Breaking Down The Faster Payments Construct

In just a matter of days, the payments industry will see a significant — and ubiquitous — change in the way payments are sent and received. Same Day ACH will create a new option for faster payments for all the banks and credit unions across the U.S. Two new same-day settlement windows will be added to the ACH Network, which will increase the actual movement of funds between all those financial institutions from once a day (at the beginning of the day) to three times a day.

Through NACHA’s Countdown to Same Day ACH podcast series, we’ve explored what Same Day ACH is all about, the myriad of use cases and applications it’s designed to deliver and if corporations and businesses are truly ready for the change. This week, Karen Webster was joined again by NACHA President and CEO Jan Estep to discuss the relationship between Same Day ACH and other faster payments initiatives — namely, real-time payments and blockchain.

What’s Under The Faster Payments Umbrella?

The term “faster payments” means many different things to many different people; however, Estep said, the best way to think about “faster payments” is as an umbrella for payments initiatives designed to speed up the systematic movement of payments.

“That way,” Estep said, “faster payments sits over the top, and Same Day ACH or real-time payments are options underneath that. Both are about moving payments faster than they are today.”

To that end, Estep said, real-time payments and Same Day ACH are distinct, but complementary, in this construct. They also come with real differences, depending on where you are in the world.

For example, Same Day ACH will move money between all bank accounts in the U.S. three times every day, supporting both debits and credits when fully deployed. In other countries, however, real-time payments have traditionally only supported credit or what are sometimes referred to as “push payments.”

Alternatively, Same Day ACH is designed to support all ACH payments, both credit (push transactions) or ACH debit payments (those which pull money from an account after authorization.)

Estep said these faster debits, which will launch next year in a later phase of Same Day ACH, can also mitigate risk by providing faster returns for individual organizations, such as billers that tend to use ACH debits for recurring payments, like utility bills or other invoices.

But, Estep said, it’s important to remember that Same Day ACH is more than just moving the money faster. Along with the funds movement, a lot of information passes through the ACH Network right with the payment. More frequent settlement can also benefit messaging layers that may operate on top of the ACH Network. Estep said that, since the ACH Network functions as a backbone for other payment mechanisms, it can enhance functionality for other payment processes across the U.S.

Take merchant acquirers who wish to expedite the posting of funds on the same day to a merchant’s bank account. Same Day ACH can give a boost to them, as well as to prepaid cards that can be loaded faster, with the assurance of having good funds behind them.

“Same Day ACH really just provides additional functionality right on top of the network, which makes it quite easy for innovators — be they independent companies or financial institutions — to create new and faster payment offerings and services,” she explained.

While both Same Day ACH and real-time payment initiatives have unique functionality and innovative use cases serving distinct end-user needs, collectively, these initiatives will give U.S. banks and credit unions the ability to better serve their customers.

“It’s not an ‘or’ but an ‘and’ when you think of Same Day ACH and real-time payments,” Estep noted.

Where The Blockchain Fits

As we know, experimentation with blockchain and distributed ledger technology is happening across the payments space.

Many organizations are experimenting with these new technologies to simplify complex financial transactions. For instance, some are developing use cases around things like smart contracts, cross-border payments and security transactions.

Estep said there are touch points for these options under the faster payments umbrella and, specifically, with Same Day ACH.

“As we think about architecture around this technology, blockchain is used kind of as a protocol layer on which these applications can be built. But it is not standalone; it has to connect to other processes, and at this time, we also have to remember that distributed ledger and blockchain aren’t widely used across the globe,” she explained.

This means many of the applications will require integrations with other systems — whether they’re back-office systems or payment systems, such as ACH; interoperability with other systems will be key. Estep views the ACH Network as having on- and off-ramps for many applications through which money must change hands.

“One of NACHA’s core competencies is really helping diverse parties come together for payment-related standards and rules. As these new technologies evolve, we can also play an additional role to help the industry where maybe a thin set of rules can help to drive efficiencies by better defining roles, responsibilities or processes.”