Fiserv's upgrades to key processing software could remove another roadblock in the way of the many banks that want to speed up their ACH payments.
Banks have clamored for years for faster processing, arguing it would improve fraud prevention. But until now, few have had the software necessary to make full use of the Federal Reserve banks' same-day settlement service.
Citigroup Inc. is slated to become the first to implement the upgrades to Fiserv's payments processing software, and when it does, that will eliminate at least one hurdle banks face. Citi's move would make it easier to add its volume to the same-day service, possibly leading other banks to commit to similar upgrades.
"If a large bank gets on board, then there's opportunity certainly for more volume to go through" the same-day automated clearing house payments service, said Nancy Atkinson, a senior analyst with Aite Group LLC in Boston.
Fiserv said Citi will use an add-on to its PEP+, or Paperless Entry Processing, program. The Brookfield, Wis., vendor aims to complete the upgrade for Citi by the end of June and make the additions available to other banks in August.
A Citi spokeswoman did not comment last week about the software or whether it plans to enroll in the Fed's service, which only a handful of small and midsize bank holding companies use. In an emailed statement Citi said it supports "the evolution of a same-day ACH environment in the U.S." and that its decision to opt in for clearing services "would be driven by customer demand and critical mass in terms of market adoption."
The upgrades to Fiserv's software are an important step, though most banks won't flock to the Fed's service because of other limitations, including the opt-in nature of the service and the fact that the types of ACH payments that qualify are restricted.
The software upgrades make it "more palatable to the back-office guys, but to the C-level folks it doesn't change the economics of the decision," said Emmett Higdon, the principal of the consulting firm Prizm Strategy.
Analysts estimate about three quarters of banks use PEP+ to deliver ACH payment files to the Fed and The Clearing House Payments Co. LLC, the two operators of ACH settlement in the U.S.
Currently, the software lacks tools to flag qualifying payments automatically. Banks must manually review their files to get an idea of how much money would be settling same day and whether the banks they are pulling funds from participate in the service.
Without clear visibility, "it can throw your accounting off balance," said Laura Clary, the product manager for global payment solutions at Fiserv.
Fiserv has been working on both a software module and companion software to run with the existing program to automate the process, Clary said. As a result of the upgrades, the program will check the eligibility of transactions within a bank's ACH files as well as identify whether the bank receiving the ACH instructions is enrolled in the service.
The Fed in August 2010 rolled out the same-day service to recapture payments volume that the ACH network was losing to direct exchanges between individual banks. Some banks that do a significant amount of ACH volume with each other had set up private connections to settle payments more quickly and cheaply.
Experts say the ability to settle ACH payments faster would help reduce fraud and manage risk because banks could determine more quickly if a customer has funds available. "We speed that up by a full day by being able to get returns and stop fraud more quickly," Higdon said.
The Fed's service allows only six categories to be processed the same day, including converting consumer checks to electronic payments, and payments made by phone or online debited from a checking account.
One scenario that banks have said would make a same-day settlement service most useful is to make last-minute payroll payments for businesses that are late submitting files, which is not one of the six ACH categories eligible today.
Additionally, "the lack of any kind of mandate to participate means that [there] is going to be this very slow, painful growth," since banks want to know that there will be other banks to do business with, Higdon said.
The Fed is unable to require banks to use the service because that would require changes to the ACH operating rules.
Nacha, the electronic payments association that sets and manages the rules for how banks use the ACH network, is studying the topic but has made no official announcement about potential rule changes.
At Nacha's annual conference in Austin, Texas, in April, President and Chief Executive Janet Estep said it is "hard to imagine a future without settlement times changing" from what "they have been for the past 35 years."
The lack of uniform standards is one reason The Clearing House, which operates the Electronic Payments Network service for ACH payments, says it has not offered its own same-day service.
"One of the huge values of the ACH network is how it reaches all or virtually all financial institutions," said Dave Fortney, a senior vice president with The Clearing House. "It's a ubiquitous network. As you introduce new capabilities that really are fundamentally different in terms of timing and in terms of frequency, in terms of types of transactions that are allowed to flow through it — to do that in a way that is only a partial solution … doesn't embrace the value of the network."
For a same-day service to benefit consumers and businesses, "it would need to be reinforced into rules," Fortney added.
Robert Johnston, the U.S. Payments & Receipts product executive at Bank of America Corp., said in an interview recently that there is client demand for faster settlement of electronic payments but there are existing options already available.
"If you need that immediate settlement, it's available via wires today," Johnston said.
A same-day settlement service for ACH payments would "require a significant amount of change, not only from a systems and processing perspective but also from a risk-management perspective," Johnston said.
Still, lagging technology has been a persistent roadblock for banks interested in the limited same-day service.
Even with Fiserv's upgrades there are technical issues banks will have to contend with if they want to use the same-day service.
For example, even if a bank's payments are settled on a same-day basis it does not mean the bank will be able to post to a customer's account on the same day because of outdated account processing systems, which often post transactions in batches rather than in real time.
"The limitation is really on how frequently a receiving bank takes the file it receives from the [ACH] operator and actually posts those files to the DDA," said Rossana Salaris, a partner with Radix Consulting Corp. and a former executive who oversaw payments services at The Clearing House.
"It's taken a while for this processing software to be upgraded … the banks want to know which have opted in and which have not as they're creating their ACH files [and] which payments clear today versus tomorrow," said Steven Cordray, a product manager with the Federal Reserve Bank of Atlanta.
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