Quick Thoughts – FIS/MCX: Access to ACH

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A risk to the thesis in the attached note that FIS will offer lower-cost routing (4 cents/transaction of which 2 cents is to be paid to banks to contribute to the cost of an ACH-enabled debit) for MCX than Visa debit (6-7 cents/transaction in network fees) is that banks will simply raise the costs of ACH. We consider this unlikely given the Durbin standard (albeit not directed specifically at ACH) that bank fees on debit may not exceed marginal cost and given regulatory focus on the ACH system.

The Fed has already signaled its intention to become more assertive in improving the “speed and efficiency” of the US payments system with a focus on end-users (that is, merchants accepting payments and consumers making them) and the new communications technologies available to them (e.g. mobile devices). NACHA (which sets the rules for the ACH system) responded by proposing same-day settlement for ACH which current has a 3-4 day settlement window. Specifically, the proposal for “Expedited Processing and Settlement” called for same-day settlement of payments submitted to the ACH before 2pm ET on weekday.

Many small banks, through the Independent Community Bankers of America (“ICBA”), supported the proposal but the Clearing House (which operates ACH and is controlled by the large banks) argued that the NACHA proposal did not present a sound business case; in the event, American Banker reports that the large banks voted down the proposal. We see this as part of a broader pattern where large banks are looking to generate a competitive edge from payments capabilities (including real-time settlement, linkage to mobile rewards programs, and advantaged authorization and fraud detection) rather than support their incorporation into platforms serving the entire industry.

Indeed, differentiated card-linked rewards is a key reason Chase announced last February that it would be private-labeling VisaNet for transactions originated on Chase-issued cards. Furthermore, and somewhat ironically in September just a few months after the NACHA proposal to improve ACH settlement times was voted down, clearXchange (the joint venture between Chase, BAC, and WFC, enabling real-time P2P payments) announced that Mike Kennedy would transition from heading WFC’s payments strategy to become its CEO. We see the timing as a metaphor for the likelihood that large banks have a stronger business case to invest in proprietary solutions than in industry-wide utilities.

It is one thing, however, for banks not to invest in improving the speed and efficiency of ACH; it is quite another for them to create advantage for proprietary solutions by actively degrading ACH. As such, we believe any move to increase ACH fees involves more regulatory risk than large banks are willing to tolerate. It is more likely that banks will look to control ACH access through tokenization (presented as a means of improving system-wide integrity) and we see resolving the standards for tokens (which MCX also plans to adopt) as a key matter for the industry as a whole and MCX in particular.

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