Fed Balks at Plan to Fund Payments Upgrade with Bank Fees

When it comes to same-day payments, everyone's a critic.

Big banks in 2012 shot down an industry proposal that would have allowed more automated clearing house transactions to clear on the same day they are initiated. Their biggest objection was that the plan needed to provide banks with a way to offset the costs of updating their ACH systems and make same-day payments profitable. So Nacha, the industry group that sets the rules for ACH transactions, went back to the drawing board. Now the Federal Reserve Board has some concerns of its own.

Nacha's revised proposal for speeding up ACH payments, released for comment late last year, includes an interbank fee that would require originating banks to pay 8.2 cents per transaction to receiving banks. The fee is intended to help banks compensate for the cost of making technological upgrades in order to receive same-day payments and to compensate for other "opportunity costs" such as lost wire transfer revenue. This provision helped Nacha win broad industry support for the new plan.

The Fed has given the proposed interbank fee a more lukewarm reception. Its comment letter, dated Feb. 6, raises three significant objections to the plan. The Fed argues that since banks would be likely to pass the cost of the fee onto businesses originating same-day payments, Nacha should involve those businesses in the rulemaking process.

It also flags Nacha's approach to setting the appropriate fee, suggesting that determining the fee based in part on "opportunity costs" and a "risk-adjusted fair rate of return" could wind up inflating the price of what has traditionally been a low-cost service. Lastly, the Fed points out that the added costs of a fee would make people and businesses less likely to use same-day ACH, thereby rendering the option less effective.

These concerns rankled a major banking trade group, which suggested that the Fed is sticking its nose where it does not belong.

"It's very troubling that the Fed is intervening into a private-sector pricing issue," said Stephen Kenneally, vice president of payments and cybersecurity policy at the American Bankers Association. "It's not the role of the Fed to set price caps. It's a big concern for the success of this Nacha proposal and an even bigger ongoing concern as we move down the road to other faster payments initiatives."

Other members of the industry had a more tempered reaction to the board's letter.

"I don't think they're trying to be interventionist, but I do think they're trying to be proactive," said Beth Robertson, a payments industry consultant. "They're not withdrawing their support for same-day ACH."

That interpretation was shared by Dave Fortney, senior vice president for product development and management at big-bank trade group and payments company The Clearing House. The group is one of two ACH operators in the country, along with the Fed, and it announced last fall a separate plan to build a real-time payments system. The Clearing House was also instrumental in voting down Nacha's earlier proposal.

"These are good questions the Fed's asking," Fortney said. "But they are not posed in ways that are objections to the industry moving forward, provided the input from all stakeholders is received and duly considered and debated within Nacha's membership."

Nacha's plans to let its members cast a final vote on the plan in the second quarter remain unchanged, according to the organization's president and chief executive, Jan Estep. She noted that the group will take all 200 responses to its proposal into account.

"This is a complex issue and will require thoughtful consideration of all responses, but it needs to move forward," Estep said in an email.

The big question is how Nacha will respond to the Fed's suggestions.

"Nacha is in a difficult position," Kenneally said. "If they were to accede to the board's letter, they run the risk of their proposal losing support among their financial institution members. And if they alter the fee structure, that takes months or years—it pushes back same-day ACH for a long, long time."

Banks will have to recover the costs of implementing changes to their systems one way or another, according to Cary Whaley, vice president of payments and technology policy for the Independent Community Bankers of America. He said that charging extra for same-day ACH would be a transparent way for banks to signal the true cost of the service.

"From a consumer standpoint, you want to be able to know what the cost of the transaction is up front," he said. The less desirable option would be for banks to recover costs through surcharges such as higher monthly fees, he said.

Moreover, customers are generally willing to pay a higher cost in exchange for expediency, Whaley said, pointing out that people are happy to plunk down more money for same-day shipping. "I think the demand for faster payments is clearly out there," he said.

But banks do not necessarily have to pass the costs on to all originators, according to payments technology expert Dave Birch. "In the U.K., the banks provide service free to retail customers (I think it costs them a few cents per transfer) but charge businesses," he wrote in an email.

In response to the Fed's recommendation that Nacha ask for feedback from the parties who would originate same-day payments, the group noted that it has been soliciting input from businesses and consumer groups for the past two years, including through a survey it conducted with the American Payroll Association.

The group's proposal for same-day ACH has prompted supportive comments from the ICBA, ABA, The Clearing House and the Consumer Financial Protection Bureau, among other groups.