By Frances Coppola
In days gone by, everyday payments in the United States were made by cash or check. But in the past few decades the world has changed, and now most payments are made electronically. Businesses use them to pay employees and suppliers, government uses them to pay Social Security benefits, people use them to pay mortgages and bills. Every year, 22 billion payments are made by ACH transfer, a value of nearly $39trillion per year.1
ACH is a batch system. That means that rather than processing individual transactions as they are received, it processes batches of transactions. So ACH service providers collect payment requests from customers and send batches at regular, predetermined intervals to one of two clearing houses – either the Clearing House (CHIPS) or the Federal Reserve (Fedwire). These two clearing houses sort the payments and send them to the receiving banks, who debit (or credit, for incoming payments) the bank accounts of the recipients.
At present, the two clearing houses wait until the end of the day before sorting and sending the payment requests, which means that funds don’t reach their recipients until the following day, or sometimes later. Currently, ACH payments typically take 1-2 business days to arrive.
From September 23rd, 2016, the clearing houses will additionally process two batches of payment requests during the day. Payment requests marked for same-day settlement received by 10.30 am Eastern time will settle at 1.00 pm: same-day payment requests received by 2.45 pm Eastern time will settle at 5.00 pm. Funds will be available to recipients by the end of the processing day.2
To start with, same-day settlement will only be available for credits, such as Payroll direct deposits, B2B and person-to-person online payments, and urgent bill payments. This will nevertheless mean a large proportion of electronic payments within the USA will be eligible for same-day settlement.
A second phase of ACH same-day settlement will be rolled out in September 2017. This will add debits such as consumer bill payments – mortgages, loans, credit cards, utilities - to the same-day settlement batches.
On completion of this second phase, US businesses and households will be able to make almost any payment intra-day. The only exceptions will be international payments, and large payments (over $25,000). Although the ACH same-day service will be more expensive than the standard service, the electronic payments association, NACHA, estimates that 60 percent of existing ACH payments could be sent intra-day.3
Settlement by the end of the day might not look like that great an improvement, compared to – for example – the instant transfers offered by alternative providers such as Bitcoin, or even the two-hour settlement provided by the UK’s equivalent of same-day ACH, known as Faster Payments.4 However, in a further phase, planned for March 2018, funds will be made available to recipients by 5.00 pm local time. And looking further ahead, the ultimate aim is for ACH transfers to become real-time. The security of ACH transfers will be combined with the convenience of immediate settlement.
In many ways, ACH transfers have already transformed the way in which people in the US manage their money. Checks are becoming a thing of the past, and use of cash is declining as electronic payments become more widespread. Now, as same-day ACH payments come on stream, and money transfers go online and mobile, cash flow management is set to become easier than ever before.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.