Glenbrook’s Carol Coye Benson interviewed Steve Ellis, NACHA Chairman, recently about the use of ACH to access consumer checking accounts and NACHA's Secure Vault Payments initiative. Read on for her full report.
I interviewed Steve Ellis last week about some future-of-ACH issues that have been nagging at me recently. Steve, an EVP at Wells Fargo, is nearing the end of his second two-year term as chairman of NACHA, the bank-owned and controlled association which sets the rules for the use of the ACH system in the United States. During this period, there has been a dramatic growth in the use of the ACH, particularly for the newer ACH transaction types, including check conversion and consumer initiated transactions.
Our discussions focused on two topics: the use of the ACH for access to consumer demand deposit accounts (also known as checking accounts or, in the industry vernacular, DDA’s) and the outlook for NACHA’s “Secure Vault Payments” (SVP) program.
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The contenders? Cash, of course (made possible by the ATM infrastructure); checks (newly reinvigorated by multiple options for ACH conversion or image presentment); debit cards (signature or PIN); and, increasingly, ACH debits. The real struggle, it seems to us, will be between debit cards and ACH debit. The ACH transactions are made possible by a set of relatively new ACH transaction codes, and accompanying rules, for internet transactions (“WEB” transaction type), telephone initiated transactions (TEL), and point of sale initiated transactions (POS).
Why does it matter? The primary difference is economic.
- Debit card transactions cost a merchant a discount fee, but provide a guaranteed transaction (at least at the point of sale). The interchange component of this discount fee is passed through to the debit card issuer, where it is booked as revenue.
- ACH transactions are not guaranteed by the issuer, but also have no discount fee: the merchant saves a discount fee but risks a “bounced” transaction if the funds aren't available.
For a typical retail bank, interchange revenue is one of the principle sources of DDA-related revenue – the other two being the value of the balances in the consumer account, and fees – primarily overdraft and bounce fees (at Glenbrook we call them “bad dog” fees). These last two sources of revenue are each being challenged – balances are increasingly easy to whisk away to other banks’ high yield savings accounts (thanks to a NACHA rule enabling ACH transactions to do this), and “bad dog” fees are under severe regulatory scrutiny, with Fed regulations limiting them currently out for review. As a result, debit card interchange revenue for banks will be, in our opinion, increasingly important as the lynchpin of DDA profitability.
Ellis’s position on this question was forceful and clear. He believes that the overall opportunity for cash and check displacement is so large – and so immediate – that bankers need to focus more on this, and less on the mechanism by which it happens. (Ellis isn’t the only one seeing this opportunity. The Nilson Report last October projected that paper-based consumer payment transactions would drop from 53% of transactions in 2006 to 37% in 2011. That translates to 15.5 billion incremental electronic transactions in 2011.)
Ellis thinks that people are increasingly interested in making payments in new ways, and moving away from cash and checks – and that bankers should take advantage of this. The differences between debit card and ACH should not be allowed to dominate the discussion – rather they should be seen as complementary products. In the end, in his opinion, the various value propositions to the merchant (who, after all, “just wants to get paid”) and the consumer will determine the outcome.
Ellis did say that the ubiquity of debit card acceptance was an important factor in its ongoing strength. Although very large merchants may migrate to proprietary, or shared, ACH card (or phone!) based payments, he thinks that the vast majority of medium and small retailers will continue to accept – and prefer – bank debit cards.
He acknowledged the challenge to DDA profitability that retail bankers face, and agreed that any large scale shift from debit card to ACH debit could exacerbate an already difficult environment. But he felt that relationship banks such as Wells would continue to have an advantage over more transaction-oriented banks. Having a view of customer profitability that extends beyond DDA to other products (such as lending and retirement products) allows a bank like Wells to better weather the cyclical ups and downs of single-product profitability.
Secure Vault Payments
Background: Secure Vault Payments is NACHA’s most dramatic new product introduction. It turns the DDA-access game on its ear. Instead of letting merchants “pull” money from consumer accounts through either debit cards or ACH debits, it allows consumers, when shopping (or paying bills) online, to be re-directed to their bank. The bank then authenticates them (presumably using the same authentication as for online banking) and “pushes” a payment to the merchant. That way, the payment is guaranteed, without the need for a separate “authorization” transaction (as with card payment systems). In other words, with push payments there's no credit risk - the push payment simply doesn't occur if the funds aren't available.
Getting SVP to take off has significant chicken-and-egg issues. Both banks and merchants will need to do work to implement the protocols. The challenge for SVP is an economic one. Originally designed without interchange (like all other ACH transactions) it had a compelling merchant proposition – guaranteed transactions without interchange! But the bank proposition was unattractive – possibly cannibalizing interchange-bearing debit card transactions with zero-interchange SVP transactions. So NACHA put in place an “authorization fee” (they refuse to use the “i word”) roughly equivalent to signature debit.
The result? Banks now have a reasonable economic proposition, but the economic value to merchants is reduced. It does, however, for both merchants and banks, solve an authentication problem that has plagued the use of cards on internet transactions. The question is whether or not this value is enough to get the program going.
Steve was cautiously optimistic about the prospects for SVP. He thinks the key to getting to acceptance ubiquity (necessary if it is ever going to be considered a success) will be ensuring that the consumer experience is positive. I asked him whether he though eCommerce shopping or bill payment would be the leading application. He said not everyone agreed with him, but that he thought that eCommerce would be more important – that “bill payment doesn’t change behavior”.
Perhaps the most thought-provoking comment he made was that it might be possible, in the future, to migrate the SVP model to the point of sale – so that a consumer, perhaps using a card or a phone for authentication, would “push” a payment to a merchant at point of purchase. This, in his opinion, might move the program out of a “niche” profile and into the mainstream.
We discussed some of the infrastructure going into place to support SVP. Recent announcements by major processors (most recently, Fidelity National, joining Jack Henry and Metavante, among others) that they will enable bank clients to offer SVP sounds encouraging. Ellis agreed that it was a good thing, although he cautioned that banks would still have work to do in-house to support the program. I asked about the long-term role of eWise, as a provider of the switching services for SVP. Ellis commented that in principle, most bank owned payment systems end up supporting multiple alternatives for switching, rather than having a single choice, but that it was too early to tell what SVP would look like in the future.
Ellis has had a highly visible role during a dramatic period in the evolution of the ACH. We often observe that banks, although in control of the ACH system, haven’t always been prescient about the long term effects of new ACH programs and rules. NACHA has been lucky to have a chairman with a perspective on payments as broad as Ellis’s. The incoming CEO, Janet Estep, will (again, in our opinion) need to ensure that her board continues to be represented by bankers with cross-payment system perspective.