In the early stages of remote banking and bill payment representatives from several large banks distributed floppy diskettes to potential consumers on crowded busy street corners in New York City. The timeframe was the late 1980’s and home computers were becoming more popular. Although many consumers did not own a personal computer, these diskettes were freely accepted. While connected via an outside modem, consumers were in communication with their bank to pay bills from the comfort of their home or some other remote location using the diskettes provided by these banks. When we fast forward today, paying bills from the computer or mobile phone or another device is the norm. For some consumers, writing a check and sending in the mail, is just as bizarre as Jurassic Park.
For many, the work “behind the scenes” is not generally known or even understood. How are payments routed in order to pay consumer bills? In summary, the bill payment instructions are routed, whether through bank aggregators such as MasterCard RPPS, or sent via the ACH channel as CIEs, or CTX transactions. In some situations, even checks are sent to a payee, where an electronic routing path does not exist. These payments can be sent directly to the RFDI (Receiver Bank) so they can be posted to the biller’s receivable file by their receiving bank that maintains their treasury relationship. Innovation has targeted the digital banking industry to improve the customer experience and drive traffic to the digital channels.
However, as many of us know, when there is a problem and the payment is not delivered through the digital channel ranging from a number of reasons for example bad account data etc., much effort is involved to manual correct these transactions. This manual process is an expense, since it requires resources to repair the transaction. In previous discussions, I mentioned some specific industry initiatives such as NACHA’s partnership with The Clearinghouse to effectively handle the increase of bill payment exception items. Although the NACHA/The Clearinghouse initiative requires manual intervention, when a bank or ODFI implements the fix, each subsequent payment will be routed via the digital channels.
However, there is a lot of noise around faster payments in the U.S. market and the impact this will have on traditional banking. This past Spring, I attended a NYPAY event (www.nypay.org) at the Deloitte’s office in New York City. There was a panel discussion with representatives from the Federal Reserve Bank, FIS Global, MasterCard Worldwide and JP Morgan Chase. These seasoned executives discussed that faster payments is a reality and is no longer just hype. NACHA’s Same Day ACH could be considered a catalyst for faster payments in the U.S.
The Clearinghouse, which is a key stakeholder with faster payments, stated that creating a faster payments ecosystem is “a multi-year effort”. It added that the system “will be designed to address gaps in payment processing and will enable consumers and businesses to securely send and receive immediate payments directly from their accounts at financial institutions.” Benefits would include:
Based on this, there will be a need to better understand the possible “use cases” for digital banking and bill payment. Currently, for many banks, the service is free, because the bank has greater deposits on hand. In many cases, the corresponding dollars to pay for the consumer bill payments are removed from the consumer bank accounts several days before the funds are routed to pay the bills. Moving to faster payments is a major change in the current strategy.
What changes in the business processes will banks need to adhere to? Will there be a potential impact on digital banking? Will there be changes to how exceptions items are handled? Moving to faster payments and same day ACH will bring benefits to the consumer but, in my mind, increase costs, to support the changes to the infrastructure. We will need to play close attention to the how the U.S payment ecosystem continues to evolve.
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