Since September of 2016, bank customers have had access to same-day ACH credits. When same-day ACH was expanded to include debit transactions four months ago, no surprise, the functionality took off. Same-day ACH grew 138% from Q3 to Q4. The funny part is that, despite its proven popularity, few bank are marketing and many customers don’t know that the functionality is available to them. The same banks that complain and worry about competition from fintech disruptors are slow to adopt and market ACH. The same banks that lament they don’t have enough fee income or deposits don’t market same-day ACH. In this article, we look at the opportunity that banks are missing out on and why the payment war is critical for banks to win.
The Opportunity of Same-Day ACH
We believe the battle for future profitable customers will be won by those banks that can provide a robust suite of treasury services. Cash management is one of the most profitable products of any bank and payment ability is critical to winning future business. As commerce speeds up, there are a large number of industries and households that don’t want to wait the traditional 2-4 business days for a standard ACH payment to be processed and settled.
With the addition of debit transactions to same-day ACH, many new use cases open up. Instant payroll, bill pay and person-to-person (P2P) payments are now all products possible to provide for any bank in addition to real-time account-to-account transfers. In addition to retail products, similar business-to-business (B2B) and business-to-person (B2P) can be offered as well to boost each bank’s treasury management offerings.
The Leverage To Profitable Clients and Deposits
As we often say, a bank’s profitability is a result of the profitability of their customers and the profitability of their clients. Want to be more profitable? The secret is to sell more profitable products to more profitable customers. The critical learning point here is that almost every customer that could use same-day ACH ranks above average in profitability for banks.
Insurance carriers, agencies, and brokerages, for example, all collect and disperse premiums with the carriers also dispersing claims. All three insurance sectors have lifetime profitability of greater than a 26% risk-adjusted return on equity. It is not uncommon, for an insurance company to provide a bank with 300% or greater return due to their deposit balances. When Hurricanes Harvey, Irma and Maria hit, carriers had to pay an estimated $4B of claims as fast as possible where same-day ACH either was used or should have been used. This is a perfect example of where same-day ACH was the cheapest payment alternative and could have immensely benefited the commercial business, their customer, and the community.
In addition to the insurance industry, securities firms, wealth management companies, law firms specializing in litigation, non-profits, hospitals, trade associations and many others can benefit from same-day ACH-based products. These firms are all in the top 50 of the most profitable customers that banks can go after and all drive their lifetime profitability largely through deposits and fees. Beyond that, millions of small and mid-sized businesses that make or receive supplier payments or employ day workers also have above average profitability and can benefit from same-day ACH products.
Putting This Into Action
Starting in March of this year, the third and final phase of the same-day ACH introduction will be complete. Then, more banks will be able to not only post a transaction the same day but make funds available for withdrawal the same-day. This will allow businesses even greater cash flow availability as they will be able to send same-day ACH transactions as late as 5 pm ET with immediate funds availability to the other party.
Investing in product design and marketing of same-day payments is one of the better returns in banking in our opinion. Few banks are marketing their capabilities which means every community bank’s effort is likely to meet with an impressive return. If that is not enough, same-day ACH is also said to boost engagement and satisfaction if those metrics are important to you.
At CenterState Bank, we expect same-day credit and debit volume to continue to grow at a rapid pace. Over the next several years, payment velocity will only increase. If your bank sits around and struggles with how to be more innovative, this is an easy solution. Card-based rails (Visa, Mastercard, etc.) are available to non-bank payment competitors, and we can’t let them fill the void. The technology, compliance, fraud prevention and process methodology already exists and is available to almost every bank. Failure to provide a real-time payment product to the marketplace is a failure of creativity and strategy rather than a failure of innovation.
Submitted by Chris Nichols on February 01, 2018