The payments industry is receiving a facelift thanks to a new rule that will enable the same-day settlement of U.S.-based automatic clearing house (ACH) credit payments of $25,000 or less.
The first phase of the rule, which goes into effect on Sept. 23, three days from now, represents an important innovation for businesses across the country and the nearly $40 trillion in payments made through the ACH network each year. Soon, all financial institutions will be required to settle eligible ACH credit payments on a same-day basis. In September 2017, the rule will expand to include debit payments, and by March 2018, the rule will stipulate that financial institutions make funds available to recipients by 5 p.m. local time.
The new rule will affect virtually every entity in the ACH transaction ecosystem, including financial institutions, corporate enterprises, small businesses, and consumers. While some players, such as large financial institutions, likely already have the capability to process requests for same-day ACH settlements, others could face more hurdles as they adapt to the new rules. Despite these challenges, same-day ACH is a beneficial system that businesses will want to adapt to and employ in their operations.
The same-day ACH rule presents both opportunities and challenges for companies of all sizes.
The biggest advantage of having access to same-day settlements of ACH payments is the increased speed at which businesses will now be able to perform their day-to-day, and even intra-day, operations.
Previously, ACH payments took 24 hours to 48 hours to process, and the only way businesses could do a same-day payment was via a wire transfer, a very manual and therefore costly and cumbersome process that is not practical for smaller payments. While a day or two might not seem like a long time to wait to receive payment, today’s increasingly interconnected and hyper-competitive global economy requires more agility in moving funds and reconciling cash flow daily.
Consider a clothing store called “Bob’s Fine Apparel Wholesale” getting ready to make an order of hats from a new supplier. First, Bob’s has to make sure it has enough cash on hand to make the purchase without dipping into its credit line. However, the store is expecting thousands of dollars in payments from other vendors and business partners. By the time Bob’s receives the necessary payments, a competing clothing store has swooped in and purchased the entire inventory of hats. Flummoxed, and not wanting to endanger customer relationships, Bob’s has no choice but to go to another, more expensive supplier.
That kind of situation happens all too frequently, much to the chagrin of the millions of businesses that rely on short-term cash flow to keep their operations in the black. The same-day settlement of ACH credit payments offers a powerful solution that helps improve the efficiency of current payment and billing cycles. Other potential use cases for the new ACH rule include:
- Emergency payroll. Paying employees promptly in the event of an error with regular payroll processing, or to provide a final paycheck on an employee’s last day (some states require companies to deliver a final, complete pay to employees on their last day of employment).
- Business-to-business (B2B) payments. Providing vendors and other business partners with near-instant payments to avoid potential late fees or to stretch cash on hand as long as possible.
- Same-day claims disbursement. Allowing policyholders and patients to receive insurance benefits directly into their accounts, even on the same day as an estimate or appointment.
For CFOs, whether at a small company or a large, publicly-traded firm, the benefits of same-day ACH payments go even further.
On the payer’s side, CFOs will benefit from:
- Improved cash flow and a stronger, more accurate balance sheet;
- Reduced cost for small dollar, expedited transactions; and
- Decrease in days payable outstanding (DPO) and invoice processing/payment cycle time.
As a payee, CFOs will benefit from:
- Improved cash flow as a result of a better cash application cycle time when remittance detail is included;
- Reduced costs compared to many other payment methods (wire, card, check, etc.);
- Improved ability to track payment for goods and services, including days sales outstanding (DSO), average days delinquent (ADD), and the collection effectiveness index (CEI); and
- Reduced risk of default or late payments since collection cycles will be quicker.
Taken together, these benefits represent a boon for the payments industry and financial executives, removing many of the barriers and inefficiencies from existing payment practices.
How to Prepare
Although many businesses are already prepared to process same-day settlements of ACH payments, implementing same-day capabilities may pose a challenge for some firms. For one, many companies will have to update their existing payment and billing systems to make sure they have clean, accurate records. It will be especially important to be aware of settlement dates so that all payments are completed on time and in an orderly manner. As with any electronic payments system, security issues and fees levied by their financial institution may also occur when using the ACH network for same-day payments.
Businesses that have not begun planning to implement same-day ACH practices must first determine if same-day payments are right for them and how to implement any necessary policy and procedure changes. NACHA, The Electronic Payments Association, a non-profit that administers and facilitates ACH payments, developed a “Same Day ACH for Businesses Essentials Guide,” that businesses can use to evaluate the various uses, impact, and implementation of the same-day ACH rule.
While all current payment types will continue to exist within the ACH network, the same-day ACH rule is another milestone in the continued evolution of the payments industry. Already, there is evidence that many firms are on target to both receive and originate same-day ACH credit payments in 2016 as the first step in the three-phase process to implement same-day changes: credits, debits (2017), and close-of-business settlements (2018).
According to a NACHA survey of 22 of the top 25 ACH-originating financial institutions, 95% of respondents indicate they will be able to originate same-day ACH transactions by year-end. Meanwhile, 100% of respondents are planning to offer same-day payroll payments and 95% are planning to offer same-day B2B payments, in addition to services for expedited bill pay and person-to-person (P2P) payments.
These figures are an encouraging sign that the payments industry is moving one step closer to real-time payment capabilities. Eventually, as technology and reporting improves, other same-day commercial payment options will emerge, bringing global commerce even closer together. There’s also the possibility that the $25,000 transaction limit will be raised, thereby providing additional utility to users of the ACH network. Whatever the future holds, both businesses and consumers are united in their continued efforts to improve the ease, speed, and efficiency of making payments.
Richard W. Burke, Jr., is head of corporate products and services with TD Bank. Burke is responsible for the treasury management services and non-retail (small business, government and commercial) liquidity management businesses. He is an active member of both TD’s U.S. and North American executive payments councils.