The push for electronic payments

Cost savings, convenience and risk reduction are just a few reasons why electronic payments continue to flourish within the payments industry. FST speaks with Elliott McEntee, CEO and President of NACHA, about the rampant growth of the payment volume within the ACH network, why electronic payments prevail over traditional checks, and the anticipated Back Office Conversion application to be released in March 2007.

NACHA, The Electronic Payments Association, is a nonprofit organization whose primary responsibility is overseeing the Automated Clearing House (ACH) network and developing the operating rules that financial institutions and their customers must comply with when using the ACH network. Working closely alongside the state and federal governments, NACHA is an important arm of the banking industry that helps assist with developing infrastructure changes that allow for greater use of electronic payments.

NACHA represents more than 11,000 financial institutions through direct memberships and a network of regional payments associations, and 650 organizations through its industry councils. As CEO and President of NACHA, Elliott McEntee is responsible for the overall management and leadership of the association and serves on the Board of Directors.

Phenomenal growth
NACHA has witnessed tremendous growth of payments within the ACH network over the last five years, with an average annual growth rate hovering between 20 and 30 percent across a number of individual payment categories. The ACH network grew by 15.6 percent in the fourth quarter of 2006 compared to a year ago, and more than 3.24 billion transactions worth more than $6.75 trillion were conducted during the quarter, according to NACHA statistics.

The most noticeable growth rates come from web transactions, teletransactions and check conversion products. Over a five-year period, consumer web transactions have gone from zero payments to 1.5 billion payments in 2006, while consumer teletransactions (telephone initiated transactions) shot up from zero payments to half a billion.

NACHA’s check conversion applications in particular have achieved unprecedented growth: Point-of-Sale (POS), where a retailer converts a check at the point of sale, went from zero to half a billion transactions in 2006. The POS check conversion product has caught on like wild fire with the smaller retailers, and McEntee estimates roughly 80,000 small merchants use the product. “We’ve noticed that by far the largest users of POS check conversion have been smaller merchants – jewellery stores, doctor offices, barber shops, hair stylists, restaurants and so on – they want to treat all these payments like electronic payments.”

Accounts Receivable Conversion (ARC), where a check is converted by the biller into the ACH payment, went from zero to two billion transactions in a five-year time period. McEntee estimates the ARC application reached one billion transactions faster than any other electronic payment application on the ACH network, and probably has the fastest growth rate of any payment application in the country.

What accounts for the exponential growth of payments in the ACH network can be attributed to a combination of factors, with convenience and control weighing in as the top factors responsible for consumer growth. “It’s certainly easier for the consumer to make payments by going to a biller’s website rather than writing a check and sending it in the mail,” McEntee acknowledges. “The consumer also has absolute control over when the payment is made – once you authorize a biller to collect a payment electronically, virtually every website tells you specifically when your account is going to be updated so there’s far more certainty than sending a check in the mail.”

On the business side, cost savings was the number one factor contributing to growth.
“A transaction that the biller initiates based upon instructions over their website is the lowest cost payment for the biller to process, so you’re seeing a lot of billers promoting going to their website to pay bills and trying to make it as easy as possible for the consumer to pay their bills on their website,” Elliott says.

The increased usage of check conversion products can be attributed to a combination of cost savings and risk reduction. The process surrounding returned checks plays a huge factor in promoting the use of the ACH network since bad checks can be detected and returned much faster. “In the risk reduction area, the huge benefit is when you’re using the ACH network and the payment is going to be returned unpaid if the consumer doesn’t have sufficient funds in the account or the account’s been closed. The returned payment through the ACH network gets back much, much faster than through the traditional checks system.”

Within the ACH system, billers typically receive returned payments the day after the payment was initiated whereas the check systems typically takes at least five to seven days. “For every day that the biller or retailer gets the return back faster, the opportunity of losing money is reduced because the biller or retailer can take steps to not allow the consumer to write checks anymore,” McEntee says. “For example, if it’s a consumer paying a credit card bill, the credit card issuer can cut off the line of credit right away – so actually, the cost savings are bigger in the risk reduction area than in the actual operating cost savings.”

Tackling fraud amid growth
While growth is always good news, the dramatically increased payment volume means stronger security efforts must be in place to offset the increased likelihood of fraud. NACHA has worked closely with a number of government agencies – including the Justice Department, FTC, state attorney generals and more – in recent years to make the network as secure as possible and has watched merchant fraud dramatically diminish as a result of their efforts. “In the ACH network not only can you trace fraudulent transactions but you can also trace where the crooks have moved their money to and there’s a number of people who are now in jail as a result of committing fraud against consumers. The FTC has been very aggressive in going after third party processors and merchants. Today merchant fraud is not a problem on the ACH network and the losses to consumers and the banks are very, very minimal.”

However, NACHA still faces the challenge of individuals creating fraudulent transactions against business accounts. Businesses need to take advantage of the tools provided by banks in order to monitor ACH debits against business accounts and reconcile accounts as quickly as possible. “If you see a suspicious looking transaction, you need to notify your bank right away and get the problem fixed instead of waiting months and months. In some cases, we’ve seen years go by before a business detects that there’s a fraudulent transaction and it makes it a lot more difficult to get the problem corrected.”

Assigning only one account to allow ACH and debit payments against it is an important step to reduce risk. “We have a separate account in which we allow ACH and other type of debit payments against that account and we reconcile that account every day,” McEntee says. “We have blocks on all our little accounts so that the bank will not process any electronic payment against those accounts and it’s a technique that even the smallest businesses could put into place and greatly reduce the likelihood of electronic payment risks.”

