We talk about ACH a lot at Glenbrook (even coining the phrase “ACH is Hot”) and there’s a reason for that. More than 29 billion ACH Network payments were made in 2021, valued at close to $73 trillion. While ACH technology has been around for decades, modernization has made this system virtually unrecognizable from what existed in the 1970’s, and it continues to evolve. 

In this episode of Payments on Fire^®, George Peabody and Yvette Bohanan are joined by Michael Herd, Senior Vice President of ACH Network Administration at Nacha. In the conversation, Mike walks us through the state of ACH, insights on volume and growth, and new Nacha operating rules. 

George Peabody:

Welcome to Payments On Fire, a podcast from Glenbrook Partners about the payments industry, how it works and trends in its evolution. I’m George Peabody, co-host of Payments on Fire, and today I’m joined by, well, the other co-host, Yvette Bohanan. Yvette, great to have you here. Great to be with you again.

Yvette Bohanan:

Always fun to have an opportunity to co-host with you, George.

George Peabody:

Okay, Yvette. So we’ve got a really a cool episode today. And, just to make folks wait a little bit longer, there’s a lot going on in Glenbrook education is what I tried to say, and had the good fortune of being in New York City with y’all. When we have our first in person, I want to say post COVID, but I’m not sure that’s the right word, but we had our first in person Glenbrook Payments bootcamp.

Yvette Bohanan:

Yes.

George Peabody:

And that was great.

Yvette Bohanan:

It was a lot of fun and it was very well attended. We had a good time with everyone who was there if you’re listening. And, we are excited because that response encouraged us. So we’re going to be doing a second public in person bootcamp, and insight workshop up for a day three, in December. So we’re just opening enrollment for that. And it’s going to be in the Bay Area in California. So we’re hoping to see people there. And then, for those that prefer virtual, we are going to continue doing our virtual public bootcamps using Zoom. So, if you want to catch us there as well. So yeah, it’s been a wonderful year in education, we’re super excited.

We’ve just revamped the public bootcamp material to keep it up to date. And the insight workshop is a “best of” reel on hot topics called advanced topics that we do on day three for people that want to stay and hear more. We might cover a topic like digital currency systems in 20 minutes in the bootcamp, but we’ll cover it for two hours if you stay for day three. So, getting into the weeds a little more.

George Peabody:

Cool.

Yvette Bohanan:

So anyway, that’s been keeping us very busy.

George Peabody:

Great. Well, and I always think of that day three, here’s what happening right now and in the future.

Yvette Bohanan:

Our forward looking thought process. Yeah.

George Peabody:

Yeah, cool. All right, Well good to hear. Let’s get going, and I want to introduce and welcome our guest today on the podcast, we’re delighted that Mike Herd, who’s the SVP of the ACH Network Administration at Nacha. Mike, welcome to Payments on Fire.

Michael Herd:

Well, thanks for having me, I appreciate it. I look forward to the discussion today.

George Peabody:

Yeah, good. Well, I’m sure we’ll have a good one. Just to set the stage a little bit for those of you who are new to the payments industry and have been living under… Now I was going to say living under a rock, that’s not quite the case. But Nacha, the ACH network is the payment system that drives… Well safe and fast direct deposits and direct payments. If you’re getting your employer putting money into your deposit account, it’s the ACH network that’s making that happen for you. And, it’s got amazing connectivity to all banks in the US and credit unions.

And so, just some numbers here, and Mike, you’re going to tell us more, but 29 billion ACH network payments are made in 2021. That’s $73 trillion. So, I almost want to say the most systemically… At least from a consumer point of view, the most systemically important payment system we have in the US.

Yvette Bohanan:

Mm-hmm.

George Peabody:

And what’s extraordinary about it is that the organization through problem solving and consensus building amongst all the stakeholders has really done some intriguing things from terms of innovation and interoperability. And, key to that is the fact that Nacha as an organization is a rulemaking body. And, if you ever attended a payments bootcamp, you’re really hearing that the network operates, yeah it’s got some technology for routing and yet some of them have brand, but it’s the rules that drive the behavior of the direct stakeholders. And that’s actually what makes a network an extraordinary thing. So Mike, let’s start off with the state of ACH.

Yvette Bohanan:

Mm-hmm.

George Peabody:

And we’d love to, of course, we want to hear more about the recent rule making because that is such a big impact and we’ll talk about some availability issues, but ACH is hot. We’re chuckling because ACH as a technology’s been around for decades, so what’s going on?

