NEACH Responds to Federal Reserve System Change

EPISODE SUMMARY

The U.S. payment system stands on the verge of a monumental shift. The Federal Reserve is proposing 24/7 operations for the National Net Settlement System (NSS), the backbone of payment finality. This means no more "lights out" on weekends; wires, ACH, and other payment types could flow around the clock.

In this episode of Wrestling Payments, Joe Casali wrestles with this complex topic alongside Sean Carter, President & CEO of NEACH. Sean acknowledges the upsides: reduced settlement risk, increased liquidity, and alignment with global standards where 24/7 payments are becoming the norm. However, he also points out significant concerns, particularly for financial institutions.

Staffing for round-the-clock operations, ensuring downstream applications like online banking and core systems are ready, and bolstering fraud prevention measures in a faster-paced environment are just some of the hurdles. Sean highlights the potential impact on smaller institutions, questioning their ability to adapt without significant burdens. Will this proposal revolutionize payments or leave some players struggling to keep up? Tune in for a crucial discussion.

KEY INSIGHTS
24/7 Settlement: A Game Changer with Growing Pains
While round-the-clock payment processing offers advantages like reduced risk and global consistency, it presents a massive operational challenge. Smaller financial institutions, in particular, face concerns about staffing and technology upgrades to handle the constant flow of transactions. The industry needs to address potential burdens and ensure a smooth transition, not a mad scramble to keep up.

Beyond the Network: Downstream Readiness Is Crucial
Successfully implementing 24/7 settlement goes beyond connecting to faster payment networks. Financial institutions must ensure their core systems, online banking platforms, and customer-facing applications are all equipped to reflect real-time transactions accurately. Otherwise, businesses and consumers could face confusion, errors, and a lack of clarity about their finances.

Optional Participation, Inevitable Pressure
The Federal Reserve proposes making 24/7 settlement optional for financial institutions. However, competitive pressures could render this option meaningless. To avoid falling behind, institutions may feel compelled to participate, even without adequate preparation. This highlights the need for industry-wide collaboration and support during the implementation process.

EPISODE HIGHLIGHTS
The ACH Question: Will Faster Settlement Mean Weekend Transactions?
Timestamp: [00:16:00]
While the initial focus is on National Net Settlement, the potential impact on specific payment systems like ACH is a key consideration. Sean notes that 24/7 settlement could open the door for weekend or late-night ACH processing, which presents its own set of challenges. NACHA, the governing body for ACH, will need to address rule changes, return timelines, and the definition of a "banking day" in an always-on environment.

"So we've been trying really hard to tell our members this is not an ACH piece. Right. This would be something that the ACH network could then entertain and would have to go through their own rulemaking process, which NEACH would be a part of obviously, as a direct member and voting member of NACHA."

A Tale of Two Coasts: Time Zones and the Same-Day Settlement Puzzle
Timestamp: [00:20:00]
This shift could potentially level the playing field and offer greater flexibility for processing transactions.

"The same happens with the same-day windows today. And those would be pushed back. There would be potential if the hours are expanded, where

Transcript

WRESTSLING PAYMENTS - NEACH Responds to Federal Reserve System Change
Season 2 - episode 18
 
Sean Carter: [00:00:00] Competitive pressures are going to make everybody have to opt in and that, you know, that assault, that creates another issue, right? Because then you have people that might not be ready or don't fully understand what it means to go in, but they're doing it as a reaction or to be defensive.

And that to me is, you know, that's a challenge. You know, think about the confusion with opt in and I don't want to do this part. That's one problem. I think the, the other part is when people do opt into things, it might not necessarily be ready to do it, have the understanding of what it means because then you're, you're almost like promising things to customers that you literally can't deliver and there's nothing worse than that.

[00:01:00] 

Joe Casali: Hello and welcome to Wrestling Payments. Very excited for today's episode. From time to time in the payments industry, there's a big change that happens. And I think of it as like, when you look at the ocean, right, it could be smooth on the top of the ocean, but underneath, there's a lot of power.

