US banks may struggle with same-day ACH window

By Rebekah Tunstead | 9 January 2020

Mid and lower tier US banks could find it difficult to run a third batch process within a business day to accommodate an additional same-day Automate Clearing House (ACH) settlement window, according to the head of global payments at a tech vendor.  

“I think it is the tier three, four, and five banks that will go, ‘wow, this is a real problem,’” says Paul Thomalla, global head of payments, Finastra. “The majority of financial institutions in the US will be rubbing their heads together trying to work out how they can run another [batch processing] cycle in their day?”

“Everyone in the US is used to [the previous] cycles, everyone in the corporate world is completely used to them. Now I have got a third cycle and the question is, do I have enough horsepower in the process? Do I have enough people power to manually do the processing? What will the customers think? And I think each of those will be different depending on the focus of the bank and the legacy that they have inside their financial institution.”

The Federal Reserve Board agreed to changes to the National Settlement Service (NSS) and Fedwire Fund Service in late December to support the third settlement window which will come into effect on March 19, 2021.

The introduction of the additional window is intended to even out opportunities for east and west coast banks to have payments settled within a day, according to Dave Fortney, executive vice president, product development and management, The Clearing House (TCH).

With the modifications, banks will be able to submit their latest transactions to be processed within the day at 4:45pm ET - two hours later than the current 2:45pm ET.

“Those two hours, you could argue are incremental. It is not a huge fundamental shift,” says TCH’s Fortney. “But particularly with time zones, that really opens up a much better window across the time zones of the US to process same day payments within that business day.”

But in order to fit the extra settlement window in, the Fedwire Funds service will close at 7pm Eastern Time (ET) and open at 9pm for the next day. The Federal Reserve banks will keep a 90 minute window – down from two hours – between the opening and closing of the Fedwire Funds Service, shortening the time required to carry out a number of processes.

“Compressing that time is going to require technical changes to ensure that things can happen maybe a little bit more speedily then they did in the past. But there is also some risk that there will be some delay of opening at some point, because some of those processes don’t conclude,” says Fortney.

In addition to the time window changes, the Federal Reserve said it will also increase from $1bn to $3bn the minimum value of transfers needed for the Federal Reserve banks to grant an extension to the Fedwire Funds service closing time.

The regulator sought comment from market participants on the modifications in May, as it acknowledged possible risks in reducing time for end-of-day processing; disruption to Fedwire Fund Service opening hours; and additional costs for accountholders at reserve banks and their customers to implement the changes.

“Ultimately the industry’s recommendation was to go forward with the proposal when the Fed put out comments and the Fed concluded the same thing,” says Fortney. “The benefits outweigh those additional processing risks.”

While the majority of ACH inputs and files processed by recipient banks are automated, according to Fortney, work will need to be done to effectively monitor those operations.

For Thomalla, the new window is part of a greater push to real-time processing. But not every bank will have adequate tech stacks in place to keep up with the pace of real-time processing, and will not see the financial benefit of building such systems.

“Do I want to put that time and effort in to make those changes to my batch system which is expensive? Because I am not going to get any more money from processing the transactions many times a day rather than overnight. So, I’ve got to do work but I am not going to get any fiscal benefit from doing it. I might get better customer satisfaction, but I am not going to get a financial kick from it.”

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