Michael Herd:

Yeah, well I think you all created that catchphrase, ACH is hot, I loved it. I loved it when I saw it. And I think we crib that from you all. I think we use that on our own presentations now, ACH is hot. But look, the last 10 years or so have really been a golden age of sorts for the ACH in terms of adoption and payment volume. Even before the recent pandemic era, annual ACH volume growth has been accelerating. Driven by things such as direct deposit, payroll, and other uses consumer bill payments, and account to account transfers, and also by business to business payments. And then you take the events of the last couple years, 2020 and 2021 in particular, where ACH volume growth was into overdrive fuel by many, many different types of government assistance payments, the stimulus payments, direct to consumers, the unemployment benefits, the advanced child tax credit payments, and all of the various forms that went out directly to businesses, and medical centers, and doctor’s offices, and universities.

And the vast majority of all that aid was provided through ACH. And then, you add into that dramatic shift to remote work. And the corresponding dramatic shifts in choice of payment method due to the fact that no one was in person with each other anymore. It’s hard to do check runs and double signing on checks in the office when no one’s in the office. And so, we really saw some tailwinds behind ACH volume growth due to those factors as well. And this is primarily an acceleration of long standing move from check payments to ACH payments in particular and also to other types of electronic payments. And if we just saw AFP, the Association for Financial Professionals just released, I guess it’s a triennial report and the state of the use of payments by corporates, particularly in the B2B space. And I think just like we expected based on what’s been going on, it documented a very large decline in the use of checks for B2B payments and a corresponding growth in ACH payments for B2B.

George Peabody:

Is that change being driven by banks who are exposing ACH more effectively to their business account holders? Or is it coming because FinTechs who would love to have 1% of your volume and call that you normally successful with that, or I mean, one of the things we all saw is that FinTech for a big piece of the solution over the last few years.

Michael Herd:

Yeah, the answer is yes to both. I mean, there really is, I would say native ACH adoption for those things. I called out consumer bill payments, B2B, and FinTechs helped facilitate those, but a lot of those are bank driven, bank directly to a corporate customer. Then there’s FinTechs that use ACH for their own purposes, to fund and to pay out from their own offerings, their digital wallets, their services that they offer, brokerage accounts, other type of accounts that they provide. And they substantially use ACH to fund those and to enable payouts. So, it’s really both. And then I would throw in just the… Calling out again in the pandemic era that the change in behavior really that was wrought by the events going back into the first half of 2020. And, I think we’d had a lot of success over the years and moving bill payments to be online, moving B2B to be electronic.

But in that time, people and businesses really had their own strong incentives to change behavior that wasn’t reliant on anyone’s marketing or product offerings. They adapted adjusted course very quickly, and I think the systems worked, the ACH worked. The treasury put 120 million stimulus payments into the ACH over the matter of a couple hours. And, our system operators, the clearing house and the Fed didn’t bat an eye, they just chewed through it and got it to where it’s going. And, that’s a strength of the ACH, it’s an industrial strength network and can handle that type of payment volume activity in a very short period of time.

George Peabody:

Mike, before I ask Yvette to guide the discussion further, one of the innovations… I guess in the last five years or so longer, it’s been the same day ACH, right?

Michael Herd:

Of course. Mm-hmm.

George Peabody:

We’re able to move money via your network within… Actually a couple few times, within a given 24 hour period, was traditionally a single window overnight. What role is the same day had in this growth over the last few years?

Michael Herd:

I think same day ACH has had a very catalyzing role in of the ongoing relevance of the ACH network to the economy, to businesses, to FinTechs to consumers. It was introduced in 2016, so actually we just passed six years since it’s been live in the marketplace. And since inception it’s moved more than two billion payments and three trillion dollars in activity. But I think even more so than just the numbers, I think it’s continued to have ACH be directly front and center relevant to the conversation about where the payment system is going, how we’re improving it, not just we… I mean, we collectively everyone. How it’s being improved and what its future state is going to look like. And I think same day ACH is integral to that.

Yvette Bohanan:

You just released the limits, you actually increased limits

Michael Herd:

Just this past March, the transaction limits for same day were increased tenfold from the prior limit of a hundred thousand dollars per payment to a million dollars per payment. And that’s really based on a couple things. One is, demand from users to have the ability to move larger dollars through the capability. And we have staged those increases over time, mostly as a form of a risk management, really more just allowing users, but also the financial institutions to get used to the dollar flows that are at different points throughout the day and seeing what those look like and what becoming accustomed to what a new normal looks like, before throwing the door wide open to the next change. So I think it’s been very deliberately staged and planned to introduce the fewest amounts of surprises to the industry, but I think it’s been well received that we have continued to increase that limit over time that we didn’t just stay where we were when that went live in 2016.