There's a lot of things going on. I equate the next topic with a lot of change going on. There's lots of repercussions from the past. what the Fed, Federal Reserve Bank, is proposing is changes to the National Net Settlement System. And if you're unfamiliar with the National Net Settlement System, it is sort of a back end of the payment systems, all payment systems, where

Joe Casali: Final payments 

are [00:02:00] exchanged. So during the day, you could get checks or ACH transactions at certain times. Those are settled where money gets shifted throughout the payments industry to finalize those payments.

Today that runs on a business day, right? Monday to Friday. And, Sean, please jump in. When you start to correct anything I mislead folks on, but it's a five day a week settlement system.

The Fed is proposing a seven day a week settlement system. Weekends will now become days where wires can be sent. Maybe ACH can be sent. Maybe checks can be settled. And, what they do is they release a request for, comment and they ask for the industry's comments and, and NEACH as a [00:03:00] valued player in the payment systems are going to respond to that.

And we're here today to talk to Sean Carter, president and CEO of NEACH, president and CEO of NPG as well, to talk about the, how we're going to respond and, and why it is we're responding that way. With that, Sean, if you could introduce yourself, I think I did a little bit of an introduction.

Sean Carter: Thank you, Joe. Always good to be on Wrestling Payments, my favorite podcast. yeah, so the only other thing I would mention about that proposal was also the time, throughout the day, right? They're looking to expand not just seven days a week, but basically very little town time.

which I think in our response, the interesting thing about it is when you look at the proposed benefits, right? I think everybody on a high level and I'll walk through some of them, but on a high level, I think members, you and I, staff, our board, we all agree that it's You [00:04:00] know, you could reduce some settlement risk this way, right?

You have enhanced liquidity, capability, alignment, obviously, globally, which other You know, we don't talk a lot here about global payments, because our members are, you know, typically at a size where it's not a big part of their business yet, right? I always like to throw that in there. so internationally getting on the same standard.

Joe Casali: And then, you know, there is this, growing non FI population, right? that is key to the payment system, right? And you could potentially have some support for non FI, or not traditional banks, right? Sean, question before you go too far. I like to keep everyone on the same level. You mentioned settlement risk. can you talk a little bit about that and so I don't interrupt you again? a little bit about the international situation. Why is that important? What, how, what, when does that come into play?

Sean Carter: yeah. So settlement risk, right? So we, [00:05:00] we, we tend to think about credit risk, right? When we're, when we're training people, but, but settlement risk at the point of. Hey, this money is going to be debit or accredited to the financial institutions account. So they actually have the money, right? The longer that takes, there's a bigger chance something could happen, right?

So let's just, for example, say something could have under this new, New setup at the Federal Reserve. Let's say something could have been done on a Sunday. In today's world, something happens on Sunday overnight or Sunday morning, and that can't happen, right? So there's that trickle down threat within the, within the industry.

Again, it's like, if you were to rate it, how often does it happen, right? During the collapse of 08, you're probably thinking more about that than you would on a, on an everyday day. Basis, but it's there, right? There's no denying that speeding that up would reduce that risk. And then when you think [00:06:00] about, global standards, right?

There's a lot of other countries already 24 by seven. Most of their payments are done that way. And When you think about what you have to do here, how long did we promote here at NEACH IATs and we used it in every marketing piece and when you look, when you look at the outgoing IAT volume, it's not It was never about the ACH network inability to move.

