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Same Day ACH Allows Payments to Move Faster

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For the millions of Americans who receive electronic payments directly into their bank accounts, a new system is about to go into place that will allow those payments to be made faster than ever. For banking executives and the legal counsel who advise them, the stakes are very high for successful compliance with this new system.

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Same Day ACH Allows Payments to Move Faster

  1. 1. SAME DAY ACH ALLOWS PAYMENTS TO MOVE FASTER BY HOLLY MERRILL For the millions of Americans who receive electronic payments directly into their bank accounts, a new system is about to go into place that will allow those payments to be made faster than ever. For banking executives and the legal counsel who advise them, the stakes are very high for successful compliance with this new system. The ACH Network Most consumers are familiar with the “ACH” payments system without even |realizing it. For example, when employers pay their workers through direct deposit—or consumers pay bills electronically out of checking accounts—the ACH network is probably responsible for those payments. According to NACHA, the electronic payments association behind the ACH network, more than 23 billion ACH payments were made last year. ACH payments are electronic payments made through the Automated Clearing House (ACH) network, which many people are surprised to discover has been in existence since the late-1970s, far before anyone had ever heard of the Internet or mobile transfers. ACH was originally conceived as a “batch” payment system for banks and credit unions. The upside has always been that ACH is more cost-effective than wire transfers and other payment systems. The downside has been that payments are not real-time and require a couple days to actually be processed and for the money to change hands. ACH payments are simply electronic transfers from one bank account to another. These transactions are popular alternatives to checks and credit card payments because they use fewer resources, thereby reducing costs for financial institutions and their business customers. Moreover, since ACH payments are electronic, there is less risk of errors from human data input and less hassle involved with mailing checks. March 2016
  2. 2. Same Day ACH In recent years, businesses have been increasingly clamoring for the ACH network to become more responsive to changes in the speed with which commerce is conducted in the 21st century. Financial institutions, NACHA and federal regulators listened. Now, after extensive discussion and exploration, we’re on the verge of a sea of change in the payments industry. In May 2015, NACHA’s membership voted overwhelmingly to adopt Same Day ACH, a new rule that will make it possible to execute same-day ACH transactions. The purpose of Same Day ACH is to allow transactions that need to move faster to be prioritized and sent into a same-day processing queue. The rule will be rolled out in a three-phase process, with the first phase going into effect on September 23, 2016. In Phase One, the focus will be on ACH Credits such as payroll, person-to-person payments and expedited bill payments. In this phase, two processing windows will spread the volume throughout the day and lessen the strain on resources at the end of the day. The proposed Morning Same Day ACH window will be submitted by 10:30 A.M. and settled by 1 P.M. ET; the afternoon window will be submitted by 3 P.M. and settled by 5 P.M. ET, with funds available to customers at the end of the processing day. In Phase Two, which will begin on September 15, 2017, same-day ACH debits will be introduced. The focus in this phase will be on consumer bill payments and the structure of the same-day debit payment windows will be the same as in Phase One: two processing windows at 10:30 A.M. and 3 P.M. ET and settlement taking place at 1 P.M. and 5 P.M. ET. In Phase Three, which will go into effect on March 16, 2018, receiving financial institutions will be required to provide funds availability at 5 P.M. local time for same-day credit entries. Practical Considerations There are a number of important implications to the new Same Day ACH rule that banking executives and their legal counsel need to contemplate. FEES Financial institutions sending Same Day transactions will be charged a premium fee to cover some of the costs to expedite payments with Same Day ACH. These fees will be collected by the two ACH Operators with the understanding that a portion of those fees will be credited back to the receiving financial institution to help offset the costs they are incurring to create the necessary infrastructure for compliance with the new rule.
  3. 3. Conclusion Once Same Day ACH is fully implemented, any originating financial institution can issue payments that must clear on the same day, knowing that all receiving institutions will be required to process the transactions that same day. This change will allow businesses and consumers to move money faster throughout the financial system. However, there will undoubtedly be a number of bumps and bruises along the way to full implementation. Banking executives and their legal counsel will need to remain in close communication as the organizations attempt to mitigate risk and ensure compliance with the groundbreaking Same Day ACH rule. MANDATORY PARTICIPATION NACHA and the Federal Reserve have mandated that all banks and Credit Unions currently using the ACH Network must be able to receive and settle Same Day ACH according to the new rules. It will no longer be optional to receive Same Day ACH. It will be optional for sending Banks to offer this service to expedite outgoing ACH transactions. Companies that would benefit from this new service should contact their bank or ACH service provider. Since Same Day ACH will revolutionize the ACH Network, all financial institutions will be impacted. NACHA and the Federal Reserve encourage all financial institutions to begin looking at the internal impacts to operations, processing schedules, agreements, return processing, settlement, risk management, etc. If a Third Party Service Provider is used, begin discussions to ensure they will be prepared for each of the phases. THE FED The Federal Reserve has also laid out a plan to work with banks and merchants to research and identify potential approaches for facilitating faster payments throughout the financial system. They have indicated they will present some of their proposals by the end of 2016 and are likely to be focused specifically on payments between business and individuals. Banking executives and their legal counsel need to stay tuned to these changes from the Fed and assess how they fit with the NACHA rules. FRAUD PREVENTION When the U.K. moved to faster payments in 2008, British banks saw a big increase in fraud as criminals took advantage of the collapsed window of time for banks to review risky transactions. U.S. banks would be well-served to review their risk and fraud policies in addition to their staffing resources to meet the challenge of faster processing.
  4. 4. 4 LexisNexis and the Knowledge Burst logo are registered trademarks of Reed Elsevier Properties Inc., used under license. Other products or services may be trademarks or registered trademarks of their respective companies. © 2016 LexisNexis. LNL01090-0 0316 About the Author Holly Merrill, AAP, is the Chief Compliance Officer for GIACT Systems, a national provider of Account and Identity Verification Services. Holly has more than 37 years of experience in payments, including serving as CEO of PaymentsPLUS, CEO of Payments Resource One (PRO) one of the Regional Payments Associations that was also one of the private sector ACH operators. She is also a past member of the NACHA Board of Directors and served on the National Check Clearing House Board. Holly is co-author of two books from LexisNexis® Sheshunoff® : Automated Clearing HouseTransactions: Operations, Compliance, andAudit and the ACHTraining Manual. She is also a frequent speaker and conducts Sheshunoff® ACH certification training Webinars.

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