ACHs - Forward into the 60s

Welcome back to Bitesize Payments. In the last episode we discussed the key stakeholders, Corporates, Governments and of course ourselves. 

I this episode we are going to discuss ACH’s – Automated Clearing Houses. ACHs are important for us as by and large that how we get paid. We are going back to relatively modern history late 60s early 70s.  This one is close to my heart as preparing a payroll file for BACs was my first role in Payments.

 Today, I am joined by the rock star Erika Baumann to explain ACHs.....

So, buckle up we are going to discuss their history how they work and who does what. 

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

SPEAKER_00: 0:00

Welcome back, dear listeners, to Bite Size Payments. In the last episode, we discussed the key stakeholders, corporates, governments, and of course, most importantly, ourselves. In this episode, we're going to discuss ACHs, automated clearinghouses. ACHs are important to us as by and large, that's how we get paid. We're going back to relatively modern history. So like late 1960s, early 70s. And this one is close to my heart as my first job in payments was preparing a payroll file for Bax. That was on an eight inch diskette, I'm afraid. So a long time ago. Anyway, buckle up. We're going to discuss the history, how they work, and of course, who does what. Here we go. So ACHs, you may not know much about them, but I'm sure you will have heard of the houses themselves because the brands such as TCH, Natcha, Vax, China Unipay, Stead, etc. They're all pretty famous. But to help me today walk through their history, how they work and who does what is my good friend, Erika Baumann. an all-around rock star. Welcome to the podcast, Erica.

SPEAKER_01: 1:27

Thanks so much, Paul. I'm super excited to be here today. There are not many people in my life that really want to dig into and talk about payments with me. So this is really fantastic. And I've listened to your past episodes and it's quickly become a favorite. So thanks for inviting me.

SPEAKER_00: 1:41

Oh, it's an absolute pleasure. Absolute pleasure. I'm so pleased. The first ACH was Bax in the UK, the British Automated Clearing Service in 1968. And it was closely followed by the California Clearinghouse in 1972 in the US, of course. Other clearinghouses soon appeared, so many so, that it became important to have a single process. And in 1974, they found NACHA, the National Automated Clearinghouse Association. NACHA oversees the two designated clearinghouses in the USA, FedACH, and the clearinghouse TCH, which is a private ACH house. In Europe, We have the EPC, the European Payments Council, who manage the European Payments Rulebook for SEPA, CT, DD, etc. The ACHs themselves process the payments for their regions, such as BACs in the UK, STEP for France and Belgium, and DSGV in Germany. But there are many ACHs around the world. In fact, pretty much every country in the world has one. They have some different mixes of governance and processing, but it's pretty much the same principles around the world. But, you know, Erica, why do we have these ACHs? What's it all about?

SPEAKER_01: 2:57

First of all, I think it's because we really like three letter acronyms. So that's one thing that we all have in common. But the simple answer really is because they're easy and payment methods just don't go away no matter what we come up with that may be new or better options. At where we are in this point in history, ACH is so ingrained in our payments landscape globally that it remains easy and widely used. It's pretty close to ubiquity, meaning it doesn't matter who you're transacting with, ACH will probably work. Now, there are some exceptions to that when we think about P2P or person-to-person payments. If I'm paying you or if you're paying me, I may not know how to accept an ACH directly if you come and say, hey, how do I send you an ACH? But there's a good chance that unless we're paying via check or cash, that what's happening behind the scenes could be being transacted with an ACH. So before ACHs, what did we do? How did people make their payments? And it's exactly what we default to when we don't know how to do something more efficient or more digital. The first one of those is checks. So checks were the most common ways to make payments. And I think you mentioned on a previous episode, it was somewhere around the year 1659, if I'm getting that right, when checks revolutionized the landscape and And here we are in 2023. We're basically doing the same thing with checks. So they work. We understand them. They're not as widely used globally. You know, a lot of people will say that it's mostly a U.S. thing. There's a couple other countries that do use checks. But in the U.S., we are particularly keen on holding on to things and not letting go to some of the older payment methods, no matter what's coming along.

UNKNOWN: 4:49

Yeah.

