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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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April 27, 2015

Not Seeing a Tree for the Forest

For this blog's title, I confess to having pineapple-upside-down-caked the common adage "missing the forest for the trees." The thing is, I want to point to a particularly nice tree in the same day ACH (automated clearinghouse) forest. By torturing the adage I hope to inspire folks to deviate from the basic, same day forest flyover and focus on one tree. It seems to me it has not gotten all the attention due.

Those advocating for same day ACH generally tout the increased functionality or the economic benefits of the latest proposal. Another oft-mentioned benefit of the proposed rule change is that it may provide a bridge from today's payments to those of the future. However, tucked into the lush same day ACH forest is a hard-to-find risk abatement species. Allow me to point out some of its features.

Settlement—By reducing the settlement window, same day ACH reduces credit risk associated with the network ecosystem—both in terms of the length of time counterparties are exposed to settlement risk and, potentially, the total amounts of settlement risk. For sure, financial institutions will have more flexibility to better manage these circumstances.

Operations—Same day ACH provides additional processing windows that result in risk reduction opportunities. Operations managers gain the means to load balance or smooth processing volumes and may also be able to ease the pressure on deadlines. The additional processing windows can be thought of as de facto contingency alternatives and seem likely to yield a corresponding increase in reliability and quality for the ACH.

Returns—Expedited settlement means expedited return handling. same day ACH would provide the opportunity for receiving banks to return same day payments on that same day. Moreover, because return requirements are tied to settlement, any same day payment that needs to be returned to an originating bank will be received one banking day earlier than would have occurred without same day settlement. NACHA points out that exceptions may be identified sooner and returned sooner, which means resolution for more problems may begin sooner. They have described this as "a 'win-win' for all parties." It's hard to argue the point.

If it passes, same day ACH will improve the risk posture of financial institutions, benefiting both ACH payers and payees. As spring continues to unfurl, perhaps some of you will get to stroll through the woods. If you come across a particularly handsome dogwood or perhaps an eastern redbud, be reminded that the same day ACH ballot will pop later this spring. I'm keeping my fingers crossed that the woodsmen don't get to clear cut the forest this time and we don't lose any of the nice trees.

Photo of Julius Weyman By Julius Weyman, vice president, Retail Payments Risk Forum at the Atlanta Fed


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