Yvette Bohanan:

And are you seeing most banks supporting it, lift their controls a little bit and a lot-

Michael Herd:

We do. Yeah. We stay pretty closely connected to most of the larger institutions that send and receive ACH. And through our payment association members, we have a good view how many of the rest of the institutions around the country use ACH, including same day. And generally speaking the rule of thumb is that, when the limits go up, originating institutions allow clients to originate up to the new limits. So it’s been pretty broadly supported.

Yvette Bohanan:

… That’s great. That’s wonderful for everybody.

Michael Herd:

Yeah.

Yvette Bohanan:

Okay, so we’re going to shift gears a little bit on you here. So we have this huge backdrop workhorse system, been around since the 70s, riving hot.

Michael Herd:

Since the 70s, but modernized.

Yvette Bohanan:

But modernized quite a bit.

Michael Herd:

You would not recognize what existed in the 70s for what exists today.

George Peabody:

No more bag tape, huh?

Yvette Bohanan:

That’s a good thing.

Michael Herd:

Right.

Yvette Bohanan:

And so, when you think about where things are going and expanding, one of the hot topics in the payments industry in general right now is cross border payments.

Michael Herd:

Right.

Yvette Bohanan:

You have the BIS with Project Nexus, you have lots of countries exploring crypto, like Central bank digital currencies in a cross-border architecture like Project Dunbar. Everyone’s figuring out how do we do cross-border better? And I think people don’t realize maybe that there is an international ACH code for cross payments. So I wanted to just explore that for a few minutes with you. Can you explain to our listeners the genesis of that and how its used?

Michael Herd:

Yeah, so maybe that’s another well kept secret for the ACH network, but it does have international capabilities. We have conveniently called the International ACH transaction, IAT. It’s a feature of the system, it’s existed since 2009, but even prior to that, the ACH had cross-border transaction capabilities. And, the core use cases for using IAT are very similar to ACH core use cases for domestic transactions, it’s payroll. When you have employees, you’re paying employees that live outside of the country or a foreign company making payroll payments to US based employees, but also retirement payments for expats. Those who are fortunate enough to have made the decision to retire in Ecuador or Portugal or what have you, setting retirement payments, or your providing their social security benefits, the federal government is a user of IAT to deliver benefit payments to people living abroad. And, a number of different types of other use cases like bill payments or even B2B payments.

So some very similar use cases for cross border purposes as to what exists for domestic use cases and volume for IAT is north a hundred million transactions a year, so not zero. But certainly I think there is great potential for expansion of those capabilities for how they’re being used and to drive those volumes north. I think a couple of key differences between using IAT and domestically using the ACH is that the transaction itself includes information about the parties to it beyond just the account number for screening purposes, right? So you want to know that whatever you’re doing for cross-border payments, that you’re not in violation of OAC sanctions programs. So in the ACH world the IAT itself carries the information about the parties to the payment for screening purposes. So we don’t put anybody in violation of their… Well at least that as a network, put them in that situation.

Everyone’s responsible for their own OFAC screening. And then above and beyond the domestic network, there’s the concept of having an international gateway, the entity that will move the payments into or out of the country. And the Federal Reserve, of course in the US is such a gateway service through their Fed global. Other financial institutions provide those services as well. But as a company, you can’t just put a payment into the system and expect it’s going to arrive in Brussels, or London, or Paris, or what have you, there needs to be an arrangement, a way to deliver that into or out of the country. So, that’s just an extra of a layer that has to happen when using IAT, but it’s there, it works well. And yeah, I’d love to see some additional traction and adoption coming out of using the international ACH.

Yvette Bohanan:

Yeah, yeah. Absolutely. I think it is a well kept secret that this evening it’s been mostly around government payments and large Fi payments. So, there you go folks.

Michael Herd:

Yeah, I think, But just even for B2B, right? I mean, like we said, we’ve seen a massive transformation domestically with B2B payments and really finally getting away from the reliance on paper checks. And I think the same potential is there for the international B2B.

Yvette Bohanan:

Yeah, I think that’s what people are recognizing when you talk cross-border, typically, from a US-centric perspective, which is what we’re doing here. You look at remittances being a big deal, person to person payments cross-border and B2B for global trade.

Michael Herd:

Right.

Yvette Bohanan:

It’s huge. And, both areas are under a tremendous amount of innovation have been for a while, but people are surprised to find out that there’s this international ACH capability that might be helpful to them. So yeah.

Michael Herd:

Hopefully this podcast is going to do something to help dispel that.

Yvette Bohanan:

Yeah. Well next year when we talk again, we’ll see what the volume is. Hopefully it’ll gone up to something.

Michael Herd:

We can point to-

George Peabody:

I have to ask. Is part of the best kept secret of the of ACH, is that banks haven’t done a great job exposing the capability their B2B customers?

