The Federal Reserve has changed its rule on automated clearing house credits, bringing it in line with market practices and potentially enhancing the attractiveness for banks of accepting the payment option from their corporate customers.
It removes some of the doubt and some of the concern heard from banks and corporations about when settlement takes place for an ACH credit, said Elliott McEntee, president and chief executive officer of Nacha, the electronic payments association in Herndon, Va.
Under the new rule, referred to as ACH settlement day finality, a credit origination becomes final at 8:30 a.m. eastern time. It took effect June 25.
Before the change the Fed could reverse settlement within 24 hours. A Fed district bank could therefore reverse settlement if it failed to get sufficient funds from the originating depository financial institution by 8:30 a.m. the succeeding business day.
Though that kind of reversal has never actually happened, receiving banks have been reluctant to encourage ACH payments because of the daylong window of risk, said Adrienne Wells, vice president of the Federal Reserve Systems retail payments office. In such a case the bank could lose the money.
ACH settlement finality removes banks longstanding concern about the acceptance of ACH credit entries by receiving banks, Ms. Wells said, and it encourages product innovation and the further adoption of electronic payment methods.
Because this reduces interbank settlement risk we will see greater encouragement of the use of the ACH, she said. Payments made by other means, such as checks, could switch to ACH credit payments, she said.
Nacha, which sets rules and guidelines for payments, stipulates that ACH credits are final payment, but this conflicted with the Feds former policy.
We had argued that the Feds practice was inconsistent with the Nacha rules and that it created doubt and uncertainty, Mr. McEntee said. This policy puts Federal Reserve practice in sync with the private-sector ACH operators and, more important, in sync with Nacha, he added.
The Electronic Payments Network, the private ACH network of the New York Clearing House, has offered both credit and debit finality on settlement day since August 1999. George Thomas, senior vice president of the clearing house, said that the new rule is a positive but that it will not generate additional ACH use.
From corporations view, I dont think they focus much on finality, he said. As it is they think the funds are final no matter what. Finality is better for everybody but is not something that is really visible to the end customer.
The move to make the rule change began formally in December 1998, in response to calls from the banking industry, when the Fed began taking comments.
The major issue was how to mitigate the risk that same-day finality could create without the 24-hour window to cancel settlement.
The Fed is managing that risk by requiring that some banks pre-fund their transactions.
It will put banks that are in weak financial condition or that are chronically overdrafted into an account balance monitoring system, Ms. Wells said. These banks must have sufficient funds when a transaction is processed.
