NACHA–The Electronic Payments Association Ⅲ

13450 Sunrise Valley Drive overnight batches during the “nighttime window” Suite 100 through the ACH Network and routed to the appropri- Herndon, Virginia 20171 ate bank accounts. The result is that most ACH debits U.S.A. and credits typically are processed within one to two Telephone: (703) 561-1100 business days. NACHA does not actually perform the Fax: (703) 787-0996 transactions, but rather it sets up the rules, procedures, Web site: http://www.nacha.org and protocols governing the network. NACHA also serves as an industry trade association for its 11,000- plus member banks, credit unions, and other financial Nonprofit Organization institutions. Founded: 1974 (as National Automated Clearing House The association was originally formed in 1974 as Association, a part of the American Bankers As- the National Automated Clearing House Association by sociation) the American Bankers Association (ABA). NACHA Employees: 70 (est.) was charged with establishing common rules and NAICS: 813910 Business Associations formats to be shared by the various regional and local ACH associations that were springing up to better automate check processing. By 1978 NACHA had put ⅢⅢⅢ into place common rules used by financial institutions across the country to exchange ACH payments. NACHA was split off from the ABA as a separate nonprofit organization in 1985, owned and governed by its members. NACHA–The Electronic Payments Association was previously the National Automated Clearing House While technology continually evolved throughout Association. NACHA is a nonprofit association that its history, NACHA continued to play a lead role in administers the Automated Clearing House (ACH) establishing a common platform for private and govern- Network in the United States. The ACH Network ment payments. It also actively promoted the use of provides a safe, secure environment for conducting electronic payments by consumers and businesses. From electronic payment transactions, including direct 1972 to 1988, the number of ACH payments in the deposits into bank accounts and direct payments to vari- United States exploded from virtually none to one bil- ous other parties. Under the ACH system, banks and lion transactions. In 2012 the ACH Network processed other financial institutions accumulate transactions dur- more than 21 billion payments with a total value of ing the daytime. These transactions are processed in $36.9 trillion.

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regional ACHs in high-volume, high-population areas. The first ACH was established in California in 1972, COMPANY PERSPECTIVES with several others forming soon afterwards. Ⅲ NACHA manages the development, administration FORMATION OF NACHA and governance of the ACH Network, the backbone for the electronic movement of money and data. The However, the Federal Reserve also recognized the need ACH Network provides a safe, secure, and reliable for a second tier of service to support the regional network for direct account-to-account consumer, busi- ACHs. This would be a nationwide network of ACHs ness, and government payments. to enable electronic debit and credit transactions to oc- cur among financial institutions across the country. In 1974 the American Bankers Association established the National Automated Clearing House Association to ad- AVOIDING AN AVALANCHE OF dress that need. The association would “establish rules PAPER and procedures for the interregional exchange of ACH The National Automated Clearing House Association transactions on a national scale,” Golson wrote. (NACHA) grew out of several financial industry initia- tives in the 1960s to address the approaching crisis in The charter members of NACHA were the handling paper checks. With check volumes forecast to California ACH Association, the Georgia Association, skyrocket in the coming decade, bankers in the United the New England ACH Association, and the Upper States believed existing systems for manually processing, Midwest ACH Association, according to the NACHA transferring, and storing paper checks would become website, with other members following in the next few inadequate. “In the late 1960s, our nation’s payments years. “By 1978, it was possible for two financial institu- system was struggling to process the ever-increasing load tions located anywhere in the United States to exchange of paper-based transactions,” James P. Golson wrote in ACH payments under a common set of rules and the ABA Banking Journal. “To keep from being buried procedures,” the association stated. under literally mountains of paper, bankers began to As dozens more local and regional ACH formed, work to make paper transactions as extinct as most of them obtained operational services from the dinosaurs.” Federal Reserve. (The exceptions were in New York and At the same time, the