Michael Herd:

Well, I think that’s a fair question to ask. I’m not sure that I know the answer to it, but-

Yvette Bohanan:

Oh, you’re not going to speak on behalf of 11,500 banks.

Michael Herd:

… Put it this way, I think most of the banks that are the transnational banks, I think they are acutely aware of the international ACH capability. So, I think there’s a good foundation there for its expansion.

Yvette Bohanan:

Yeah, sometimes things are out there for a while and it’s a moment in time. And I think as B2B innovation continues to get more and more traction coming up pandemic and everything, it’s just good for people to realize there are a lot of emerging capabilities when you get to cross-border and eventually all roads lead to cross-border these days I think, so in one way or another. All right. So, that’s international ACH, that’s very helpful. I’m going to switch gears on you and talk some recent rule change.

Michael Herd:

Sure.

Yvette Bohanan:

More or less recent. So I’m going to start with account validation and I’ll tell you… Thank you, my phone was ringing. Off the hook when this one came out, and you guys actually, you had great… You still have it, I believe a great FAQ on this on your website, one of the clearest, most concise and readable interpretations of any rule out there that I’ve been able to point people to for a while. But I just wanted to break it down for a second and talk about what’s going on, the spirit and intent behind some of these.

Michael Herd:

Sure.

Yvette Bohanan:

So with account validation, you’re basically, originators are now required to validate that an account number, the DDA, the deposit demand account is valid, correctly formed, is legitimate. And I’ve heard it was to reduce return code five, operational risk kind of things, having to do with just fat fingering or mistyping or more or less administrative issues. Possibly to mitigate some of the account takeover stuff that we’re seeing out in the industry at large or other types of third party fraud. If you could shed some light on-

Michael Herd:

Yeah, I will

Yvette Bohanan:

… And how people should be thinking about it. And most importantly, is it working? Is it having your desired outcome?

Michael Herd:

Yeah. So, a couple things, first of all thank you for the kind words about the FAQ. We actually, as a result of this, pulled together the first of what became a great many number of resource centers aimed at the corporate audience to whom this rule applies to. I think the rule had an effect of, I’ll use the word again catalyzing the industry, and coming up with and deploying and promoting new solutions in the account validation space. And it became hard to keep track of. So we pulled them together as a resource center to try to do that, especially when we get lots of inquiries on our end about, “Okay, so who’s in the account validation space? Who are service providers? How can we find one? How do we know what services are offered?” So we try to provide that resource center. But about the rule itself, I want to offer maybe some additional clarifications.

The rule applies to originators only of internet initiated debits. So it’s not broad base across any type of ACH transaction by any originator. It’s specific to debits originated on the internet and really getting at that ability for transactions online to have those much greater volumes and the velocity of initiation that the internet environment makes possible. It’s also only applies to the first use of an account number by an originator. So it’s not every time, it’s only the first time you see a new account number being used for an account transfer to pay a bill, to perform some commercially reasonable account validation on that number. So we tried to be narrow in the applicability of the rule to that environment versus a much more broad based type of rule. And that’s really where we were seeing some of the underlying issues that we’re trying to address.

Yvette Bohanan:

Issues around, you mentioned fat fingering, which is certainly one. We do hear of those types of administrative errors when a person would put the account number into the wrong field, the dollar amount, the payment amount field, triggering a multimillion dollar payment unintentionally, and that’s not caught and screened by the various parties along the chain, the originator or processor, and then the ODFI. And that makes its way into the system and that just has a bad effect downstream when a receiving bank gets a multimillion dollar payment into a customer’s account, that only should been for a couple hundred dollars. So that seems like an avoidable error that this type of rule is, it goes to… But it also goes to a number of types of third party fraud scenarios, that try to take advantage of the ability to generate large numbers of transactions in a short period of time, and sometimes can be concentrated against a small number of receiving banks through their RTNs or accounts at those receiving banks.

And so this type of validation requirement is also intended to try to minimize and cut down on the frequency, but also the success rate of those types of frauds. And, it really goes to protecting the downstream party from being the fall guy for those types of incidents. It’s maybe a little counterintuitive that… But a rule isn’t necessarily in place to protect you from yourself, a rule is in place to protect other parties in the network from something that might happen through you, or because of what you do, or don’t do. So it’s really, that’s the intent of a rule to the degree that it is working, I’d offer a couple things. It’s hard to measure things like this precisely, but we tend to look at things like transactions that are returned. We do not see an ongoing increase in the overall rate of returns that are associated with those types of situations, those types of frauds.

