E-Checks Rapidly Gaining Acceptance, NACHA Says

Automated Clearing House (ACH) transactions could grow to 18 billion payments by 2010, up from 9 billion in 2002, according to a recent study released by the National Automated Clearing House Association (NACHA).

Much of this growth will come from single-entry ACH e-check transactions. While these single-entry transactions could generate additional customer service inquiries and labor costs for financial institutions, these expenses are expected to be minimal compared to those for paper check transactions.

These are just some of the preliminary findings from the NACHA Business Case Validation Task Force's analysis of the economic value of ACH payments. Specifically, this study focused on the various versions of e-check transactions. The results were revealed during the session, Trust, But Verify-An Economic Analysis of ACH Applications, presented by Ward Gailey, senior vice president of SunTrust Banks and Steve Ledford, president of Global Concepts, a payments consulting firm, at NACHA's recent Payments 2003 conference.

NACHA develops business practices and operating rules for the ACH network. Guidelines and standards supported by NACHA helped the ACH network grow by 11 percent in the fourth quarter of 2002, compared to the same quarter the previous year. As a result, more than 1.76 billion transactions were conducted during the quarter. This level translates to $4.95 trillion.

The most common ACH transactions are direct deposits. The number of direct deposits in 2002 increased by 4.8 percent over the previous year, to 3.9 billion. Direct deposit is used for payroll, expense and travel reimbursement, pension and annuity payments, interest payments, retirement and mutual fund distributions, Social Security, veterans and other government benefits, and tax refunds. Direct deposits totaled $4.6 trillion, an average of $1,162 per transaction. In the commercial sector, the average direct deposit was for $1,257, up 5.3 percent.

However, the category demonstrating the highest potential is e-checks. An e-check is an electronic debit to a consumer's checking account that's initiated at the point-of-sale, on the Internet, over the telephone, or via a bill remittance sent through the mail, and is processed using the ACH network. More than 490 million e-check payments were made in 2002, nearly tripling the number in 2001. In 2002, 233 million e-checks were initiated via the Internet, up 213 percent over 2001. The average dollar amount of a Web e-check was $246.

"The infrastructure and usage of recurring ACH payments have been available for more than 25 years," said Mike Herd, director of public relations and spokesman for NACHA. "With this platform in place, e-checks are becoming more widespread in the marketplace and adoption continues to grow."

The NACHA economic study dates to 1997, with the creation the ACH Vision 2000 Task Force. Simultaneously, the Federal Reserve was working on its own report. At the time, the Rivlin Committee analyzed the Federal Reserve's role within payments systems. One of the Fed's recommendations was to lower barriers for initiating one-time ACH payments. NACHA thereupon commenced a review of the business cases for e-check transactions.

The task is complicated by the various NACHA transaction formats, such as POP (point-of-purchase), RCK (re-presented check), WEB (Internet-initiated transactions), TEL (telephone-initiated entries), and ARC (accounts receivable transactions).

Regardless of the format, NACHA expects e-check applications to be a less costly payment substitute for paper checks. "They offer a service processing improvement, they provide a new revenue opportunity for financial institutions originating the ACH transaction, and there is an operational cost savings for the bank where the consumer's account is drawn upon," Herd said.

These early cost savings are based on the growing acceptance of ACH transactions in the marketplace. Between 2001 and 2002, NACHA recorded hefty gains in all transaction types, e.g., POP (89 million to 167 million), RCK (23 million to 26 million), WEB (75 million to 233 million), TEL (9 million to 68 million. ARC transactions hit 24 million in 2002, the first year they were available.

ARC and WEB transactions are showing the earliest benefits, "and both are getting very widespread," Herd explained. "During the first quarter of 2003, ARC transactions generated 26 million in volume, which is more than all ARC payments throughout 2002," he said. "WEB payments, which grew to 120 million in the first quarter, grew 71 percent over 2002. These transactions are starting to achieve mass adoption."

As e-check volume continues to grow, the expenses tied to them may grow as well. Early findings indicate that back-office ACH customer service costs average $0.0015 per item. However these expenses still pale in comparison to paper check customer service costs which top out at $0.0026 per item. This bodes well for the future of e-checks.

The next step for the Task Force is to finalize the research. "The study will take another couple of months to complete," Herd said. "Completed research will be presented to the NACHA board by the summer." Following the board's review, NACHA will use the study to educate the industry on how these costs will affect business models.

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Direct Debit Payments (2002)

Number of Payments: 2.8 billion

Total Value: $2 trillion

Source: NACHA