The ACH Balance Act
Gamble, Richard H., Independent Banker
Competition has arrived at the automated clearing house payment system, and community bankers are not turning out in droves to welcome it.
The camel got his nose under the tent in October 2000 when the Federal Reserve Board of Governors bowed to arguments that the current system of charging banks for ACH processing penalized the Fed's three private-sector competitors: EPN, ACHA (the former Arizona Clearinghouse) and Visa. It approved an apparently modest change in pricing that energized EPN (the Electronic Payments Network, successor to the New York Clearing House) to challenge the Fed to a pricing duel over who
will rule the ACH processing roost.
EPN now is using aggressive price cuts and intense marketing to woo the small group of large banks that generate the greatest volume of ACH transactions. Those few big banks, offered substantial price cuts, are, in many cases, signing up with for-profit EPIC The not-forprofit Fed is losing market share. Community bankers are concerned that profit-driven, deregulated competition will split the market, cutting prices for the high-volume banks and raising them for the low-volume banks that offer less profit opportunity for the processor.
Since most community banks are lowvolume producers and since EPN is an instrument of the big banks, many ICBA members are not happy about the way things are going. Their initial fears were confirmed when the Fed, which is fighting back to retain some of the high-volume producers, announced a new pricing schedule last October. Pertransaction charges were dropped from seven to five mills, creating an effective price cut for the high-volume banks. Meanwhile, flat fees for file processing were raised, causing an effective price increase for lowvolume banks. (For details, see www.frbservices.org.)
The good news is that this initial deregulatory move came in an area where prices were low. For most community banks, a cheap service became a little less cheap.
The bad news is that it may not stop here. If the Fed does see its market share erode and if it is forced to continue to raise prices to cover its fixed costs-as it is required to do by the Monetary Control Act of 1980-then community bankers could see a succession of price increases.
But there's more good news. The growth in ACH volume is picking up speed as a result of initiatives that allow consumer checks to be converted, with or without the writer's consent, into ACH debits. It started with checks presented at the point of sale and recently expanded to checks received at retail lockbox processing sites. Payees like the notion-they get quicker availability, an earlier shot at funds if there are not enough in the account to go around and one more presentment in cases of insufficient funds.
In a couple of years, check payments from businesses received in retail lockboxes will be included as well. If there's a battle over market share, it helps that the overall market is growing briskly.
Verdict from Main Street
So far, community bankers are alert but not alarmed by the changes. Fed prices definitely went up Oct. 1 at the $535 million-asset Gardiner Savings Institution FSB in Gardiner, Maine. "We send a lot of small files, roughly 90 a month," reports Jim Fairfield, vice president for electronic banking. "So raising the file fee from $1.75 to $5.00 will cost us about $300 more a month. And we don't have enough transactions to make it up in lower per-item charges."
At this point, a net increase of less than $300 a month is not a source of anguish in Gardiner, but the new competitive environment "is causing us concern. It's definitely on our radar," Fairfield reports.
He sees it as a negative development. "The Fed historically has provided services at a reasonable price for every financial institution, regardless of size." If this minor adjustment in fees works and keeps the Fed in the ACH processing business, then paying more is "the lessor of two evils," he says. …