And, we certainly don’t know that ongoing types of scenarios that are generating those significant numbers of fraudulent payments against receiving institutions in a mass scale. So from those extents, I think the rule is having the intended effect, unintended but I think beneficial side effect is that even in eCommerce and payments where this rule does not apply, parties are exploring how to utilize things like account validation into their daily processes, like adding suppliers to master files for accounts payable. How to add employees in payroll and validate the accounts that they’re using so you’re not making bad payroll payments. I think they’re taking the lessons learned in initiating web debits and applying those to other realms where they do business and where they add accounts for making ACH payments.

That’s a great point. And also begs the… I mean, when we read the ruling coming out, we were struck by the fact that it was super focused on web debits.

Michael Herd:

Mm-hmm.

Yvette Bohanan:

And wondering, do you foresee a point where it would just make sense to say, “No matter what you’re doing, no matter what the SEC is like, just be a good citizen.”

Michael Herd:

Yeah, I don’t have a specific answer to that question as of yet. I’d say the question that you raised has been raised elsewhere and otherwise. And it’s a topic of conversation that if it’s applicable and works in this environment, we should be looking at it in other environments as well. So, I think that is part of the conversation of the future.

George Peabody:

Mike, another rule change that you recently announced has got to do with micro entries. I think civilians don’t know them as micro deposits.

Michael Herd:

Right. Test transactions, right?

George Peabody:

Yeah. So this is the technique that the provider makes a couple of tiny random deposits into an account holder’s account, and then the account holder reads back the deposit amounts in order to really validate that to the provider that their new customer actually controls that particular column.

Michael Herd:

Right, right. Mm-hmm.

George Peabody:

And the rulings, the first phase went into effect of September to find the value of those micro entries and how it should be identified. And then, you’ve got another phase coming up in March to ensure monitoring of those entries for fraud patterns, great stuff.

Michael Herd:

Mm-hmm.

George Peabody:

I guess what we’re curious about is, PayPal pioneered this approach back in the 90s. Why go through the rule making exercise now?

Michael Herd:

Yeah, so it’s a good question, right? This is not a rule to create something new. This is a rule to put some standards in place for how these types of payments are being used. PayPal did pioneer the test transactions if it was in the 90s, as you say, I’ll take your word for it, I didn’t look that up. But it just a multitude of variations on how these are being done. And the triggering of that for us was some susceptibility for these to be used as a vector for fraud. And putting some standards in place so that again, the various parties along the chain can tell what they are. There’s common formatting standards in place. They all carry us as the same description so that if a receiving institution is looking at inbound traffic or consumer is looking at an account statement online, or hopefully not they’re in the mail, but let’s say online, that they can identify exactly which of the transactions they’ve received are these test transactions, it’ll say that’s what it is.

So it’s really more about putting standards in place and enabling identification as a stage one, so that they can be readily identified by the parties in the network, particularly when they need to be investigated or researched because there’s a of error or fraud that’s going on. And then, to the part two that you referenced, the commercially reasonable fraud detection going on with that, I think that probably speaks for itself, but if you’re an entity that is utilizing these types of transactions, that you have some methods in place for being able to tell if they’re being initiated with fraudulent intent. Just last point, we’re not mandating that everyone use micro entries, it’s still originator’s choice whether you decide to use something like this, something else entirely.

George Peabody:

Sure.

Michael Herd:

The idea is that when they’re used there’s some standards in place.

George Peabody:

Have you seen growth in this particular technique or?

Michael Herd:

Well, yeah. So the rule just went into effect in September. And so, one of the early things that we’ll be doing is trying to measure the volume of these moving through the system since they have a standard identification, that is something we should be able to do and you should be able to judge or have some data to tell about the success rate or the fail rate. So that’ll be forthcoming in the near future.

George Peabody:

Nothing like knowing what your transaction is actually doing?

Michael Herd:

That’s correct. Right, uh-huh.

Yvette Bohanan:

Exactly. Okay. The other one that we wanted to focus on for a few minutes is a rule around third party sender roles and responsibilities. And I’m very curious about this one and diving in because we go through a lot of discussions with clients or with people in workshops. And they assume that there’s so much talk about the card networks and payment facilitation and things like that, that this stakeholder role of a facilitator of payment transactions doesn’t exist in ACH, and it couldn’t be further from the truth.

Michael Herd:

Right.

Yvette Bohanan:

There’s a lot of helpers. I mean, if you think about your own personal payroll, your employer probably works with a company that then probably gets to… Maybe another company that’s actually generating your payroll that’s working with the bank. There’s a lot of cooks in the kitchen when it comes to moving these transactions through the network and there are specific rules around them. So third party sender rule is one of those and there’s some new rules around it. So, can we unpack that one a little bit?