federal government was seek- Chicago, where the ACH associations set up private ing ways to streamline its processes and reduce costs. clearinghouses.) In the early years, technology was the The U.S. Treasury generated millions of paper checks main obstacle to rapid processing, as there were few data for government employees, Social Security, and other networks in place to connect banks. “Back then, entitlement program recipients, contractors, and other electronic ACH transactions required human transport vendors. Financial executives in the private and public of magnetic computer tapes between financial institu- sectors seeking new technologies and new operating tions,” according to a 2006 report in Cards and systems in order to develop a “paperless check” alternative soon pooled their resources to address a common Payments. need. In 1982 the 32 ACH associations across the “It would not be easy to make a shift to electronic country reported their volume of transactions was grow- transactions,” Golson wrote. “A nationwide processing ing by more than 90 percent each year. “Yet bankers no and delivery facility would have to be developed. Old longer fear the collapse of the check-processing system,” services would have to be modified and new ones James Lordan, a State Street Bank executive and developed. And, most important, the financial habits of NACHA vice president, wrote in ABA Banking Journal. both consumers and corporations would have to “We have learned that technology will continue to step change.” up to the challenge and provide the capacity to process The Federal Reserve (which provided check-clearing any future increases in check volume.” Costs were com- services to banks) promoted a strategy of organizing lo- ing down while transaction activity increased, Lordan cal and regional automated clearing houses. These added. Higher volumes were being driven by new bank- ACHs would process credit and debit transactions ing products, direct deposits of employee paychecks, and through electronic means. Since most financial transac- preauthorized debits of regular payments (such as tions took place within cities, states, and nearby mortgages and utility bills) that provided more efficiency geographic regions, the early focus was on setting up for consumers and businesses.

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NACHA marketing executive Linda Garvelink in the same report, paper checks cost $1.11 per paycheck at KEY DATES that time, versus nine cents each for direct deposit. Ⅲ While banks, the Federal Reserve, and NACHA 1974: NACHA is established by four regional pay- heavily promoted payroll deposits in the 1990s, they ment associations. also focused on encouraging electronic services through 1985: NACHA becomes an independent which consumers could pay their bills. Steven Marjan- organization. ovic reported in 1995 for American Banker that only a 1988: ACH payments exceed one billion small portion of the 20 billion in consumer bill pay- transactions. ments was being handled by the ACH Network. Busi- 1998: First electronic check application takes effect, nesses had already chosen the lower costs and improved soon followed by point-of-purchase, Internet- efficiency of electronic billing, so supporters began targeting consumers. Paul Connolly of the Federal initiated, and telephone-initiated transactions. Reserve Bank of Boston told Marjanovic that the 2003: ACH payments exceed 10 billion transac- expenses associated with using paper check to pay bills tions; e-checks pass the one billion mark. was $30 billion to $60 billion annually. “The printing, 2012: Total ACH Network transactions exceed mailing and delivery of well over 60 billion checks each $36.9 trillion. year cost the equivalent of about 0.5 percent of the U.S. gross domestic product,” the article quoted Connolly as saying. SKYROCKETING ELECTRONIC However, Karen Gullo reported for Datamation that PAYCHECKS, BILL PAYMENTS disputes over software standards, communications, “In less than a decade, it [the ACH Network] has linked protocols, and other issues had delayed broader ac- the entire nation,” Lordan reported in 1982. During its ceptance of electronic payments among corporations. In first eight years of operation, the ACH system grew to 1995, Gullo wrote, many companies were using ANXI include some 75 percent of commercial banks, 10 X12 formats for electronic business data exchange percent of thrift banks, and more than 15,000 private (EBDI) transactions, while the banks used the different companies, as well as the federal government. NACHA format. It would take several years before all While volume was rising, financial and government the parties could agree on common protocols for officials realized even further growth was necessary to electronic billing. make the ACH Network more cost efficient. The Federal Reserve initially did