The Automated Clearing House (ACH) is the electronic network that connects banks and credit unions in the United States, allowing more than $40 trillion to move across various accounts from different institutions. Among its many other uses, ACH is essentially the system responsible for paying out salaries in the US via direct deposit and credit cards payments. In September of 2016, financial institutions started rolling out the first phase of “same day ACH”, and with that development, IACH (International ACH) became a new possibility. There are key differences in the current status of same day ACH and IACH in the world.
Prior to last year, the ACH system typically took two to four business days to process payments. One of the primary reasons for the waiting period was that banks had a small window in which to submit their ACH files. Basically, if a payment or transaction was processed after the daily window cut-off time, it would not be processed until the following business day. Another cause for delay was that ACH is based on proper funding and data transfer between financial institutions. When information relating to the transaction, such as bank account number, ABA number or beneficiary information, was incorrectly or incompletely communicated, that would delay the process — and still can.
As a result of annoying wait times and the ever-increasing pace of modern living, NACHA (the body that develops and administers ACH) passed mandates for mandatory same day requirements. Now, financial institutions in the U.S. must be able to receive and process same day credits. Also, additional processing windows were added at 10:30 AM and 2:45 PM ET, with new settlement times at 1:00 PM and 5:00 PM ET. This doubles the number of windows each day. A third window will be added in 2018, giving both businesses and consumers more time and flexibility to make same day payments a convenient reality.
In September 2017, the second phase of same day ACH is being rolled out, making it mandatory for financial institutions in the U.S. to receive and process same day debits — in addition to the already established credits. The third phase launches next year — in March 2018. In addition to the third window referenced above, it will ensure that financial institutions make same day ACH funds that are sent before the cut-off available to the payee by the end of business on the same day.
Similar to ACH payments in the U.S., International ACH transactions are essentially an ACH entry that is part of a payment transaction involving a financial agency’s office that is located overseas.
When Same Day transactions become available to international institutions, it will dramatically change the way multinational organizations transfer funds and pay employees. Replacing the “wiring” of money with this type of transaction will save senders and receivers enormous amounts of both time and money. Unfortunately, the development of IACH is not as far along as domestic, intra-US ACH.
The problem with IACH is that there is no single payment method. That’s a result of no official governing standard, which makes a regulatory requirement for same day ACH and IACH very difficult to accomplish and manage. But the problem is being worked on, and, in the meantime, there are other, similar systems overseas in regions like Europe and Australia that can be tapped into.
For example, in Europe there is SEPA, the Single Euro Payments Area, which consists of 35 participating countries. As a result, same day transactions may be available if the country is willing to participate. Also, many financial institutions in the U.S., such as PNC, JP Morgan Chase, and US Bank use IACH, where it is available. This allows businesses to process payments to sources overseas.
In general, with or without the benefit of the ACH, multinational organizations can run into issues when processing transactions in the global marketplace. For example, cross-border payments usually require foreign currency exchange into the local currency. Some countries allow direct payment in dollars or other popular currencies. But more and more often governments and financial institutions are favoring the settlement of large local payments in their native currency as a way to gain greater control and transparency. Most employers don’t have this capability in house, and, thus, they need to engage a treasury management service.
Also, without a tightly managed program for moving money internationally, senders can expose themselves to:
• Delayed payments as a result of not understanding the time needed to clear multiple stops in the payment chain
• “Short pays” from intermediary banks getting fees from the gross payment amount intended for the recipient
• Harmful issues surrounding compliance, if rules are not followed precisely
A good example of compliance risk is the failure of the sender to recognize their obligations, under the US government’s OFAC regulations, for screening all payees. These regs are designed to stop money laundering, aid to terrorists and countries currently under sanctions. (We’ll have more on OFAC in an upcoming post.) Noncompliance carries stiff penalties and, among other harmful effects, can cause a shut down in a company’s ability to make payments overseas.
The good news is that all of these risky issues can be eliminated when organizations work with a payroll partner to help them navigate their multinational employee payment schedules.
When it is available, there are a number of benefits for using same day ACH for business operations. Those benefits include:
• Same day payrolls and quick resolutions if an error occurs during the payroll process
• Faster bill payments, using both ACH credits and debits
• B2B payments, enabling faster settlement of invoice payments between organizations
Overall, ACH is on the rise. In fact, by 2020, the projections are that ACH will account for 45% of payments, followed by checks (34%), cards (12.5%), and cash and wire (8.5%).