Michael Herd:

Sure, sure. Well, you’re right, third parties. We call them third party centers in the ACH world. And I just have to pause for a second just to acknowledge the discussion in your questions. We are truly, truly geeking out here in payments and I love it. But yes, third party centers have been around the start of the ACH network and they play a very, very important role. They’re responsible for a lot of the business, a lot of the volume. Just think about somebody entities in payroll space like paychecks and ADP, very significantly sized entities generating lots of business and lots of transaction volumes. So very important to the state of the ACH network. And I think it’s important when you have an entity like that, a role like that, that it’s defined that there are obligations go along with having that party defined. They really, in some sense fill not just the processing chain, but the legal chain in terms of who has a contract with whom to process payments.

And that usually spells out what they’re responsible for and what they’re not responsible for. So I think it’s important to do that in a rule set like ours to say there’s this type of entity, and this is what it does, and this is what they’re responsible for. So, I think that’s a core function of keeping a rule set for a payment network. And that’s of course one of the core things that Nacha does. So, since we started requiring the registration of third party senders, we now know that there’s more than 7000 of these entities who play a role in ACH processing. So almost as many third party senders as there are financial institutions that originate ACH payments, that tells you how large that role is and how important that is to the overall functioning of the ACH network.So it’s important to know that the entities, and the relationships that they have with financial institutions, and businesses, and consumers, are appropriately managed. And that when a financial institution is onboarding them as a customer, that there is a level playing field, that there’s a standard amount of due diligence that is required and is performed when onboarding.

We shouldn’t have a situation where we have a race to the bottom where somebody can hold up their hands saying, “Hey, come process through me. I have the fewest number of onboarding requirements so you don’t have to worry about all that compliance stuff and audit stuff.” It’s like, no, we should have some common standards when it comes to that kind of thing so that we have a safe network and it’s high quality and well managed, and you compete on your products, and you compete on what do you offer versus you not having compliance obligations. So, that’s the view that we take with respect to third party senders. I think sometimes because we pass rules around third parties there’s this perception that they’re bad players, and I like to take the opportunity to try to dispel that myth, which is the modern ACH network wouldn’t be what it is without third parties. And, I think we appreciate the role that they play and the business that they generate, but I think there are standards to be set in terms of how those types of relationships are managed.

Yvette Bohanan:

Yeah, no, I think that’s a great point. And, a lot of times you’ll talk about the chain of liability, it’s really a chain of trust.

Michael Herd:

Well, if you have a well-defined chain of liability, we can all trust each other.

Yvette Bohanan:

Exactly, precisely. And those standards basically allow people to function at scale. Which you guys are obviously at scale, we’ve established that for sure, but at scale and allow the network to grow with participants, right?

Michael Herd:

Right.

Yvette Bohanan:

So, it’s an interesting development to be creating those now, but at the same time, given the history of the network, you’ve pointed out it’s evolved, it’s not the same network it was in the 70s, it’s not the same rule set or technology or participants. So, as everything continues to evolve, you’re evolving within.

Michael Herd:

That’s well said.

Yvette Bohanan:

Fascinating. Speaking of that, one more topic.

Michael Herd:

Mm-hmm.

Yvette Bohanan:

Speed, everyone, it’s the need for speed. Everyone is about fast, faster, fastest out there, and availability goes along with that. And, we’ve heard rumblings, we’ve read rumblings a little bit about the possibility that the operators are going to increase the ACH network availability, and maybe continue to close some operational windows. And that’s been going on with same day already.

Michael Herd:

Right.

Yvette Bohanan:

You’ve been not only increasing limits, but you’ve been adding operating windows for same day ACH, which is really cool. Can you tell us a little bit, maybe foreshadow this story a little bit, what should we expecting here?

Michael Herd:

So, it’s not even just foreshadow, I can report.

Yvette Bohanan:

Ah, excellent, excellent.

Michael Herd:

It’s a great topic, it’s very timely. We have added the three same day ACH windows since we went live in 2016. And, the most recent enhancement is that both of our operators have added ACH file distributions late at night from Monday through Friday. I call it late night ACH.

Yvette Bohanan:

I like that.

Michael Herd:

And how can I best explain this? So distributing files late at night that would otherwise get delivered to banks the next morning is a form of acceleration, it’s a form of faster. You’re receiving the payment file at 11:30 PM on Monday night instead of 6:30 AM Tuesday morning and so on throughout the week. And where that really gets significant in my view is when those files are received on Friday nights in advance of the weekend or even a holiday weekend. And where we did have some evening ACH processing and file distributions previously on Monday through Thursday, we had a gap on Fridays. And this has gone into effect as of last month, September. And it’s really filling that gap on Friday nights to where every receiving institution in the ACH network is getting a file of ACH payments on Friday night at 11:30 PM in advance of the weekend.

