US bank-backed ACH, The Clearing House, has moved to develop a faster payments system as it begins the long process of replacing its antiquated current payments system.
The Clearing House, a payments company and trade group representing 24 of the nation’s
largest commercial banks, announced Wednesday plans to build a real-time payment system to be used by all of the country’s financial institutions. The effort will be a “multi-year endeavor,” according to the group’s press release.
“The only way a system like this will be successful is if it’s ubiquitous and not just a small set of banks,” Clearing House president and chief executive Jim Aramanda said. “So it’s going to take a while — there are a lot of constituents involved.”
The announcement comes in the midst of a broader push to improve the nation’s payment system. The Federal Reserve is expected to lay out a multi-yearroad map for achieving a near real-time system in a paper to be published before the end of the year. And Nacha, an industry trade group that sets the rules for the automated clearing house network, is working on an initiative that would allow ACH transactions to clear on the same day they’re initiated, rather than a day later.
The Clearing House’s plan signals the turning of a new page for the organization, which along with the Federal Reserve operates the ACH network and processes wire-transfer and check-imaging payments. Two years ago, the group helped kill an earlier Nacha plan to allow same-day payment processing.
At the time, The Clearing House argued that Nacha hadn’t presented a “sound business case” for making the investments that would be necessary.
“Our objection was largely that it wasn’t going to meet all unmet needs; it might be incrementally better, but the time and effort and money to be spent on that wasn’t efficient,” Aramanda said Wednesday. “Same-day ACH has a place but it isn’t the end game … We just felt that was only an incremental step and not where we needed to get to.”
The Clearing House raised similar cautions in December about the Fed’s vision for the construction of a ubiquitous, near real-time system within 10 years. In comments submitted to the Fed, the group argued that any industry-wide modernization plan needs to generate a reasonable return on the banks’ investment spending over both the long term and the short term.
But as the Fed has pushed forward with its vision, the thinking inside many big banks seems to be evolving.
“The Fed consultation on immediate payments has obviously got people thinking that it’s actually going to happen in the U.S.,” said technology consultant Dave Birch. “So the situation has changed over the past year or so. Now people think there is going be an immediate payment system, so they’re more interested in trying to become it.”
The Clearing House remains committed to the idea that a speedier payment system will only work if it is also a revenue-generator for banks, according to Aramanda. But the organization is still working to determine exactly how financial institutions will profit from it.
“It needs to be a system that is self-sustainable, meaning that it’s creating value that people will pay for,” Aramanda said. “We believe real-time payments can meet unmet needs that are out there now.”
While three separate groups are now working on plans to roll out faster payments, their efforts are not contradictory, according to representatives from Nacha and The Clearing House.
“These are all complementary ways to work on moving payments faster,” said Nacha president Jan Estep, noting that her organization works closely with the Fed and the Clearing House. “Moving to same-day ACH, I don’t see that at all as conflicting with changes in the ecosystem that will support real-time payments.”
Same-day ACH and real-time payments are “two different and complementary needs,” said Clearing House senior vice president of product and strategy Steve Ledford, who is heading up the new system.
What distinguishes The Clearing House system from same-day payment processing will be the speed of payments as well as “the security, the protection of account data, and the enhanced messaging that would go along with it,” Ledford said.
The Clearing House plans to provide customers with extra security by routing payments via tokens in order to protect account information, according to Ledford.
“If we’re coming forward with a new payment capability, why not build in safeguards?” he said. The Clearing House also plans to include messaging features that will notify the senders and receivers of payments as soon as the transactions are completed, according to the organization’s press release.
The Clearing House would not say what infrastructure it plans to use to build the new system. But the initiative may provide the organization with a chance to update its technology to better facilitate faster payments, according to Birch.
“To me, it seems like people like The Clearing House might have an opportunity to build something on more modern technology,” Birch said. “Something on more modern standards would have more flexibility.”
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