not charge financial institu- GOVERNMENT ELECTRONIC tions for ACH transactions as it encouraged more FUND TRANSFERS institutions to use the relatively new system, Lordan stated. But Congress passed laws that required the The major driver for electronic payment adoption soon Federal Reserve to end its subsidies by 1985 and move came from the federal government, Forbes reported in to an “incentive pricing” model that reflected its true 1996. “A quarter-century ago, digital visionaries were costs. While the result was higher fees for banks, those predicting the checkless society,” Janet Novack wrote. costs were still well below that of paper checks. “The number of checks written in the U.S. has tripled since then, to 61 billion in 1995.” However, a new law Encouraging wider adoption of ACH and embrac- by Congress required the federal government to stop using new technologies was a major part of the NACHA ing paper checks by 1999 and shift some one billion an- mission. In 1985 NACHA spun off from the American nual payments to electronic fund transfers. In 1996 the Banking Association to become an independent cost for issuing and mailing a paper check was 42 cents, nonprofit organization. It changed its name from the while the cost of electronic payments had fallen to two National Automated Clearing House Association to cents. NACHA–The Electronic Payments Association. In 1988 ACH payments exceeded one billion transactions. In “Yet, as things stand, 90 percent of U.S. banks and 1994 U.S. Banker reported, ACH payments totaled 2.5 some federal agencies aren’t capable of electronically billion, with direct payroll deposits accounting for ap- transmitting and receiving key information that ac- proximately half of that amount. While 15 percent of companies vendor payments,” Novack continued. “The private sector employees had received their paychecks new law will force them to get moving.” Once some through direct deposit in 1990, that total had grown to 300,000 federal contractors and their financial institu- 42 percent by 1994, the report added. According to tions comply, NACHA president Elliott McEntee told

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Novack, “There will be a spillover effect to the private ACH volumes also continued to grow. NACHA sector.” reported that total ACH payments exceeded 10 billion Indeed, by 1998, ACH payments reached five bil- in 2003, with e-checks surpassing one billion lion transactions. NACHA also introduced its first transactions. Five years later, payments had almost e-check application (another significant step toward doubled to 18.2 billion. John Alarcon and Robert eliminating paper checks). Also in 1998, the association Hansell reported for the Pennsylvania CPA Journal that developed electronic bill presentation guidelines that global use of electronic payments rather than checks had brought together information technology (IT) vendors, grown from 55 percent in 2000 to 80 percent in 2008. banks, telecoms, and other parties that eventually U.S. volumes had grown by 18 percent annually over resolved the impasse over standards. the preceding five years. By 1999 a growing number of retailers had adopted By the end of the first decade of the 21st century, check conversion, another interim step toward paperless the major competition to the ACH Network was no payments. “A consumer in a store writes a check and longer paper checks but direct payment processing presents it to the cashier,” Orla O’Sullivan wrote for services such as PayPal that operated outside the U.S. Banker. “She runs the check through a reader and traditional financial industry. Credit and debit cards hands it back to the customer for keeps,” creating an held the largest share of the online retail marketplace, ACH transaction that is processed electronically. Check but there was growing use of alternative payment conversion was “a hybrid approach that suits customers services provided by such e-commerce vendors as eBay determined to write checks while conferring the benefits (PayPal and BillMeLater), Google (Google Checkout), of an electronic payment method on both merchants and Western Union (eBillMe). Patti Murphy reported in and banks,” the article added. NACHA estimated some 2012 for the Green Sheet that PayPal processed some 25,000 merchants (led most notably by Wal-Mart $118 billion in payments during 2011, with double- Stores, Inc.) and fewer than 100 banks were using digit volume increases seen in the previous years. conversion at that time. However, expanded use of debit However, Murphy also noted that more than 30 percent cards eventually replaced check conversion for retailers. of PayPal transactions were processed via the ACH Network, with an estimated $50 billion in ACH The Federal Reserve Bank of New York reported transactions for 2012. that the ACH Network had become the largest payments