And I think that is where the power really comes in terms of having information about what’s happening to an account, being able to show an account holder transactions that are pending that will post to their account on Monday morning or in the case of a holiday weekend on Tuesday morning to show what’s coming in, and just as importantly to show what will be going out, and perhaps being able to better manage an account, not get into an overdraft or an insufficient funds situation, or even at the choice of the institution to make those funds available to the consumer in advance, even before opening up for business on Monday morning. So, I think this is a huge step forward for the ongoing faster ACH, so you will. They’re not technically same at ACH payments, they’re settling at 8:30 AM the next banking day, but they’re being received much more quickly, much sooner I should say, than they were before.

And we have some insights that some of the volume of those payments moving particularly on the Friday nights are sizeable. These would be payments that would be for many institutions not received until Monday morning. Many of the banks do and have the ability to schedule their own file deliveries even over the weekends and have been doing that. It’s not that nothing existed along those lines before, but this is really making it across the entirety of the ACH network and again, creating a standard flow in receipt of files late at night. So, it’s the next unknown we’ve pushed into and it seems to be very well received. And I think it’s related to the idea of making funds available to consumers, especially more quickly. And this is certainly an area that many receiving institutions in the ACH world are deciding to get into, making funds available to the account holder before the network actually settles those funds varies scheduled times.

And so, for the most part I think that is to a consumer benefit, I would call out, I had in other places, that’s a practice that if not managed correctly, that if it’s not monitored correctly, if there’s not controls in place, can be a vector for fraud. For fraud moving through and being given… Fraudsters, like early funds availability too, right?

Yvette Bohanan:

Right.

Michael Herd:

So I would just call that out as the potential counterpoint to early funds availability. A couple other points I’d like to make if I can just continue on?

Yvette Bohanan:

Please do.

Michael Herd:

Our operators, Monday through Fridays at least, they’re actually up and running close to 24 hours a day. There’s only a very small period of time after 2:00 AM when they’re reset for the next day that they’re not accepting file submissions. So, least Monday through Friday ACH is virtually a 24 hour network.

The remaining gap that we have is weekends and banking holidays. And there’s a tremendous interest in continuing to push the availability of ACH into those time periods, and we are looking at that. I think the constraint we have with weekends is that quite literally the Federal Reserves National Settlement Service, which the ACH uses to settle transactions, it’s closed. So, it closes Friday night at 6:30 or 7:00 PM whatever the time is, and reopens on Monday morning at 7:30 AM. So, it’s the settlement mechanism literally is not available for ACH during those time periods. So, there’s clearly an interest in having the Fed expand the operating hours for that service at the same time that we’ve already got RTP 24/7/365, right? And we’re going to have FedNow 24/7/365, come next sometime May through July in 2023. It would be, I think a huge benefit for just the payment system in the US generally, but also the ACH network in particular to have the settlement service available much closer to a 24/7/365 posture.

Yvette Bohanan:

And one would hope and dream with the work going on with FedNow, that perhaps that’s living in a world from a technical perspective, that a new settlement service could be-

Michael Herd:

FedNow has had to address things like liquidity management.

Yvette Bohanan:

… Mm-hmm.

Michael Herd:

And that includes how do we manage liquidity after Fedwire closes? That’s the similar issue as with NSS closing, that Fedwire has closing hours too, but participants in the FedNow system have to have a way to manage liquidity when Fedwire is closed. And they’re also going to optionally offer a seven day accounting for participants in FedNow. And it seems, I struggle with how… If you’re an institution, you’re not just a FedNow participant, we don’t do anything else. Right? If we’re going to take advantage of seven day accounting for FedNow, does that have a domino effect throughout the rest of our institution and all the other things that we do, and how do we figure that out? So, really seems like that is a direction that we’re all collectively moving in, and I think from the ACH perspective, we’d like to have the ability to move in that direction as well.

Yvette Bohanan:

Yeah.

George Peabody:

Well, Mike, this is really exciting. I’m sorry, we’re going to have to leave it there. And I’m just having visions of this spiffy new American payment systems. It’s very exciting. So-

Michael Herd:

Yeah, yes it is.

George Peabody:

… Thank you very much for joining us.

Michael Herd:

Well, it’s my pleasure.

George Peabody:

We’ll be back to you. We look forward to the next conversation.

Yvette Bohanan:

Thanks so much. Take care.

George Peabody:

Okay, Yvette, that was really interesting. And first of all, I appreciated this shout out to Glenbrook saying ACH is hot.

Yvette Bohanan:

Yeah.

George Peabody:

They used it.

Yvette Bohanan:

Yes.

George Peabody:

We’re not a media company, so that was pretty cool.

