When it comes to business-to-business (B2B) payments, those funneled through automated clearing house (ACH) rails are increasingly popular. Although many businesses are still mailing checks as payment, more businesses are seeing the risks and looking toward ACH payments as a cost-efficient and convenient alternative.
During a recent PaymentsJournal podcast, Brian Holbrook, Director of Product Strategy and Integrated Services, LSEG Risk Intelligence, and James Wester, Director of Cryptocurrency and Co-Head of Payments at Javelin Strategy & Research, delved into the current landscape of ACH payments in B2B use cases, the potential impact of Nacha’s proposed amendments on originators, and the challenges and opportunities for originators that are arising from these amendments.
The Current Landscape
ACH payments have been growing in popularity among businesses making B2B payments. Funds are transferred seamlessly between bank accounts, and settlement times range from one to three days. ACH payments are also fast and more cost-effective than paper checks. As waiting for payment becomes less sustainable in the maintenance of cash flow, B2B use cases will continue to expand.
“So when we look at data coming out of Nacha, we can see that the B2B volume increases across ACH are up nearly 10%,” Holbrook said.
“We’re seeing a significant growth across the originator landscape, seeing multiple increases in different verticals, different industries. And, of course, with those increases come additional risk.
“We see some new rules coming out that are going to have an impact on the whole ecosystem, but particularly on the originator side.”
With the ACH network processing tens of billions of transactions, with thousands of banks in participation, and numerous regulations, the network can be difficult to navigate.
“I think that sometimes it’s a bit of a surprise—just how the infrastructure for ACH transactions, the use of the ACH network, and the need across multiple use cases is growing so very, quickly and so expertise in this space is sometimes hard to come by,” Wester said.
According to Holbrook, Nacha reported that Same Day ACH payments were up 20% in Q3 of 2023 over the same quarter a year ago, a significant jump indeed.
“When you look at that Same Day (ACH), as we began to see that demand for faster and faster settlement times, faster and faster throughput, the other side of that coin is, OK, less and less time to address issues, less and less time to figure things out like fraud, suspicious transactions,” Wester said.
“I think that surprised everybody in terms of how quickly we are beginning to move to this need for faster and faster settlement across multiple networks, but especially across ACH.”
Getting Familiar with Key Proposed Amendments
Nacha is proposing a new risk management framework that could affect the entire network, including a third party, the Receiving Depository Financial Institutions (RDFI), the Originating Depository Financial Institutions (ODFI), or a new regulator. The proposals will require more from industry participants.
“These proposals are going to require everybody in the value chain to have more diligence on the accounts, on the account ownership, particularly with higher-dollar value transactions,” Holbrook said.
“It’s going to be critically important that they understand where those funds are coming from, where they’re going to. When something suspicious is happening, that the receiving institution has an opportunity to reject that, that inbound money, or for the originator to call it back.
“It’s going to be paramount that they have the tools to validate accounts, validate identities, and to be able to do it. And as close to real time as possible.”
Risk, Wester said, was not an important topic for a long time. The original focus among fintech players within the industry was growth. However, the tides have changed and more FIs, their partners, and technology vendors have shifted their focus to mitigating risk.
“Risk, compliance, governance, fraud, security, all of those things are now becoming more and more important in coming to the forefront,” he said. “And we’re hearing a lot more about the need for risk, and risk tools, and the things that financial institutions and the financial system have done very, very well.
“So I think that’s a very interesting switch in the last 12 to 18 months, that prominence in terms of risk and compliance being a talking point or something that we’re discussing more.”
Said Holbrook: “It’s really about monitoring across all parties in the value chain funds, recovery tools and standardizing of information so that individual names, descriptions are standard across the network, that there is an ability to recover funds, and that there is monitoring across that. I think that’s really what it comes down to across the value chain.”
Potential Challenges for Originators in Proposed Amendments
Although regulations are put in place to protect participants from fraud, there will always be the challenge of establishing a happy medium between mitigating risk and delivering a seamless customer experience.
