The Electronification of PaymentsA Year of ACH Innovation and Mobile, Prepaid Movement
As more transactions and banking channels rely on Automated Clearing House networks, U.S. banks are expected to up their investments in ACH innovation and security. Kenneally, vice president of the Center for Regulatory Compliance within the Financial Policy and Regulatory Affairs division of the American Bankers Association, says increases in ACH and debit transactions are opening doors for mobile, especially where online bill payment is concerned. Quite simply, in 2011 will be all about "mobile, mobile and mobile," Kenneally says. "There are banks that have it and are really pushing it, and there are banks that don't have it are afraid they're going to lose customer market share because they're not offering a mobile product."
During this interview, Kenneally discusses:
- Advances in ACH services;
- The ACH connection to mobile; and
- Staying ahead of ACH-related fraud.
Kenneally works in the Center for Regulatory Compliance at the ABA, where he focuses on regulatory issues related to payments, technology, Internet gambling and identity theft. He also serves as the staff liaison to member committees focused on payments issues. Kenneally covers different aspects of the payments industry, including check, ACH and credit and debit card regulation. Prior to joining the ABA in 2005, he managed the private network of banks for the Treasury Department. Kenneally also led the government relations efforts of the National Association of State Auditors, Comptrollers and Treasurers and investigated securities violations for the National Association oArf Securities Dealers. Kenneally holds a master's degree in business administration from The George Washington University and a bachelor's degree in finance from Boston College.
ACH Investments and Mobile Banking in 2011TRACY KITTEN: What security and transactional innovations should banks be investing in 2011? Steve Kenneally of the American Bankers Association is here to share his thoughts about expected bank investments in channel integration and ACH innovations in the year ahead.
Steve, as the vice president of the Center of Regulatory Compliance within the Financial Policy and Regulatory Affairs Division of the ABA, you focus on innovation. Could you tell us what you are hearing from bankers, where investments and ACH innovation are concerned?
STEVE KENNEALLY: Well, when it comes to investments, bankers are prudent these days. The economic forecast may be improving a bit, but a lot of our bankers remain concerned about the cost of complying with all of the new regulations that are out there already and some of the new regulations they expect to come out of Dodd-Frank. So, what does this mean? It means that whatever investments they do make have to be well thought out, and in areas where they have a strong conviction that there is a going to a good return. So, if you are one of these prudent banks and you have a few dollars and you want to make sure you are putting them in the right place, where we're seeing them put their money right now is in mobile banking.
Right now, you can divide banks into three categories: the banks that offer mobile banking, those are that are implementing a mobile banking platform and those that are nervous, because they don't have mobile banking in place and they're scrambling to get it in place as soon as possible. Mobile banking is basically giving bank customers another way to access their online banking accounts, and through that also initiate online bill-payments and, subsequently, increase ACH. That is the connection received in the ACH network, and mobile banking is definitely where most banks are putting their money.
KITTEN: Are innovations in the ACH channel the focus for banks in 2011? It sounds like they are, but primarily through mobile.
KENNEALLY: Yes, that is definitely what we see. If you look at the Federal Reserve study that came out, you can definitely see that ACH is a growth area. It's grown about 9 percent per year, according to transaction volume, from 2006 to 2009, and checks have dropped about 7 percent a year. So, I think you will definitely see banks concentrating their investments, their IT investments, their capital investments, in payment channels that are growing. That is going to be ACH and debit cards. You are going to be seeing a shift away from banks spending money for check processing, basically because the volume is drawing up. Also, the shift toward ACH shouldn't be much of a surprise because it's safe, it's secure, and it's efficient, and it's also very important to banks these days. Those are all key qualities that people are looking for when they need to route their payments somewhere.
ACH FraudKITTEN: One of the things that we've written about quite a bit recently relates to ACH fraud, and so talking about the security of the ACH channel is something that I would like to elaborate on. But I would also like to speak a little bit about how ACH innovations are expected to effect future payments, as well as the security of those payments?