There's other factors about, international payments. So creating the SEC code wasn't this barrier to make that a little bit easier for folks. So that's kind of some of the benefits, in here. And then there's talk of consumer benefit, which I find interesting, right? Because if you think about it, today a consumer, Could transact either through IRTP or FedNow, 7 days a week, 24 by 7.

but I guess the argument would be [00:07:00] those are their only two choices, right? You can use your debit card as well on the weekend, right? You can use,I think that one is a benefit that, is more about, there would be more choice potentially, and we don't want to confuse the audience and go down the path of what it could mean for a particular payment system, but all payment systems, in theory, could say, okay, if this NSS is expanded, we're gonna create more windows within our system that would allow a consumer to use this network to receive payments, make a payment, and so on.

So we'll say payment system agnostic. The challenge,

Joe Casali: on just for a

Sean Carter: Yeah, go

Joe Casali: both RTP and FedNow are instant payment systems. They're great. But right now FedNow, it has a limit of half a million dollars. RTP has a limit of a million dollars. The minute a big corporation wants to send an international transaction of 40 million dollars, those two don't work.

Sean Carter: Yeah, so that's a challenge too, right? And so one of the [00:08:00] things we did in this was talking with our members. We talked about certain types of use cases and would, would it be cool if you could do certain things like open loans on the weekend, right? but if you think about it and I showed you this when I printed that out, off on real estate.

With that dollar limit, I don't know what house in Massachusetts is selling from the 500, 000 that you're going to do closing on a weekend, right? I do think, there's some interesting, obviously in the future those limits will go higher for, the instant payment reels, but until then, I don't know.

If there's a need that this could address, that's how some people would see it as a benefit, expanding the hours, right? And I think at a high level, people are like, oh yeah, this is a good idea, right? Like, it gets, all payments can be competitive, there's no, it doesn't look like winners and losers are being picked by the oper It, it, at the face of it, there's a lot of benefit.

the challenge you have, [00:09:00] especially for an organization like NEACH, where a majority of our core members that are active are between 100 million and 5 billion size institutions, got to be there, right? Or, in theory, somebody has to be there to manage this process, right? And You would have to maybe add staff or rearrange how you staff your operations, and you might not get any transactions, right?

And so trying to, to make that return on investment, I guess, is something that people wanted the Fed to think about. That was kind of a, it wasn't. It was interesting when you read through the, the materials of our, it wasn't a, this is a bad idea, it was more about can we think about how these things would be impacted, right?

Staffing, downstream applications, which is more of an FI issue than it would be for, the, the Federal [00:10:00] Reserve to think about, but It would apply to everybody, right? So if you're, if you're getting transactions on the weekend, you know, we've, we've seen this example with Instant payments, right?

Where if a bank's downstream is not reporting everything on to the the the corporate statement They don't know what they got paid for on Saturday. Yeah, they have the money It's in their account, but they don't know what they got paid for. So technically they didn't get any money, right? That's how a corporate thinks because they can't post it anywhere.

So the downstream core your online banking your ATMs all of that would have to be able to Be more real time, I guess, right? Because you're gonna, there's not gonna be that reset at a certain point every day where, you can come back and do that. So our members were really looking at the staffing, the implications of, what that could mean from a fraud perspective as [00:11:00] well, right?

So I know there's been a lot of, poo pooing of people that say faster payments, faster fraud, but in theory, that's a true statement, right? in theory, The less time you have, right? So we talked about settlement risk before, where closing that time gap reduces settlement risk, speeding up that reduces the chance to catch something, right?

So there is the offset there when you, when you think about fraud and you know, there's all, Oh, The bigger part of this is, to my point, is, what I think about is where are we going to be a couple years from now, right? Because this was, this did not put a sun, specific date. It was a couple of years after ISO goes into effect, which in theory is going to be March of this year.

So you. thinking the earliest

Joe Casali: March of 2025.

Sean Carter: 2025 right coming up shortly actually by the way you should do a podcast on that one

Joe Casali: We'll have that. Yep.

Sean Carter: [00:12:00] so I think you know when you think about the time so at a minimum it wouldn't be till 2027 where this would be something that you have to think and it probably would be longer than that right

Joe Casali: So let me, let me comment on that for a second. Cause we, we, we, he, we here at Wrestling Payments, we wrestle with these topics and, we were not afraid to call things out. this is, this RFC is for national net settlement. But, ACH uses National Net Settlement. Check clearing uses National Net Settlement.

