26 September 2017
Upendra Sinha

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Upendra Sinha - Nucleus Software Exports Limited

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Same Day ACH: Opportunities and Risk

06 October 2016  |  4725 views  |  0

ACH is an efficient and scalable service that all banks, regardless of size, can participate in. The Newly released NACHA Rule will provide capability for the same-day processing of virtually any ACH payment.

Currently, most ACH payments are settled on the next business day, but more commonly it takes three or more banking days to post due to conventional processing arrangements. New Rule from NACHA for Same Day ACH will enable ACH Originators that desire same-day processing an option to send same-day ACH transactions to accounts at any receiving financial institution (RDFI).

Virtually all types of ACH payments, including both credits and debits, will be eligible for same-day processing. Only international transactions (IATs) and high-value transactions above $25,000 will not be eligible.

Migration of Same day ACH is a new breakthrough in the US Payments systems and one step towards making the processing faster. Essentially, Same Day ACH will benefit all stake holders ranging from ODFI, RDFI, Originators, Receivers, Corporate as well as government agencies.

Opportunities:-

Some of the advantages of the "Same Day ACH" with respect to stake holders are listed as below:-

1. Benefits ODFI who initiate corporate payments.

Many billing companies use ACH debits extensively to collect bill payments from their consumer customers. The availability of a widespread same-day ACH capability could be of great value to such originators in order to collect payments faster. For example, a biller that receives a large number of check payments at a lockbox location during the morning would be able to collect those payments using a same-day capability by converting to ACH using Accounts Receivable Entries (ARC). Similarly, a biller whose customers use its website to authorize payments (i.e., the biller direct model) could use a same-day ACH entry to collect those payments faster. In addition to collecting payments faster, a biller would be able to learn about returns more quickly. Currently, an ACH debit originated on a Monday settles on Tuesday and the return deadline is Thursday morning. But if the originator meets the same-day ACH deadline, the debit originated on Monday would settle on Monday at 5 p.m., pushing up the return deadline to Wednesday morning—a full day sooner, reducing originator risk. Many community banks are also billers for their own portfolios of card balances, mortgages and other loans. As billers themselves, these banks would benefit from being able to collect payments faster, particularly for card issuers that are required to provide credit for payment on an account on a same-day basis.

2. Benefits to RDFI and their customers.

Earlier receipt of some ACH credits results in the faster flow of funds. Since smaller financial institutions are predominantly net credit ACH receivers they may receive relatively more same-day credits.

An increase in the use of direct deposit for payroll would replace many paychecks that are deposited in branches and eliminate the high-processing costs of these transactions.

In the case of Fed ACH Same Day, same-day ACH service provides a late afternoon window for expediting eligible same-day returns.

Expedited processing of debit returns results in earlier re-crediting for the receiving bank.

Counter-party settlement risk on received ACH credit transactions is reduced, Banks have more processing windows available in the event of missed file deadlines or system outages and same-day ACH also enables faster recovery in these contingencies.

3. Reduce settlement risk for all banks.

Same-day ACH offers the opportunity to reduce overall settlement risk, including counterparty risk, to all network participants. 

a. Counterparty and settlement risk

Accelerating some ACH entries from next-day to same-day settlement reduces the duration of exposure to counterparties, thereby reducing systemic and liquidity risks proportionately. For example, a bank that receives a same-day ACH credit will know before the close of business that the transaction has settled, and that it does not face the risk of an overnight default of the originating bank. Same-day ACH entries that use the existing multilateral net settlement feature of the ACH network would have lower counterparty exposure to participants than with bilateral arrangements that settle through correspondent accounts and are remitted via wire transfer.

b. Transaction risk

The acceleration of returns further reduces credit exposure for originating banks and their customers through shorter duration of debits outstanding. By collecting debits faster, the Originating Depository Financial Institution's (ODFI) exposure through a line of credit to an originator such as a biller is reduced. The ODFI could increase the amount of ACH activity it permits for such an originator without increasing its overall exposure. For the receiving bank, the acceleration of debit returns results in faster re-crediting of its position. 

Risks:-

1. Settlement Performance

With migration of same day ACH, there will be increased use of the service for same day payroll, P2P, bill pay, and other payment offerings. More ACH files will be required to be posted and cleared in a time frame that is being reduced from two days to two hours which will place tremendous pressure on operational processes and staffing. Additionally, the funds will be harder to retrieve if a transaction turns out to be fraudulent. With any new service comes initially it increases the opportunity for the fraudsters, who have repeatedly demonstrated their ability to take advantage of change in unexpected ways.

2. Transaction Volumes surge

Volume is a second major risk consideration. While same-day payments are nothing new to the banking industry – wire transfer systems have been in existence for decades – the volume of same-day ACH transactions has the potential to dwarf the volumes banks are accustomed to dealing with.

Initially same-day ACH applies to credit transactions only. However, it's important to realize that in the next few years virtually all types of ACH payments, including both credits and debits, will be eligible for same-day processing. Only international transactions (IATs) and high-value transactions above $25,000 will not be eligible. Eligible transactions account for approximately 99% of current ACH Network volume. This means that the volume of same-day ACH transactions will be rising exponentially, at the same time that the settlement window is contracting to a matter of hours.

3. Risk from Fraudsters community group

Migration or implantation of any new processes provides opportunity for criminals to slip fraudulent payments through unnoticed.

Here are some of the fraud schemes that financial institutions need to be thinking about as they update processes and consider new technologies. Fraudsters could:

>>>Risk of payments getting through unnoticed in the event when large volumes of payments are submitted just before cut-off time. 

>>>With constraint of very tighter window time frame coupled with higher volumes , payments that are just under the institution's review threshold are less likely to get noticed.

>>>Compromise third-party senders and submit fraudulent payments into which ODFIs have no visibility and that could get overlooked among the high volume of payments needing to be reviewed in the short review window. 

 

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