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, the functionality took off. As the chart below shows, same-day ACH grew 138% from Q3 to Q4.
The funny part is that despite its proven popularity, few banks are marketing same-day ACH and many customers don’t know 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. And the same banks that lament not having 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 cash management business. As commerce speeds up, a large number of industries and households won’t want to wait the traditional two to four 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 for any bank to provide in addition to real-time account-to-account transfers. In addition to retail products, similar business-to-business (b2b) and business-to-person (b2p) payments can now be offered to boost each bank’s treasury management offerings.
Leverage profitable clients and deposits
As we often say, a bank’s profitability is a result of the profitability of its customers and the profitability of its 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. The carriers also disperse claims. All three of these 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 $4 billion of claims as fast as possible. 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, and trade associations can benefit from same-day ACH-based products. Such organizations are all in the top 50 of the most profitable customers that banks can go after. All of them 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.
Put this opportunity into action
Starting in March of this year, the third and final phase of the same-day ACH rollout 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 p.m. 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 struggles with how to be more innovative, this is an easy solution.
Card-based payment rails (Visa, Mastercard, etc.) are available to non-bank payment competitors, and banks can’t let them fill the void. The technology, compliance, fraud prevention, and process methodology for same-day ACH 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.
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