Day one, if this goes live, or some variation of it goes live, there are no rules in place for weekend, late night ACH or The same thing with check, but it does open the opportunity for those systems to develop new solutions and new windows and all of that. The second thing I can remember little bits of this from [00:13:00] my read of it.

I wasn't really active in the, the request, development. You guys were, One of the things was, sorry, one of the concerns I had was the staffing issue, right? So you mentioned that a little bit, but, the big piece here, and I personally, this is my personal opinion, not the opinion of NEACH or Wrestling Payments, the Fed proposed that the service be optional.

Sean Carter: Yes.

Joe Casali: So that would mean that a financial institution could say, nah, we're not interested. And I would say, even though I'm, I'm concerned about this meteoric change, I would say making it optional is, provides too much confusion into the network. Thoughts?

Sean Carter: I also don't think it really becomes optional. Right. It becomes such a competitive selling point between the fis that although you're saying.

It's optional. [00:14:00] Competitive pressures are going to make everybody have to opt in and, and, and that, you know, that assault, that creates another issue, right? Because then you have people that might not be ready or don't fully understand what it means to go in, but they're doing it as a reaction or to be defensive.

And that to me is, you know, that's a challenge. You know, think about the confusion with opt in and I don't want to do this part. That's one problem. I think the, the other part is when people do opt into things, it might not necessarily be ready to do it, have the understanding of what it means because then you're, you're almost like promising things to customers that you literally can't deliver and there's nothing worse than that.

So yeah, I do. I do think with that, though, with the, with the Fed was doing there, Is obviously understanding there was going to be that concern right from the smaller institutions, right? That's probably not a big bank issue from the smaller institution. So [00:15:00] putting that in there right is a way to right?

What do we talk about in risk? One way to avoid risk is risk avoidance. Right? One way to get rid of an issue is to give people the ability to avoid it. Unfortunately, the way that competitiveness is within the institutions, it most likely doesn't give that reprieve that it was set out to be. And the other interesting part about that, Joe, that you mentioned with the ACH piece.

So we've been trying really hard to tell our members this is not an ACH piece. Right? this would be something that the ACH network could then entertain and would have to go through their own rulemaking process, which NEACH would be a part of, obviously, as a direct member and voting member of NACHA.

so anybody in favor of this is not automatically supporting an ACH rule change, right? you know, we, we had some conversations with members and board members where it's like, they love this for wire. [00:16:00] Right. They think this could be a great, tool for wire transfer, but maybe not so much for ACH because of the debit aspect in the weekends.

Right. So you could have somebody that wants to support this, hoping that one payment system like wire could use it. and then they would have a say in the other payment system and say, no, we don't want, and that could possibly happen, right. That, that is a scenario that could come about is that it gets approved in this version.

They start using it for wires, NACHA it goes out, and people say no, right? That is a possibility, because NACHA is going to have to address, not to go too far down that rabbit hole, but you are going to have to address the returns, re renaming banking day, all these things that would have to happen in the rules time frames and things like that are not as you know, I'm sure if I was not sure, if I was not sure, I'd be creating all those now, those things that we would have to adjust in the [00:17:00] rules because, some of them would, would be things that they need the industry to work through before it's even a proposal.

But, yeah, is nothing. It's

Joe Casali: you know, for folks to give you an idea of the back end of how things work, the ACH network basically turns out the lights and closes the door on Friday night. They disappear until Sunday night where they turn on the lights again and start processing entries for the delivery on Monday.

So this would give them an opportunity to maybe work, you know, you know, I don't know if they still call it mother's hours or, you know, re maybe they could do partial orders hours on a Saturday. Maybe they just fire up everything and say it's just like any other day hasn't been decided. Not a thing.