system in the country. In 2000 more than 4.8 NACHA responded to the growing popularity of billion payments with a total value of more than $12 PayPal and similar programs with its own service, Secure trillion were processed by ACHs through the Federal Vault Payments (SVP). The system used the ACH Reserve System. The Federal Reserve processed about 75 Network to connect online payers with bank websites to percent of all U.S. ACH items that year, with the bal- authorize transactions. However, the technology “faces ance divided among three private sector operators, some big hurdles,” Andrew Johnson reported in 2010 including the New York ACH Association. for American Banker, as it needed more consumer aware- ness and more bank participation to become successful. ACH AND THE INTERNET Meanwhile, another effort to bring the ACH The beginning of the 21st century also saw explosive Network in better alignment with real-time processing growth of the Internet, setting the stage for further pay- was unsuccessful in 2012. Although approved by a ment automation. In 2001 NACHA introduced ACH majority of NACHA members, the initiative fell short standards for electronic transactions over the World of the 75 percent vote margin needed to implement its Wide Web and through telephone systems. Peter Lucas Expedited Processing and Settlement (EPS). The EPS reported in Credit Card Management that the Internet initiative would basically have been a “same day ACH” had not yet attracted a significant volume of ACH pay- process. EPS “would have enabled the ACH to become ments because there were few safeguards to prevent a much more viable payment option in today’s rapidly fraud or to protect the privacy of consumer accounts. evolving payments arena,” Beth Robertson wrote for However, NACHA took several steps that year to Javelin Strategy. “In particular, same day payment settle- establish security standards that would protect financial ment would support the needs of the high-speed Inter- institutions and their customers. “Early returns suggest net and mobile commerce environments.” However, the new guidelines will enable Internet-based ACH Robertson noted, the Federal Reserve has its own same- volume to mushroom,” Lucas added. “In June, NACHA day ACH solution that could provide a platform for recorded nearly six million Internet-based ACH transac- that service. tions, up from 3.8 million a month earlier and 2.9 mil- Despite those challenges, NACHA continued to lion for April.” grow as the new century progressed. In 2012 ACH pay-

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(c) 2013 Cengage Learning. All Rights Reserved. NACHA–The Electronic Payments Association ment volume exceeded 21 billion transactions with a Alarcon, John, and Robert Hansell. “The Check Is (NOT) in total of $36.9 trillion transferred over the ACH the Mail.” Pennsylvania CPA Journal, Summer 2008. Network. Check transactions initiated via paper declined Dougherty, Carter. “Payment Group Says U.S. Banks Can by 7.75 percent from 2011 to 2012, while pure Work with Legal Online Lenders.” Bloomberg, August 24, electronic payments rose almost 6.4 percent and ac- 2013. counted for 85 percent of the network’s total trafﬁc. Golson, James P. “Evolution of the ACH.” ABA Banking Web transactions also rose 10.2 percent in 2012 and ac- Journal, March 1980. counted for 17.6 percent of the total ACH Network Gullo, Karen. “Chicken and Egg: Disagreement Over Software volume. In 2013 NACHA represented more than Standards and Communications Protocols Slows Down the 10,000 ﬁnancial institutions and 17 regional payment Acceptance of Electronic Corporate Trade Payments.” Data- mation, December 1, 1985. associations. Lordan, James F. “A Fresh Approach to the Potential of ACH.” ABA Banking Journal, March 1982. Bobby L. Hickman Lucas, Peter. “ACH Payments Hit the Web.” Credit Card Management, September 2001. Marjanovic, Steven. “NACHA Teams with Fed to Encourage PRINCIPAL DIVISIONS Consumers to Pay Bills Electronically.” American Banker, ACH Network March 27, 1995. Murphy, Patti. “ACH and the POS: Not Necessarily Made for Each Other.” The Green Sheet, May 28, 2012. PRINCIPAL COMPETITORS NACHA. “ACH Payment Volume Exceeds 21 Billion in 2012.” Press release, Herndon, VA, April 9, 2013. Google Inc.; PayPal, Inc.; The Western Union Novack, Janet. “The Check Is Not in the Mail.” Forbes, Company. September 9, 1996. O’Sullivan, Orla. “When a Check Is Not a Check.” U.S. Banker, July 1999. FURTHER READING Robertson, Beth. “NACHA’s EPS—Gone But Not Forgotten?” “ACH Volume Soars.” U.S. Banker, May 1995. Javelin Strategy & Research, August 13, 2012. “ACH: What It Is and How It Developed.” Cards and Pay- Salmon, Felix. “The Stranglehold of Payments Networks.” Reu- ments, March 2006. http://www.paymentssource.com. ters, March 29, 2012.

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