By Jesse Berger & Drew Freeman
Has your bank ever told you that Same Day ACH will not make a difference? Has anybody ever said that to you? Maybe a credit card processor? An ISO? Has your payroll company ever intimated that it does not matter? Do you push payments to a card or to fund a bank account? Gig economy employees know real-time payments and Same Day ACH makes a difference. Why then, do we continually hear the same response from many banks and other stakeholders throughout the financial services community? While there are clear marketing benefits across financial payments industries, there is a distinct and definable advantage to the recovery of funds owed.
In some respects, when told that “Same Day ACH may not make a difference,” with 100% success rates of collection, the theory has some merit; however, they are partially confusing the situation. On a broader scale, you can always follow the money and understand certain income advantages to delaying funds, maximizing fees, and other overnight investment and bill pay advantages to utilize float. However, the customer-driven market forces are quickly surpassing this dated model – especially considering the low cost of funds. This is a value to the lender as much as it is to the other users of Same Day ACH. To fully understand what’s at work, it is important not to confuse the ‘behind the scenes’ settlement process that happens with Receiving Depository Financial Institutions (RDFI) and Originating Depository Financial Institutions (ODFI) for the settlement process that happens in your bank account and your customer’s bank account.
Automation is not enough to adapt to the changes in the digital landscape. Businesses still playing catch up to the digital shift are losing revenue rapidly due to manual processes. ValidiFI’s independent survey of current customers revealed that a financial service provider can incur an additional 3.8 hours of personnel hours per loan, to manually collect on existing customers. Not only does this cost financial service providers soft money, but it also costs hard money in the sense that these employees could instead acquire and originate new customers, inform current customers about new products, or answer customer service questions. The PRO platform addresses the issues tied to operating expenses and the soft costs that businesses incur by removing manual processes for least cost routing and selective cost routing, using AI and ML to solve these business challenges.
Under NACHA rules and guidelines, RDFI’s are supposed to settle Same Day ACH transactions within two hours of the cut-off windows but are afforded the option to settle by 5 PM the same day. So that means, if you process a Same Day ACH debit or credit from your bank account to a consumer’s bank account, then the ODFI is supposed to settle the monies to your account within two hours but reserves the right to settle the funds to your account by no later than 5 PM. That is what happens in your bank account, we refer to this as the funding settlement.
Now let us discuss what is happening behind the scenes when processing a Same Day ACH between the ODFI and your customers’ bank account (RDFI). When you instruct your bank to debit your customers’ bank account using Same Day ACH, NACHA is requiring:
1) Your bank to send the request to your customer’s bank within a two-hour window
2) For the customers’ bank to send the money to your bank that Same Day.
3) For the customers’ bank to settle the debit transaction in your customers’ bank account that Same Day, too.
That means the debit transaction is not appearing as “Pending” in your customers’ bank ledger but being fully settled as a completed debit transaction.
Same Day ACH and NSFs
So, can a Same Day ACH get returned for non-sufficient funds (NSF)? Yes, of course. The difference is with Same Day ACH, the RDFI, your customers’ bank is forced to settle the funds the Same Day, whereas, with Standard ACH there are no such rules. With Standard ACH your customers’ banks can settle the funds today, tomorrow, 2 days, 3 days, or even a week later. Essentially, the Standard ACH goes into a proverbial black hole in your customers’ bank subject to contractual obligations including the bank’s responsibility to manage risk
Now, let us discuss clearing of the funds. NACHA does not control the clearing policies of the member banks. Clearing, subject to regulatory compliance, is controlled by the internal policy of each bank, and policies vary significantly from bank to bank. So, in theory, going with the example above, your customer’s bank could settle the funds to your bank on the Same Day, but then decide to reverse the transaction days later due to an NSF.
The reality is that the reversal of an ACH transaction does not happen often when using Same Day ACH for this scenario. The customer’s bank will not simply settle an ACH transaction (whether Same Day ACH or Standard ACH) without first making sure there is money in your customers’ account in advance. So, one goal of Same Day ACH is achieved by NACHA exerting a strong influence over the “Too Big to Fail” type of financial institutions to move the ACH transaction faster. Further, competition from alternative clearing houses, the Fed’s fast payments initiatives, and the emerging non-bank FinTechs are rapidly moving our financial system to real-time commerce.
Does It Work 100% of the Time?
Is it a 100% guarantee that Same Day ACH will settle the same day? Statistically yes. Is it a 100% guarantee that Same Day ACH will clear the Same Day? Statistically yes. Is it a 100% guarantee that Same Day ACH will not return for an NSF at some point in the future? No.
Same Day ACH represents a lot of things to varying constituencies including Payments Processing Companies, Lenders, Collectors, and more. All can agree that Same Day ACH is a reasonable and meaningful way to increase confidence that an ACH transaction will clear and settle as expected. In this case, it is particularly significant that a debit transaction cleared, settled, and will not likely be returned for NSF. With the advent of new technology like ValidiFI’s BAV (Bank Account Validation) and Bank Aggregation, you can now know whether or not a customer’s bank account has enough funds and with a Same Day ACH debit submitted timely, you will know that there will not be a Return to you, nor an NSF to the customer.
Exceptions to the Rule
Although there may be evolving and even unprecedented exceptions to this rule, here are some possibilities for exceptions:
- Correspondent Banks. Some banks more often credit unions, leverage Correspondent Banking for ACH transactions. A bank that uses a corresponding bank essentially uses a middleman to process their customers’ ACH transactions. This introduces a third party to the settlement and clearing process, theoretically increasing the probability of errors due to communication, timing, and available ACH windows.
- Pending transactions. A customer may have pending transactions in their bank account that cannot be seen at the time of verifying funds. For example, if we verify $100 of funds are available at 10 AM and the balance in the account is $105, but the consumer buys $10 of donuts at 10:05 AM, now the funds available are $95. As a result, the $100 debit you submitted will be returned. However, alternative services like ValidiFI’s BAV, access dozens of live, near real-time fintech, and database sources to help mitigate this issue for a financially significant portion of these pending circumstances.
- The RDFI’s ledger policies. Banks with antiquated systems may be using outdated balance calculation rules for customers’ bank accounts. There has been litigation over banks discovered settling and clearing debit transactions in customers’ accounts through a self-enriching method that maximized NSF fees.
Why Same Day ACH?
No magic wand exists for completely eliminating ACH returns. At least, not until banking systems and technologies synchronize information in a real-time format. Until then, technologies like ValidiFI’s BAV and Bank Aggregation services, and the PRO platform providing analytics, smart scoring, and predictive technology, in conjunction with Same Day ACH, represent a smart and effective strategy to solving the challenge. Any strategy considered should be met with stringent considerations for operational constraints and realistic expectations. The guidance from NACHA implores both reasonability and procedural integrity. The likelihood of success for deployed strategies will depend upon the planning, design, and execution of these projects. As the adage exclaims, “Garbage in, garbage out.”
Here are additional links to resources that may be helpful to further understand the benefits of using Same Day ACH:
NACHA video: https://www.youtube.com/watch?v=evH4b5ibxns
NACHA explanation of Same Day ACH: https://www.nacha.org/resources/same-day-ach-moving-payments-faster
Contact ValidiFI today to learn more and to find out how Same Day ACH can increase your collections.