SPEAKER_01: 4:49

Then we have wire transfers. So wires is another way to send money without having that piece of paper. They're certainly more expensive, but they are faster and more secure than a check. Typically, they're used for payments that are very high dollar and urgent. So think about things like when you're closing on a house and everyone's kind of waiting in that room. You've just signed 150 pages and then they're waiting for the payment. What they're waiting on is a wire. Once it comes into the account, it's verified that transaction is able to be used. It settles instantly. There are some issues with the wires, but oftentimes, especially if you're making an international payment, it may be one of the only options that you can make, at least up until recent history. Some of the issues I mentioned, it's expensive. Everyone is sitting around looking at each other, waiting for this wire to clear. There could be, especially if you're going international, there could be some additional fees. But far and above, if you're making a very high dollar, fast, secure transaction, a wire may be an option. And of course we have cash, right? The oldest and simplest way to make a payment, but it can be really inconvenient to carry around large amounts of cash. It can be unsafe to carry around large amounts of cash. Cash is king, I think, is a term that has been used over the last few decades. At the end of the day, everybody will still use cash or accept cash. That's becoming a little bit untrue. Certainly, I've traveled to some foreign countries recently where cash was the Thank you so much. being played they had atms reverse atms around the arena that you would um put in your cash and you would get a prepaid card so that you could then you could use it at the vendor so so interesting things happening in in the cash world but for sure if i say hey paul i owe you some money and i and i want to give you some cash you're not going to decline it a little bit hard to do when we're across the ocean though right yeah so then when we think about the other ways we as individuals want to make a payment sometimes we can think about things like money orders i think that's definitely less prevalent now they function like cash but they're sort of in the middle of a cash and a check so they're they're prepaid they could be purchased in you know a business sometimes you'll see it at a gas station or a check cashing place or most commonly at at financial institutions they're more secure than cash and that you're not carrying around this big you know wad of paper and it's clear who the recipient is like a check but they're also more expensive they're they're a little bit more susceptible to to fraud in that somebody could alter the information someone could create a fake money order we're just not so accustomed to seeing a money order and i'll be honest i'm in this industry if someone handed me a money order i would not know the differentiating features to look at to know if it was real or not other than it has my name on it yeah um One thing that all these payments have in common is that where there is money, there is the desire to make things move faster. But then there's also the potential for fraud, right? So people making fake money, altering checks in this digital age. Now they're trying to get account information and login credentials. But I suppose all of that is a topic for another podcast.

SPEAKER_00: 8:40

And one that I'd love to go into. I think if we go back to this, I mean, the thing is, before ACHs, there was no automation. Everything was a one-off. I mean, you know, can you imagine, you know, being in a company, you've got to pay a thousand employees or hundreds of suppliers, and you're going to write all these checks manually, you know, you're going to give them cash. It's very slow. It's time consuming. It's prone to error. And of course, it's prone to bits of fraud as well. So In the late 60s and early 70s, a solution was developed in this automated clearinghouse, Macy H's. But, you know, what do they actually do? What's inside them?

