The US Federal Reserve Banks announced plans for financial institutions to clear and settle certain automated clearing house (ACH) transactions in one day. This will be the first material change to the settlement schedules for the Federal Reserve in 35 years.
The recent action was caused by the increasing threat of bilateral exchanges developed among the largest ACH players (e.g. Wells Fargo and Bank of America, Citigroup and Capital One with certain institutions). These exchanges, made possible because of new Check 21 legislation, cause big drops in the volume of transactions clearing and settling through the ACH network.
Direct relationships between banks for clearing and settlement create an inefficient payment system and drives up prices. As network revenue drops because fewer transactions are cleared, the cost per unit for all remaining ACH transactions increases The Federal Reserve has expressed concerns that lack of NACHA regulations and rules in bilateral exchanges reduces the ability to monitor transactions for illegal activies.
The new plan calls for ACH deposits made by 2:00 pm to be settled by the close of business that day rather than on the first business day after they are originated. The expedited clearing will make ACH more competitive with check-image exchange networks and bilateral image exchanges between banks.
Faster settlement times provide quicker funds availability and earlier returns for credit risk management. Despite the obvious benefits, some banks are worried about same-day credit eroding profits from lucrative wire business by driving down the price of wire transfers.
The plan will not require file format changes for submission of transactions. The fast ACH service maintains the existing formats for the standard entry class codes and complies with NACHA rules.
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