I, I worry, I want to, I want to, I want to pull two more things out from you. I talked to someone at the, the TPI, the Payments Institute, and said, Oh, are you concerned about the staffing? They were not concerned about staffing at all. They said we'll, [00:18:00] we'll adjust, we'll just adjust people's schedules and, and have folks work on the, the weekends.

I thought of it as, again, meteoric change where now banking is no longer a, you know, Nine or eight to four. It's now at twenty four seven three sixty five, which I thought was a big change This this professional said nope We'll just adjust but the bigger thing and this came in and out in our conversation about wire And you know, we do need an episode on the wire transition Things may not be going as as smooth as it could be going That's probably a technology issue.

But the bigger question is You If the financial institutions get the, you know, get their systems working, that's not the end of the story. What's about the rest, the downstream? You talked about that earlier. Want to talk a little bit about

Sean Carter: Yeah, so so the downstream applications with all of the technology providers involved right again at a high [00:19:00] level, the policy makers, the operators, they just need you to be able to connect to the network and it works right. But we all know from the financial institution that is not the end of the story, right?

So being able to connect to FedNow or RTP or ACH or There's so much beyond that, right? There's your online banking, there's your, ATM networks, there's your, you know, ability to give somebody an app with their up to date balance, right? That app's useless if you're not pulling in, or able to pull in all the information, because I'm going to look at my balance, I'm going to be off.

It's going to be like, The old days with the people that didn't have the book and were guessing when they went out. you know, that, that could happen. So I, I, I really think too, would your, your, question of that professional is interesting because does that change the type of person that you can attract to banking?

Right. it, it may actually open up a different type of [00:20:00] individual or, you know, maybe there's, you know, doing, you and I did the second job thing for a long time together at, at a pizza place. Does banking on the weekend allow somebody that does Monday through Friday? Hey, I want to, I want to do a side job in banking.

I think that's an interesting byproduct of what this could be. and the other thing, Joe, too, with, What you talked about with ACH, it kind of shuts down. The same happens with the same day windows today. And those would be pushed back. There would be potential, if the hours are expanded, where maybe on the west coast that becomes a better deal.

than it is today, and I know some people have brought that up. So we're primarily an East Coast association. That wasn't a big talking point for our members, but if you go beyond the Mississippi, it becomes maybe a different story. again, I didn't get the sense that people hated the proposal, right? It was more about, whoa, right?

We got [00:21:00] a lot going on. There's been a lot of change lately. We have this huge thing coming with ISO. And then how do we how do we work it? so our comments will be around that kind of more of a, Hey, Fed, you need to think about these concerns that people are raising. and are there tools that could be built to offset that?

We don't know where AI will be 2 3 years from now. Does that solve your exception issue? Does that solve your need to even have people there, right? you could use, you know, again, as they're going to be a use case that springs up that every bank and credit union that can take advantage of the weekend processing or holiday processing or later in the day processing, those things are like unknown.

So when you're filling out a request for comment, you don't want to predict what's going to happen in the future. So these, these comments we got, real genuine as of today, what are people's thoughts on this proposal, which is [00:22:00] probably the best way to answer it. But it would be interesting if we could get some of those prognosticators that are on LinkedIn that predict everything about like the fintech business three years from now.

It'd be nice if one of those people could take a stab at where would all, what does operations look like three years from now? Right. And if that vision is, is a good vision and this would, you know, this would probably be a no brainer, but unless you give people that assurance, I think they're gonna, I mean, reading some of the public call, you know, you can go and look at other comments.

There's almost two themes in there. There's almost like a, an understanding that this is going to happen, right? So it's a, it's a fait accompli. but everybody's saying, Okay. Kind of, we understand this is going to go, but please think about these same issues, and they're pretty consistent when you look at them.

even, even within our own membership, we did a little survey, and if you look at asset size, [00:23:00] it's, it's that size, you know, 100 million to 5 billion, and it's pretty much the same concerns. Without any one use case jumping out either to say, Oh, we would, we would do this and we need it because this will make our business tenfold.

