Federal Reserves Rocks Pushes for Same Day ACH Settlement

The US Federal Reserve Banks announced plans for financial institutions to clear and settle certain automated clearing house (ACH) transactions in one day. This will be the first material change to the settlement schedules for the Federal Reserve in 35 years.

The recent action was caused by the increasing threat of bilateral exchanges developed among the largest ACH players (e.g. Wells Fargo and Bank of America, Citigroup and Capital One with certain institutions). These exchanges, made possible because of new , Check 21 legistlation cause big drops in the volume of transactions clearing and settling through the ACH network.

Direct relationships between banks for clearing and settlement create an inefficient payment system and drives up prices. As network revenue drops because fewer transactions are cleared, the cost per unit for all remaining ACH transactions increases The Federal Reserve has expressed concerns that lack of NACHA regulations and rules in bilateral exchanges reduces the ability to monitor transactions for illegal activies.

The new plan calls for ACH deposits made by 2:00 pm to be settled by the close of business that day rather than on the first business day after they are originated. The expedited clearing will make ACH more competitive with check-image exchange networks and bilateral image exchanges between banks.

Faster settlement times provide quicker funds availability and earlier returns for credit risk management. Despite the obvious benefits, some banks are worried about same-day credit eroding profits from lucrative wire business by driving down the price of wire transfers.

The plan will not require file format changes for submission of transactions. The fast ACH service maintains the existing formats for the standard entry class codes and complies with NACHA rules.

Remote Deposit Capture and Third Party Checks

Third-party checks are a $300 billion business, according to 2006 data from Boston based researcher Aite Group . The majority of third party checks are payroll checks. About half the checks are cashed at banks. The other half are cashed at grocers, convenience stores, check cashers, and other retail locations.

NACHA, the governing body for the ACH Network does not permit third party checks to be cleared and settled through the ACH network. But the checks can be processed electronically via remote deposit capture, using technology which complies with Check 21 legislation. Check 21 allows images of third party checks to be cleared and settled through the Federal Reserve , completely bypassing the ACH network.

Third party checks represent a good niche market for Check 21 remote deposit capture. But, like ACH processing, remote deposit capture is a volume driven business. With profits of only a few cents per transaction, it takes a lot of transactions to make any money.

Although remote deposit capture itself is not hugely profitable, banks are using the service as an incentive to capture more direct deposit account business. Many banks will provide free scanners or lease the scanners for a few dollars per month. For the banks, the profits come cross-selling additional products to commercial customers as well as from money generated from the float of the new deposits.

Pre-Paid Cards Boom or Bust ?

In the United States, open loop (bank issued) pre-paid cards have experienced only moderate success. When the cards were first brought to market, expectations were of far greater success. There was a lot of hype about the benefits of the cards in meeting the needs of the “unbanked”, defined as those without direct deposit accounts.

Mercator Advisory Group divides pre-paid cards into 12 segments, including prepaid segments in 12 categories. These include payroll, travel, campus, in-store and distributed gift, transit, utilities, open money and financial services, and digital media.

Pre-paid cards are most profitable for card-issuing programs if the cards are reloaded on a regular basis. Therefore, the best application for card profitability comes from payroll or for government run entitlement programs such as social security or welfare.

Estimates are an average open-loop pre-paid card user pays $12.50 in fees each month. What card holders are charged for varies from program to program. The most annoying fee assessments are those that make card-holders pay extra for every point of sale purchase, customer service call, balance inquiries, card load, and for exceeding the amount on the card.

Card holders resent being charged fees to access their money. The old argument that cards fees are less than the costs of cashing a paper check at a check cashing establishment no longer hold water. Walmart now cashes checks for a flat $3 and loads the funds onto a pre-paid card.

It’s cheaper for a worker to use Walmart than to accept a payroll card through his place of employment. The average pre-paid card program simply cannot compete. Profits will continue to be squeezed and force many card-programs out of business.