SPEAKER_01: 9:24

So I think how we define that varies a little bit by if you're looking at this from the perspective of a business owner or someone who's making payments on behalf of a business or if you're an individual. For individuals, it's really about just getting your payment without having to do something. You don't have to go to the bank to cash a check or to make a deposit. You don't have to do anything other than supply your bank account and routing information and then the funds appear in your account. Right. For business, it you know, as you mentioned, it's very resource heavy to do things manually. And if you think about, you know, even a midsize business, you have limited amount of resources and time. Payments is not the core of what most businesses do. Right. Unless they're in some sort of financial services, there is a good or service that they are providing and spending all of their time on payments is just not efficient. Right. So for businesses, it's an easy way to facilitate transactions. And I've said easy a couple of times. I don't want to confuse that with efficient, but it's easy because, I mean, we've had 40 plus years of practice at this, right? So we've gotten pretty good at it on most fronts. So you're going to hear things like direct deposits. So what does that mean? That's payroll, essentially, right? So that's, I know that every other, you know, There's going to be a credit into my account, and that's where I see my payroll. My employer has probably asked me for my account and routing information, and then there's the payment. Of course, there's moments of disruption where there could be a holiday weekend or something has happened that there's a delay, but it's mostly pretty predictable. And then we have direct debits. So that's like when you pay a bill, when funds come out of your account automatically. So if you're a utility company or you're paying your internet bill, you've applied some information and whoever it is is allowed to go into your account and take that money out of your account automatically. So it adds to the convenience and helps to be more efficient on the collection side for that recipient. We also think about ACH in terms of just the volumes, right? So you mentioned if you're sitting around paying a thousand people, that's very time consuming. And anytime you have a manual process, you have the opening for human error. That's the other piece that's important about this. So you can add some automation to prevent some of that human errors. Then we have recurring payments. And that's mostly, again, for businesses. They're paying their payroll. They're paying their vendors or their suppliers. And a lot of times they're doing that with bulk payments. So again, that efficiency of the ability to make a lot of payments, most of them being low dollar, low value, not like when you're sitting in the room at the closing waiting on that million dollar transaction, whatever it might be. Not for me, but for others maybe. But when they're paying vendors and when they're paying payroll, those come in bulk payments. So I think it's important now that we've kind of define that to talk about some of the whys, if I may. And I think I mentioned earlier that ubiquity piece. So we've gotten good at it. We've had a lot of practice. It makes it convenient. So they're convenient for both businesses and consumers. Businesses automate. Consumers can pay their bills without having to write a check or to use credit cards. They can set it up for automatic payment. It just becomes easy when you have this unspoken, unwritten handshake between transacting partners. It could be business to business or person to business, et cetera, that, hey, this is how we're going to do this. And it makes it pretty easy. and then we have the security piece of it so ACH payments are secure again more secure than having a lot of cash that you're walking around with or I mean this is a real thing at a check cashing place sometimes you'll see a white van in the parking lot and they will approach somebody going into a check cashing store and say hey I'll give you 50 bucks if you let me borrow your your check for five minutes they borrow the check and and boom they've been able to recreate that check stock and and you know whitewash who that recipient is anyway so so it's more secure. The, there are fraud measures in place both by the ACH networks. And then there is also the bank security, right? So there's encryption and fraud detection and all of these things, because again, we've had a long time to figure out how to combat the fraudsters in this payment method. We have the security. Then I think there's one of the most important pieces, which is the cost effectiveness. So ACH, The costs of processing an ACH are definitely lower than a check or a wire or credit card payment, especially if you're a business and have to pay the interchange on those credit card payments. It becomes a way to have very predictable costs that are not, they're not overwhelming, right? Sometimes a, you know, a wire can cost, you know,$25,$35 just for one transaction. When you're looking at ACH, especially for a business that is sending thousands of payments, They can literally send hundreds or thousands of payments for the cost of a couple of wires. Yeah. It might not be the fastest, but it's much more predictable than knowing, say, when someone is going to receive a check that you have mailed to them and then when they decide that they're going to deposit or cash it. So for a business, it really impacts their cash flow. When am I going to have these funds taken out of my account? How do I know what my cash position is when I have all these payments outstanding? And then again, for a consumer, they don't have to do anything. They can pretty much predict outside of a couple of blips that, you know, for things like a payroll payment, this is when I'm going to get my payment. So all of these things really make ACH effective when you have a lot of payments. And when you have this need to be able to have a certain level of automation and predictability and cost effectiveness, it just makes them work. That's what's so great about them.

SPEAKER_00: 15:44

Yeah, and they're often called bulk payments too, all right? I mean, so the idea is relatively simple. It's by and large, you'll send a single file with lots of line items, instructions for payroll or supplies, as you said, and you send the single file and it just goes through and it pays all the various people. So it's pretty easy all around. And I can remember... you know, paying my bills, you know, once a month, I'd sit down with a checkbook and I'd write it all down. Well, you know, I don't do that anymore. You know, direct debits have taken that world across. And as you say, you know, the costs are, you know, pretty cheap. I mean, especially concerned to, you know, to wires. I mean, somewhere in the region of, you know, a quarter of a cent, half a cent for credit transfer and, bit more for a direct debit, maybe up to one and a half dollars per trend, typically something like that. And I think we should comment, you know, timing is important here. It used to be, you know, three days, but of course, in the US now, we're the same day. It's one day, but by and large around the world, it's been pretty much like three days, maybe two days, but generally three. So while maybe not the speediest of payments, they are, in fact, the workhorse of the payments ecosystem. So now we have a little history of ACHs and what they are. But who's doing what, Erica?