McEntee acknowledges the single most common source for businesses to have their account numbers compromised is the payroll check. “They are essentially issuing that number to as many people as they have on the payroll so that is another lesser known benefit of going to Direct Deposit for the company. Again we don’t issue payroll checks and the checking account we use for our payroll transactions can’t be debited.”

Moving forward, NACHA is looking at putting into place more aggressive enforcement tools to be able to impose much higher financial penalties more quickly on banks involved in supporting fraudulent behavior. “The ACH operators that process the payments between banks are putting in more sophisticated tools to stop fraudulent types of transactions before they are passed on to the bank that has the consumer’s account or the business account, and educating consumers, businesses and banks on what steps are needed to reduce the likelihood that they’re subjected to fraudulent transactions,” Elliott says.

Payment plans for 2007
NACHA recently introduced network administration fees for institutions using the ACH network, which went into effect January 1, 2007, including per-transaction fees and annual fees. Until now, NACHA has been funded like a typical trade association, relying on a combination of membership dues, educational programs, publication programs and so on without any funding by financial institutions using the ACH network. The fees will cover the costs associated with risk management and infrastructure improvements, including developing the operating rules, products and services surrounding the network.

Every financial institution in the country will now pay NACHA based upon their use of the ACH network, which would be a transaction fee both to the sending financial institution and the receiving financial institution. “Both the annual fee and the transaction fee are very, very low,” McEntee assures. “The transaction fee is .0001 and based on our calculations, if you look at the 16,000 financial institutions that use the ACH network – all but 100 of them – their annual bill from NACHA will be less than a thousand dollars – it’d only be the top 100 financial institutions that use the ACH network will be paying more. The biggest users will be paying hundreds of thousands of dollars more because they are by far the biggest volume generators of ACH transactions.”

Despite the additional fees institutions will face, NACHA is getting a nod of approval from the industry. “This whole change has been viewed very, very positively even by the biggest banks that will be paying the most money because they feel it’s necessary for NACHA to have the stream of revenue coming in to cover developing new products and services so we’ve been very, very pleased with the response from the banking industry,” McEntee adds.

Another notable component scheduled for 2007 is NACHA’s annual conference on electronic payments, PAYMENTS 2007, which will be held April 15-18, 2007 in Chicago and will feature a number of hot topics and initiatives NACHA has in motion for the year. Most importantly on the agenda will be several retailers sharing their implementation experiences with Back Office Conversion. “We’ll have about 30 days of experience with Back Office Conversion and we’re going to have several retailers talking about their experiences and what they’ve run with their initial implementation. We think this information is going to be invaluable for retailers that are planning to start their process later on in 2007.”

The conference will be a great vehicle to showcase the product to larger retailers who will be implementing the highly anticipated Back Office Conversion product. With Back Office Conversion, retailers receive the check in their back office processing, convert it to an electronic payment, destroy the physical check and retain an image of it, then collect the check electronically. “Virtually all of the large retailers that we talked to are planning to implement that program in 2007 and we think that’s going to be a huge success,” McEntee speculates.

Another initiative that will be discussed at the conference is NACHA’s All-in-Line Payments Initiative, which offers major benefits to the consumer, merchant and bank. McEntee explains how it works: “A consumer would go to a merchant’s or biller’s website and they would be redirected to the consumer’s bank by that website through a secure network and then the consumer can either pay a bill or make a payment to the merchant through the bank’s website. The consumer doesn’t have to disclose any account information to the merchant or the biller – the consumer simply gives the bank name to the merchant or the biller and the bank would then redirect the consumer to the consumer’s website.”

NACHA is starting a pilot program in late 2007 to introduce the new system that addresses the major problems that consumers and merchants have with internet payments today such as privacy security issues, fraud, high chargeback rates, etc. “More and more merchants don’t want account information anymore because of the problems they’ve had with their systems and third-party processes being hacked into where millions of credit card, debit card and checking account numbers have been compromised – so they are very excited about this potential product that we plan to roll out.”

Outside of NACHA’s specific initiatives for 2007, a number of trends are impacting the payment sector, the foremost being the convergence of check and ACH systems. “We’re starting to see a big conversion within the corporate and banking communities now of checks and ACH processing where checks are being processed as electronic payments,” McEntee says. “We’re seeing tens of thousands of companies now that are capturing an electronic image of the check and then transmitting that image to their bank. Businesses are going to be taking steps that anytime they get a check in from one of their customers, the foundation is going to be set for the entire transaction to be done electronically. So we’re starting to see the marketplace developing the tools that the banks and their customers need to allow this integration of the checks system and the electronic systems.”

Another positive trend that has even greater implications is collaboration among the industry. “We’re starting to see more coordination between the different payment networks, especially addressing the risk management and privacy area that is part of the card networks, ACH networks and even the check networks,” Elliott says. “There’s much greater cooperation in these areas and I think that’s going to lead to less risk that everyone faces because we’ve seen crooks move around from network to network. With greater cooperation and coordination between these networks amid the risk management and fraud control area, that’s only going to reduce fraud and address concerns that consumers have so we think that’s a great development.”

“We think 2007 is going to be an important year in greater cooperation amongst the networks that will hopefully translate into a more seamless way of making payments on the part of consumers and corporations,” McEntee adds. “I’ve been in the payment business for several decades and this has been the most exciting time because there are so many changes and people are embracing changes far more rapidly than they ever did before.”