Electronic Check Processing is the Norm

Despite years of predictions that paper checks would go the way of the dinosaur, paper check transactions are still alive and well. But, there’s little doubt that the number of checks being written is declining. Many people under 30 have never written a paper check and scoff at the notion.
As the Federal Reserve drives up the cost of processing paper checks, the cost of processing checks electronically is steadily decreasing. The older generations may continue to write checks but the checks will be processed as electronic images.
SVPCO Image Payments Network is the nation's largest check image exchange network in the US. In 2008, it, handled a record 5.6 billion check images, nearly twice the number exchanged across the network in 2007. SVPCO was clearing an average of 27.4 million check images daily, according to network reports.
Research firm Celent estimates two-thirds of small businesses receive five or fewer check payments a day. As check imaging prices continue to drop and check scanners get cheaper, even the smallest of merchants will begin converting paper checks to electronic transactions using Check 21 remote deposit capture technology.
Paper checks will continue to exist for many years to come. But few merchants will ever deposit paper checks in the bank, preferring the convenience of submitting them electronically.

Can You Make Money Selling Remote Deposit Capture?

Remote deposit capture is finally moving into small-mid size businesses. The allure of being able to scan checks to electronic transactions and avoid trips to the bank is understandable attractive to business owners.

Wausau Financial Systems in an effort to bring remote deposit capture to smaller businesses has aggressively been recruiting independent sales organizations (ISO) to sell the product. The squeeze of margins on credit card processing has driven many an ISO to seek alternative product offerings to boost declining revenues.

But, can an ISO really make money selling remote deposit capture? on the float in the accounts and from selling merchants other products or services.

If an ISO already has customers who will benefit from remote deposit, it pays to offer the service. Without an existing customer base, an ISO will work hard to low-value business.

Remote deposit capture is a volume driven business where ISOs make a few cents per transaction. There’s hardly money in accounts processing less than 500 checks per month. And the real money is with accounts processing thousands of transactions per month.

It’s not cheap for a merchant to being using remote deposit capture. The biggest expense is buying a scanner. Prices are coming down, but a good scanner still costs upwards of $500.

The biggest competition to the ISOs is banks who can offer merchants free or low cost scanners in exchange acquiring direct deposit accounts. Offering remote deposit capture as a loss leader makes good sense for banks. Banks make money direct deposit accounts from float and from cross-selling more profitable products to the merchant. But, for the average ISO, remote deposit capture is not worth pursuing.

Debit Cards Strong but Credit Cards Weak

Not surprisingly, US buyers are shunning the use of credit cards and embracing debit more than ever.

MasterCard’s total U.S. debit and credit card purchase volume for the first quarter dropped from $206 billion in 2008’s first quarter to $192 billion, a dip of 6.8%. However, the number of transactions rose 2.5% to $3.33 billion.

Separate from credit cards, U.S. debit volume rose 5.3% to $79 billion from $75 billion in 2008. Debit purchase transactions were up 10.8% to 1.95 billion from 1.76 billion in last year’s first quarter.

U.S. credit card purchase transactions dropped 6.7% drop from 1.49 billion last year. Credit card purchase volume dropped to $113 billion in the first quarter, down 13.7% from $131 billion a year earlier.

MasterCard’s U.S. credit card base was reduced by 14% to 239 million from 278 million in 2008’s first quarter. The debit card base increased 9.5% to 127 million from 116 million a year earlier.

Visa Inc. reported that U.S. debit dollar payment volume exceeded that of credit for the three months ended Dec. 31. This reversed the trend of several years where credit card volume was higher than debit because of credit’s higher tickets.

Visa’s credit card transactions have been falling, as has the size of the average sale. Visa’s total $409 billion U.S. debit and credit card purchase volume represented a 1.1% drop from last year.

Credit card purchase volume fell 6.9% to $203 billion from $218 billion a year earlier. Visa’s U.S. credit card base slid 8.5% to $334 million from $365 million. Visa’s U.S. debit card base increased 12.9% in 2008 to 333 million cards from 295 million in 2007.

ACH Processing for Property Management

If you are a property management company that is not offering recurring ACH processing, you are leaving money on the table. Get smart. Make ACH the method of payment for every new tenant.

Surprisingly, many property managers are still doing business the old-fashioned way by accepting paper checks as payments. And they are still taking paper checks to the bank. What a waste of time and effort.

Make an ACH authorization form part of the rental paperwork. Along with the lease, the tenant signs the authorization form which gives permission to electronically debit a checking or savings account each month.

Most tenants are familiar with direct debit and expect to be offered ACH payments as a matter of course. It is so much more convenient that remembering to make out a check each month and the potential for incurring a late fee if they forget.

Automated reporting of electronic payments makes it easy to download data directly into accounting programs. Reconciliation of accounts fast, easy, and accurate.

Fees for processing payments are far less than a single first-class stamp. So inexpensive that no property manager can afford not to collecting all rents via ACH payments today.