SPEAKER_01: 17:18

Yeah, I think for the consumer, we can't We can't say it enough times that one of the benefits is they don't really have to do anything, right? They're providing their account number, their routing number. That's a relatively easy lift. Of course, you do have, you know, some times where people might not be comfortable in providing that information, but it's become so normal and it's so accepted that that isn't really a big hurdle. So for a consumer, they have to provide their account and routing information, and that's pretty easy. They don't have to do anything. For the businesses, it's a little bit of a heavier lift, right? So they're sending these transactions. The financial institutions and the payment service providers have made it pretty easy to be able to send in a file that's in a particular format. As long as you have those fields filled out and the file goes out and you have funds to be able to cover that file, that makes it pretty easy. Where we run into a little bit of, I guess, cloudiness is when the businesses are receiving those payments, right? So the most important thing that a business needs to do to make their cash flow more efficient is to be able to have predictability in their cash flow and to be able to understand who has paid them and for what, right? So we have this cost-efficient payment method. We know the parties who are involved. We have a standard Right. So the parties are the financial institution, the payer, the recipient. We've gotten pretty good at it, but there's still some room for improvement. And that's where we continue to see this continued evolution of payments.

SPEAKER_00: 19:30

Yeah. And I mean, you know, to be fair, in 1968, 1970s, you know, it was an analog world. And effectively, the ACH world is still, you know, although it's digitalized a bit, it's still not really a digital system. But it works and it's very efficient. But it's nice and convenient. It's great for utility companies. And we should mention them because they just have fantastic technology. I mean, all that liquidity just comes in. It's almost guaranteed, right? It's very powerful for them.

SPEAKER_01: 20:03

Absolutely. That guarantee of funds. And I go back to this consumer world because I think that consumers play a big role in how we continue to evolve. And in some of those demands, consumers want to know when they're going to be able to get paid, right? Businesses want to be able to close their books at the end of the month. utilizing ACH is a way to make all of these processes much easier. So it goes back to this ease and the mostly predictable nature. And I say mostly again, because we do have the opportunity for things to be faster and better when we really dig into kind of the what's next and what's coming. And why do we not just say, okay, ACH is what everyone's going to use and this just works. It's because there are ways to make things better. both when we're looking at domestic and cross-border payments and really dig into the real-time payment landscape, which is also probably a topic for another podcast another time.

SPEAKER_00: 21:02

Well, we've got more and more work for ourselves here, haven't we? Okay, so let me try and summarize it like this. ACHs automate payments for us as citizens paying our bills, for corporates paying their suppliers. Governments paying their suppliers. And probably the biggest use case, as we think about it, is probably payroll and benefit systems for governments. But these business processes, as I said, they're pretty old. They're 60s, 70s use cases. They will come under pressure from the immediate payments, which you've already hinted, right?

