Using Automated Clearing House (ACH) Payments for More Effective Business Transactions
ACH payments have made headlines in the corporate banking space, as they’ve recently gotten speedier for corporations in the United States. Chuck Garcia, Director of Commercial Deposits and Treasury Management at Associated Bank, provides a bit of context around the use of ACH payments over the years.
ACH: Part of the Banking World for More Than 40 Years
Automated Clearing House payments – a batch processing for electronic transactions – got their origins in banking in 1974.
“Banks began to create a more mainstream product set with ACH and develop products,” Garcia said. “ … It also created different services for particularly large corporates, like auto industries and so forth, where they created different information sets that they could (use to) share information, so not just the payment via the ACH channel but an electronic data interchange – often called EDI – spawned off of that as well.”
Recently, what was once a several-day-process consolidated into same-day transactions in the United States – a commonplace practice for quite some time in other locales around the globe.
Europe and Canada are no strangers to same-day ACH.
“You look at Europe ... you look at Canada,” Garcia said “First there’s far, far fewer banks. You look at the sheer number of banks we have and the payments that have to run through all of the banks of all different sizes. Europe has been so far ahead of us in the card business, not using cash. There’s still a lot of cash in our system and a lot of checks. Now I’m not saying there’s none in the other systems but they’ve far outpaced us in terms of ridding themselves of checks and cash.”
Previously, ACH Moved More Slowly in the United States
“So, if I’m company A and I want to pay you your payroll … they (previously) had to have that file at the bank at least two days in advance,” Garcia said. “It’s a batch process … (and) it would basically be warehoused at the institution (and) funds would then be released the 15th, 31st, whatever your pay date is. But that file had to be at the bank two days in advance.”
“With today’s same-day ACH (transactions), a file could show up in the morning – say your company forgot to pay you, or you’re a new employee or whatever the case may be,” Garcia said. “Today that file could show up in the morning (and) you would see same-day funds in your institution ... so (while it’s) still a batch process – it’s not a real-time payment like a wire transfer – but (it’s now a quicker) batch process and institutions can now process that payment on a same-day basis.”
ACH Continues to Evolve – and Even Helps Combat Fraud
“So, different technologies have had to be created,” he said. “It’s a much, much lower-cost vehicle for both corporate and banks to use, but it also has created new technologies that have to be managed; there’s fraud within the system that has to be managed. So many of the manual intensive elements have certainly gone away, but there’s also new technologies and new employees that have to be around this as well.”
One of the primary advantages to financial institutions using ACH payments is the decreased risk of fraud.
“… Because, if you think about it, if a file is sitting warehoused for a day or two – or sometimes four, five or six days, depending on what a company does – the chances of that being compromised are much higher than something going in in the morning, payments are out in the system, the reality there’s fraud opportunity everywhere, but yes I think those statistics are showing,” Garcia said.