We didn't hear any of that.

Joe Casali: just a little bit of pulling out some more information and then the wrap up and I will be asking you for a prediction. as East Coast residents long time. I lived my whole life and in and around Boston. We don't, you know, same day windows. Oh, there's a new same day window. Excellent. We can use it as a west coast institution.

You're like, eh, it's still, I gotta be, I gotta figure this out by noon. If I don't figure it out by noon, it's no good to me. And I'm making that time up, but it's not as useful as, as the east coast institutions. And if you're, if you're Hawaii, you developed your own system because we're way six hours away from, from settlement times at them and Guam, right?

Same [00:24:00] days. Yesterday? I don't know. so that's, that's a really interesting thing. my experience with Fed, RCs, are they are all ears. So they, they did this with Faster Payments, FedNow, they listened. To the responses and they ended up having town hall sort of thing and they listened to the responses and they they adjusted their plan to, to meet any of the negative negativities in the responses.

So with that in mind, any predictions on how much this will change will the, the, the implementation timeframe change will, will, I don't know, will any, any other things they're predicting or planning

Sean Carter: So I, I, I would, I would say that the 22 hour, It would be the winner.

I would, I would assume this would be a beyond a 2027 thing, right? They, I think they will take the time between now and then. [00:25:00] Also on the Fed side, I think there, there's tools they could develop to help people do certain things that would need to be done. kind of like they did the liquidity tools for FedNow, right?

I do, I do think that's an opportunity. My, my other guess is that there are going to be vendors that read this and start saying, how do I automate someone's operations that that I would say is deaf as a definite. And I don't know what that would look like or who's going to do that. But I would imagine that. There is enough people with their eyes on this industry saying, wow, look at that proposal and look what people are complaining about. How do we solve for that?

Joe Casali: Solve the problem.

Sean Carter: and then the problem with that is if they can automate it for those days, what happens? but we don't want to go down that path of, especially since we're in the business of training ops people, that would not be,

Joe Casali: Always going to need training. Always to need

training.

Sean Carter: Excellent. I think with that, I, I, thank you for joining me. Thank you for [00:26:00] explaining the NEACH approach to this RFC. Any parting thoughts?

No, just want to thank all of our members from our rules and operations type committee for their time and looking at this matter. want to thank those on staff working on that. Mary Morrison did a great job pulling things together. and I, we did a general survey to some of our other members completed that.

So the input is really important, just so they know we do use that. We do take it internally and discuss this stuff and,it is, it has always been fascinating for me at NEACH when proposals are out, the level of conversation we all can have about them because we're so into it. same with, you know, some of the other associations, you know, we've had calls with NACHA on this topic, other, I just, it's been really interesting to hear, everybody's thoughts and, Again, it's kudos to the Fed for pushing forward.

This is one of the things that came out of 2015. How do we [00:27:00] make the, how do we modernize or make the payment system better? So they're, they haven't, they haven't backed away from any of the suggestions in there, right? They got FedNow rolling. Kudos to the Clearinghouse for getting RTP out as well. They haven't pushed away from any of those things, and to your point of them listening, right, this is what people said needed to be done, and so they are listening, and I would expect, like you said, there'll be modifications to make sure that, The word people use is steamrolled.

I'll make sure, I think they'll make sure nobody feels steamrolled as part of the process.

Joe Casali: Excellent. Thank you very much. If, if you found this topic interesting, please subscribe. We're going to have more topics like this. We actually have a, I think we're going to record another one now that's going to be a, going to be a battle royal. stay

Sean Carter: subscribe after this one, you'll definitely subscribe after the next one.

Joe Casali: Absolutely. All right. Thanks. Thanks very much. 

​[00:28:00]