Call for faster paychecks overlooks key facts

There’s understandably a great fascination with the Federal Reserve’s recently announced plan for a real-time payment and settlement service.

A lot of commentary surrounding the Fed’s decision involves paychecks. The concern is that people still getting paid by paper checks don’t have quick access to their funds, and that causes a cascade of issues for Americans living payday to payday.

While paper paychecks are inefficient and should be replaced, most workers do not get paid by paper paychecks anymore. Direct deposit via the automated clearing house (ACH) network is the way in which nearly 93% of Americans get paid, according to a 2018 American Payroll Association survey. It’s considered fast, safe, reliable and can reach every U.S. bank account.

Most importantly, by using direct deposit, workers get the money in their accounts at the opening of business on payday, without having to wait for a paycheck to clear. For example, an employee with a payday on Aug. 30 using direct deposit will have funds available for withdrawal or to cover payments at the start of that day, prior to Labor Day holiday weekend.

For employees without set paydays, the ACH network now enables faster processing of direct deposits with same-day ACH. In the example above, the employee can still get access to money in his or her account by 5 p.m. via a same-day ACH direct deposit.

Direct deposits and other disbursements to consumers are the largest and fastest growing category of same-day ACH payments, increasing by 142% in the past year.

Direct deposit comes at no cost to employees who genuinely seem pleased with it. A 2016 report by Javelin Strategy & Research found that 95% of people paid by direct deposit are very satisfied with it. Even unbanked workers can get paid by direct deposit to a payroll card.

The success of direct deposit can be attributed to the modern ACH network, which is thriving. In the second quarter of 2019, the ACH network experienced its highest quarterly growth rate in more than a decade. Payment volume in the second quarter rose 7.7% from a year ago to more than 6 billion transactions, transferring nearly $14 trillion. Same-day ACH payment volume is up 46% in the second quarter from the same period last year.

This growth only happened because the industry has continually advanced the ACH network by adding new capabilities and transaction types, and providing new options for settlement speed.

New capabilities are also being added to same-day ACH. Next month, a faster funds availability requirement takes effect. And in March 2020, the dollar limit jumps from $25,000 to $100,000 per same-day ACH transaction.

Beyond these enhancements, there should be an extension of the operating hours for same-day ACH. Currently, ACH payments can only be settled when the Federal Reserve’s settlement service is open. To enable the expansion of same-day ACH, which we oversee at Nacha, we have asked the Fed to extend the hours of their national settlement service by one hour to 6:30 p.m. Eastern time.

While we await an answer, Nacha will continue to work cooperatively with the Federal Reserve and The Clearing House, as the two system operators of the modern ACH network, and bring together other diverse stakeholders to advance the capabilities of the ACH network.

The creation of new services, including new instant systems, provides choice. This is good for the end users of the payment system. Lost in this conversation, however, is that a direct deposit is not the same as a paper paycheck.

Direct deposit already provides workers with a choice to get paid without having to wait for a paycheck to clear. Ultimately, it’s up to our payment system users — businesses and consumers — to make choices that best fit their needs.