KENNEALLY: Well, when talking about security, again we can look at those payment trends from the Fed study. There has always been check fraud. There also has always been ACH fraud. But I think we're going to be seeing check fraud decrease roughly at the same pace that check volume is decreasing. What does this mean? Well, we know the ACH networks are secure, but with the increased volume going across the network and the increased attention they are going to get, it tells us that we need to remain vigilant in protecting our ACH networks. It comes down to the old Willie Sutton line, "Why do you rob banks? Because that's where the money is." I think that was illustrated with all those recent ACH incidents in the past few months or couple of years and the increase in corporate account takeovers, where cyberattacks have been launched at people that aren't protecting their online-banking security. They aren't protecting their computers as well as they should, and, unfortunately, that has been a weak link for people who have had some money transferred out of their accounts.
ACH and Channel Integration
KITTEN: Now, talking about mobile and all these different channels that are connecting to ACH, the notion of channel integration kind of comes into view. How are these innovations in ACH expected to impact channel integration, if at all?
KENNEALLY: A lot of things are driving toward ACH, whether it's initiating a payment from your mobile phone, from your land line, from your online bank account, or even if you're filling out a slip to get your salary paid to you by direct deposit. Those are all just different ways of having the payment follow the ACH rails. They're following the ACH rails because it's relatively inexpensive and it's safe, and it's a known process. Everybody knows how the ACH works and they're comfortable with it. That comfort level is combined with the efficiency and the low price; it's not a real surprise that people want to keep driving payments in that direction.
KITTEN: Could you speak a little bit, Steve, about the role you see ACH innovations playing within financial institutions in 2011, and how security investments might impact ACH payments?
KENNEALLY: Well, because it's efficient, secure and inexpensive, it's going to continue to be the preferred route for banks to process transactions. When it comes to innovations, I think one of the key things that banks are looking at is the same-day ACH services that are available now. It's an interesting concept. Everyone has always looked at ACH as being safe, secure, efficient and relatively inexpensive, when it's been an overnight batch-type process. When you talk about increasing the service or making the service a little bit better for some customers that want same-day credit through these same-day services, you're going to have to compete against your own bank's wire room. So, you have the opportunity to charge a little bit more, but at the same time, it's competing with your enhanced real-time wire transaction. It will be interesting to see how the same-day ACH service plays out in 2011, to see what kind of volume it gets.
Mobile: 2011's No. 1 InvestmentKITTEN: In closing, Steve, what do you see as being the top three areas financial institutions will focus on and make investments in, in 2011, especially as they relate to ACH, channel integration and payments, generally?
KENNEALLY: I would say mobile, mobile and mobile. As I said before, banks are really recognizing that customers are more comfortable with smart phones. They are more comfortable doing things wirelessly; and I think, especially, after this Christmas season is over, you'll see a lot more people that will have smart phones that will be able to access their accounts. There are banks that have it and are really pushing it, and there are banks that don't have it are afraid they're going to lose customer market share because they're not offering a mobile product.
I think if we take a step back from product investments, one thing that banks are going to have to invest some of their resources in is going to have to deal with the Treasury's new initiatives in 2011 through 2013, which is to migrate federal benefit recipients to electronic payments. People receiving retirement payments or salary payments or any type of benefit payment from the federal government, they are going to be eliminating checks and switching everybody to direct deposit, or they're going to be giving them a prepaid card. That means there are 12 million people out there that are currently getting paper checks from the federal government that banks need to talk to. Many of them may already be customers, but banks need to get them into a direct-deposit banking relationship as soon as possible. This isn't like the Treasury initiative from 10 years ago, where you could opt out and say, "Oh, I want to keep receiving a paper check." Nope, the time has come. This is for real. Everyone is going to be migrated over to an EFT payment and I think it is important for banks to get people locked into a direct deposit relationship and not let them fall into a default prepaid card program.