NACHA’s CEO On The Fed’s Faster Payments Proposal  

After many months of sitting on “pins and needles,” waiting for the Fed to disclose more specifics on its plans to deliver “faster payments” here in the U.S., the world got the results. And, a result that MPD CEO Karen Webster described as somewhat “anticlimatic.” The Fed’s plan to improve payments in the U.S. is to organize a “heterogeneous” task force in the early part of 2015, to sort it all out.

And, while admittedly a bit surprising, NACHA CEO Jan Estep believes that the Fed’s approach might be a pretty good outcome and prudent next step. And, since the ACH system, which her company administers, manages and governs, functions as the backbone of interbank payments, it’s safe to assume that it has a strong interest in the outcome of the Fed’s work.

Estep sat down with Webster to talk about the Fed’s proposal, what it means for payments overall and how it syncs with NACHA’s efforts to implement Same Day ACH.

KW: Let’s start with the basics – what’s your reaction to the proposal that the Federal Reserve just released for improving the U.S. payments system?

JE: Thanks so much for asking. NACHA is very supportive of the work the Fed has done and the opportunity to continue to have a dialogue about payments across the payments industry. And I say that because in our world, NACHA really does continually reach out to diverse parties of all types who want to come together in the areas of payments standards and rules. I think we can really understand and appreciate the outreach that the Fed is conducting. We’ll continue to support the Fed in forums that we host to bring industry users together and then our rulemaking processes that can support our payments progress. So we really look forward to being a part of the work that they outlined for the next year or so.

KW: Based on what we were given a little peek at last year, I, at least, had an expectation that when their results were released, that there’d be a pretty well defined plan, perhaps a business model and a set of operating principals that would govern their vision. So I was a little surprised to see that the plan was to gather stakeholders to talk more. Were you?

JE: We do know that it’s critical to bring stakeholders together and really talk through details, that’s kind of what we do every day. But with that said, I agree. I did believe that the Fed would have shared more detail behind the proposals that they discussed at a high level last summer.

With that said, I think it makes sense to backup and dive down into the more detailed requirements related to improving the payments system in the U.S. and that’s really where the challenge is. You know it’s much easier to talk about a high level concept, and even get high level costs or benefit estimates from looking at other systems or other countries, in this case. But it’s much, much harder to gain consensus on specific requirements, rules, warranties, liabilities, costs, benefits that align with those specific requirements.

So I think part of the work that they will do will be to identify what systems, even outside of the payments flow itself, are impacted by a desire to improve payments and may also have to be changed. This, of course, is not only across thousands of financial institutions, but in order to support millions of their customers of all kinds. And when you think of it that way, that is the full task at hand, which is not trivial.

KW: No, it’s certainly isn’t.  But let’s talk a little bit about the focus of the study and some of the use cases that the Fed has proposed. In their briefing, they described these cases and said that they cover about 12 percent of the payments volume in the U.S. So, my question to you is: why propose something so big – a whole new payments system – for something so small?

JE: You know I think it takes looking at a two-step process to answer that question because the five use cases they shared with the industry last summer did identify a total universe of some 29 billion transactions. Not all of those need to move faster, of course, but certainly having that option is something that’s needed in the U.S. So, for those five use cases, the Fed can really work with the industry to improve the speed at which they move through the system.

But the second step, and the one I also appreciate, is that the Fed identified a need to be proactive in thinking and in planning – so not to be shortsighted. We need to think about our needs for today, and how to best position for the future and how that’s beneficial for the industry. If we can do that as an industry, it helps all of us sort out how to get from here to there, in a factual and wholesome way.

Let me give you a couple of examples where I think that’s beneficial to be more proactive in our thinking.

The Fed paper was about more than just faster payments, it also surfaced other topics that are critically important to the industry. And we’ve spent a lot of time looking at that because actually those key points are all very consistent with work that we did when we reached out to the industry back in 2012 and created our blueprint for the next 10 years for the ACH network. In addition to faster, the Fed actually identified concepts that are beneficial to the ACH network today as well as to real-time payment methods in the future, because many of those impact those systems outside of the payment itself.

For example, a directory that can help identify recipients of the dollars that are sent, potentially without sharing a bank account number. That’s beneficial to payments today as well as in the future. Another example is focusing on payments plus information which is really a benefit that the ACH network has today but cards don’t have. A focus on formats that allow for consistent data will allow us to exploit the benefit of straight through processing today and tomorrow.

And then certainly security or fraud litigation is critically important for payments today and very important to helping payments move faster.

Focusing on all of these things today and thinking about them well into the future, it’s a good way for the industry to be proactive.

KW: Those are all good points and perhaps points easy to lose sight of since the focus of the Fed’s initiative has always been couched in terms of “real-time” payments. So, sticking with that, when I was listening to the briefing I noticed that real-time payments weren’t really mentioned – instead there was a lot of reference to near real time instead. What’s the difference then between the Fed’s “near real-time” initiative and what NACHA is advocating with same day ACH?

JE: As the paper calls out, Same Day ACH clearing settlements can be complementary to any work in the future that may move payments even faster. And when you look at what we’ve proposed for Same Day ACH, we do think it’s complementary of those processes that not only need to change with the payment itself, but as I said, those systems outside the payment flow, the directories, payments information, risk mitigation, etc.

So with Same Day ACH, we’re proposing three settlement windows per day to give ­­­­­­an option to end users, which is a big step forward that the industry can take today. And I say that because we’ve already defined the requirements, the costs, the benefits, and we’re receiving very positive feedback from the industry. There are over 70 million ACH payments every single day, flowing through the ACH network. And many of those can benefit from moving during the same day.

But you also have to recognize that the ACH network today is both credit and debit. It’s payments, plus potentially the voluminous information that has to travel with payments. It has much broader capability than the Fed is defining in its five use cases. For that reason, it’s complementary but also very different than moving a real-time payment message. The ACH network is not only a settlement mechanism but it’s a network that deals with a lot of very flexible payments.

KW: My final question is about timing. The Feds said that its task force will be assembled sometime in the early part of 2015, with findings not really known until very late in 2016. If NACHA’s Same Day ACH proposal is adopted, the first phase, at least, would be ready to roll in 2016. So how will what the Fed is advocating impact what NACHA is doing, if at all? Is what the Fed is proposing a conflict or a complement?

JE: I do believe Karen, as I said before, that they are complementary and in fact, the proposal for Same Day ACH is a way that the industry can take action today. I was very pleased that the Fed’s paper was supportive of moving forward with Same Day ACH settlement as an immediate step and we really look forward to the Fed being supportive as an Operator in the ACH network.

We have already begun, as I said, to do work around rules for ACH credits and moving them faster as well as posting rules that support availability out to the end user and more strategic work on directories and on payments information. So we really hope that the work that we have already begun can be leveraged so that the industry does not have to have duplicate work into the future. Our outreach, sharing and bringing stakeholders together will and can help the Fed as they try to do the same.