SPEAKER_01: 21:43

Yeah, absolutely. And there's a couple of reasons for this. So I'm going to go back to that consumer piece. We are very finicky these days. everything faster, and that includes payments. Even when it's not a payment, we're technically owed payroll, and I use the example of an online marketplace, right? So if I'm buying some sort of product online, it gets delivered to my home, and for whatever reason, it doesn't fit, it's not the right color, or I simply just made an impulse buy that I really should not have made, right? I want a good experience when I have that return, right? So this is something that was completely on me that, you know, I made this purchase. I want the online experience that I return this, you know, piece of merchandise. And I know that it's possible through obviously, you know, the biggest online marketplace in the world that before I even get home from returning and dropping that off at the UPS store or whatever the, you know, the postal entity is, the funds are already back in my account, right? I want that capability. I want that ability. The funds are there. I can move on. I don't want to wait four to six weeks to see a statement on my credit card bill or even three to five days to see the funds back into my account. Consumers are finicky. We also have to think about things like insurance. So, am I going to choose an insurance provider that's going to send me an ACH in three to five days? Sure, in the U.S., they're same-day ACH, but there are windows and there are cutoffs. That's not a 24-7 rail system. especially if you're on the West Coast. It's gotten better with some of the timing, but it certainly isn't guaranteed to get to me the same day. Or do I want to be with an insurance company that when I have something urgent that's happened, you know, everything bad happens after business hours, it seems. Something has happened between midnight and 3 a.m. I want an insurance company that's going to be able to get funds into my account immediately to help me overcome whatever urgent thing has just happened. So all of these ways that because Pandora's box, and I think in this case is a good thing, has been open to be able to make payments real-time and faster, immediate payments. It's important that We understand and continue to demand that as consumers. And then payroll, we talked about payroll. Every Friday, the funds are in my account. But even that is being revolutionized by immediate payments. And there's a lot of pressure on businesses in a very hard labor market to be able to attract and retain talent. Sometimes you have to do nontraditional payroll. Think about the gig economy. The gig economy has normalized that. DoorDash and Uber, et cetera, when people are doing the services they expect, payment the same day. And now that has moved into fast food. It's moved into manufacturing. It's moved into all other industries where it becomes a differentiator and being able to attract payments. In the business world, I think small businesses, it's really important to consider the liquidity positions of small businesses. It's hard. A lot of small businesses have to show And it's not because they're good or service isn't great. They have a cash flow problem. And much of this can be solved. And at least some of the pressure be eased through real time payments. So a lot of pressure to continue to evolve immediate payments across the globe, which also then we can talk about cross border payments, right by connecting these networks to each other, and facilitating better cross border payments where we're not waiting on very expensive work. wires with unpredictable fees, etc. Real-time payments and immediate payments are really opening up the global economy for individuals that have never been able to, you know, sustain that kind of presence.

SPEAKER_00: 25:41

Yeah, I think that's right. I mean, you know, I once worked for IBM and they had a motto long before I was there, which was forward into the 50s. And while it seems ironic at the time when I was there, which was in the 80s, I think you know, effectively, you can imagine the logos around, you know, nature and backs, you know, forward into the 60s, forward into the 70s. People just didn't think of these use cases back then, because they just didn't exist. And now we have them. Well, we need newer technology, new methodologies. And I think you've mentioned a lot of them. But are there any other final comments, Erica, you want to? Yeah.

SPEAKER_01: 26:21

So, you know, I think there's no doubt that ACH is going to continue to stick around. Right. And for anyone that's really interested in understanding the payments landscape, I think it's important to know that it's just one piece of the puzzle. It's efficient. It's quick. It's easy because we've been doing it so long and it's very much ingrained in the payments landscape in so many economies and countries around the world. But again, it's just one piece. And as we continue to evolve and we continue to talk about this story of payments, it's important to understand how it fits into the context of what's yet to come. And hopefully those will be some topics in some of the future episodes.

SPEAKER_00: 27:01

I'd absolutely love that.

UNKNOWN: 27:03

Yeah.

SPEAKER_00: 27:04

Thank you very much indeed for your help and your insight to take us through ACHs, their history, how they work, and of course, who does what. I thought that was absolutely fantastic. So thank you very much indeed for all your thoughts and your time today.

SPEAKER_01: 27:19

Thanks so much, Paul. Thanks for having me.

SPEAKER_00: 27:22

Absolute pleasure. Well, there you go. I hope you really enjoyed today's This episode on ACHs, they really are the workhorse of the ecosystem of payments. If you have any feedback, any questions, please don't hesitate to get in touch via bite-sizedpayments at gmail.com. And if I could ask just one favor, if you've enjoyed this podcast, please tell a friend. It's by far and away the best way to get the message out. Word of mouth. Thanks so very much indeed. Cheers.

UNKNOWN: 28:12

Thank you.