Yvette Bohanan:

And a shout out to Nicole Pinto, who was the person who wrote that P

George Peabody:

That’s right.

Yvette Bohanan:

I remember when we were trying to figure out a title that was a lot of fun. And we weren’t sure, we’re just like, “Should we put that down?” And then we’re like, “Yes.”

George Peabody:

Oh, I remember encouraging her to, absolutely.

Yvette Bohanan:

It was fun.

George Peabody:

So what jumped out at you?

Yvette Bohanan:

Oh my goodness, what didn’t. So first of all, I think it’s always good to have people who are on the front lines writing these operating rules to talk with us, because as we were saying, there’s so many people involved as stakeholders in the network. It’s almost like that telephone game when you’re a kid and you say something, you whispered in someone’s ear and it goes around the circle and then the last person tells you what they heard. And it’s like, “Wait a minute, this is not what I said.” That happens a lot in payments with operating rules, and with new rules being introduced it can be really confusing. And so, I’m so appreciative that Mike joined us, and I know there was a little bit of, when I said, “I think we should be bringing people on to talk about operating roles.” Everyone was like, “Well, we know they’re important, but really?” Yes, really.

And no matter what, we’d love to get the card networks in here, the Fed, clearinghouse, to talk about changes. And like I said, the spirit and intent. What are we trying to get at by doing this? And I love the fact that even though there’s a lot of practices out there today with the system, with the ACH. They’re making sure that they’re standardizing things when they need to because they’re such scale, and there are so many participants, and it’s growing, right? That now they’re seeing areas where standardization becomes important. They’re not telling anyone to stop what they’re doing, but they’re telling everyone there’s a level playing field.

And I love the fact that he used those words because we say that all the time, that the network’s role in creating these rules and having this governance, a huge part of that is creating a level playing field. And when you have 11,500 banks, 7,000, my gosh, registered third party senders, you need a level playing field. There’s like where you compete and there’s where everyone gets along and does the same thing so that it works for everybody. And, I think that was just a wonderful distinction that was being made. That’s me geeking out on rules, which never happens, but yeah.

George Peabody:

The longer I’ve been in payments the more I’ve appreciated the fact that rules are foundational to payment systems.

Yvette Bohanan:

Mm-hmm.

George Peabody:

And, which means if we’re interested in using a payment network proving one bringing being a FinTech, we better know what those rules are about.

Yvette Bohanan:

Absolutely. I mean, and rules, sometimes they’re grounded in regulation, sometimes they are grounded in what the network’s trying to accomplish. It’s a combination of both. And they’re just vital to making everything work and to having adoption and stability. The other thing that I found fascinating was the very end of the discussion when we started talking about pushing that envelope of 24/7, 365, and this is not new to payment system because the fast payment or instant payment system, they’re doing this. And Mike was talking about that when he said, funds availability and institutions choosing to do this, networks being created to do that funds availability, You still have that inner bank settlement. Who knew that in 2022 we’d be sitting here talking about innovation around interbank settlement. But that’s exactly where we were going towards the end of the conversation. And, other countries are doing this.

If you look at India, they have done 24/7, 365 across the board for their systems, not just IMPS, UPI, but all of them, right? It’s possible, but it’s not an overnight thing, but it’s possible. And with the right infrastructure. And, we don’t talk very often about the National Settlement System and it’s role, it’s huge, it’s a really important role. It’s the backbone of the backbone, it’s huge. But everything is innovating and evolving right now. So, we need to get someone on from FedNow to talk about what they’re doing with interbank settlement, how that might ripple out. I think that’s a great next topic.

George Peabody:

The picture he painted, suddenly I’m looking at with the innovation at the way back end, as you say, look what we can do with these payment systems that ACH has been around for a long time. One of the things that struck me was that the interest in the metadata now in the cross border stuff, understanding who those parties are.

Yvette Bohanan:

Yeah, Well, yeah, travel rule that you got to know what’s going on.

George Peabody:

The DDA information, the flag that this is indeed a micro entry being added. Pretty cool. If you can start to describe what your transactions are, then you can start to measure what in fact their usage, and really have an impact on things like fraud.

Yvette Bohanan:

Yeah. Measurement is how you get better, so.

George Peabody:

Right.

Yvette Bohanan:

It’s true for networks too.

George Peabody:

All right, well, let’s leave it there.

Yvette Bohanan:

Alrighty. George, it’s always a pleasure. Thank you.

George Peabody:

All right, we’ll see you next time, Yvette. Thank you very much. And, thank you all for listening to Payments On Fire. If you’ve got ideas about who we should have on the show suggestions, send an email please to paymentsonfire@glenbrook.com. We really appreciate your feedback.

Yvette Bohanan:

Until next time, take care and do good work.