“People want these funds moved in as close to real time as possible. So striking the balance between good customer service, good throughput speed, and risk and fraud mitigation is going to be a needle they’re going to have to thread very carefully,” Holbrook said. “They’re going to have to strike a balance there, and they’re going to need processes, procedures, and tools to be able to do this.
“And those tools are going to have to work in as near real time as possible so that you’re not applying excessive friction to your customer base or to the movement of funds.”
Wester elaborated on the required balancing act.
“And that’s almost as much art as it is science,” he said. “That’s one of the things that we’ve said about security for a really long time. You can make something absolutely secure, but it’s completely useless (if it repels legitimate users with friction), or you can make something very open, but unfortunately, it’s not very secure.
“That balance that you were talking about between customer service and protecting things, making sure that risk is taken care of on one side, but also making sure that customer service and access and all the stuff that we want in terms of payments are available on the other side. It is a balance.”
And it doesn’t end there. Wester said achieving it will require constant monitoring and fine-tuning, ensuring that organizations are doing everything in compliance in terms of fraud, risk, governance, and security. This has to be done in tandem with customer retention efforts.
Opportunities and Benefits from Proposed Amendments
Although these newly proposed amendments are likely to create some headaches, there is a silver lining, and that is the many potential benefits for the ACH Network and the consumers and businesses using it.
“There’s an opportunity for them to not only improve what they’re doing today, but it’s an opportunity to help them reduce risk and loss further within their systems,” Holbrook said.
“There are opportunities here where these tools that they would apply to these types of transactions can be used in other parts of their business that will also, whether it’s at account opening or account closure and throughout a customer lifecycle. Those tools that are available in the market can absolutely help them in other parts of the business.
“And I think that’s a huge opportunity for them to reevaluate many of the systems and processes they have in place today and look for ways to enhance them, make them better, make them faster.”
Said Wester: “A lot of times we think we’re going to take a tool and we’re going to apply it to the problem. Especially a digital solution is going to come in and it’s going to fix things.
“You do have to look at those processes, those things that are internal that may have nothing to do with the technology or the tool, but you still have to address those.
“It is better to have those tools that are easier to integrate, the partners that are easier to work with because you are going to have a lot of stuff internally that you have to work on.”
Top Recommendations for Originators to Prepare for Proposed Amendments
Before originators can tackle and implement the directives under the proposed amendments, they must get educated. Reading up on these amendments on the Nacha website and attending conferences and webinars can be valuable ways to stay current. Once armed with information, originators can look at their current toolbox and see what they have and what they need to add.
“This is an opportunity for compliance departments to really go back and evaluate what they’re doing today, where they may have gaps,” Holbrook said. “What tools do they have in place today that are going to help address these new rules? Or do they need to be looking for something new?
“In some of the other workshops that we have done, many of our clients tell us that they feel good about where their risk and compliance mitigation is at. But there’s more to do. This is where these areas need to be out looking at new solutions and looking at different providers, and seeing what’s going to best fit their needs, what fits into their technical ecosystem, and what’s going to give them the best performance when they’re looking to strike that balance between speed and risk.”
Wester and Holbrook agreed that preparation and proactivity are keys. Organizations need to grant themselves ample time to research, invest, and implement new solutions to remain compliant.
“I think one of the things we’re also seeing a recommendation for is (to) be proactive on this,” Wester said. “A lot of times, when you look at deadlines, when you look at compliance issues, you do an, ‘OK, I must be done by this date,’ and you do a workback. This is one of those where you start sooner rather than later.
“There are issues, there are areas where there may be problems, there may be costs, there may be concerns that need to be worked through that you didn’t know, the things you know that the unknown unknowns.”
Preparation is essential, Holbrook said.
“If you’re going to engage with a new solution, you know you’ve got to get it into a road map, you’ve got to develop, you’ve got to have resources that can work on it, and then you’ve got to have time to test it and do proof of concept,” Holbrook said.
