ACH: Beat It or Join It?

ACH: a formidable commercial payments option

With the capacity to send a great deal of information with a single transaction in real time at a cost that is much lower than the average card payment, ACH makes a very formidable commercial payments case. In the United States, electronic B2B payment value remains dominated by ACH: Packaged Facts in the report Commercial Payment Cards: U.S. and Global Market Trends, 10th Edition estimates that commercial cards comprised 3.7% of electronic B2B payment value in 2016.

Card networks are responding to provide card-based and ACH-based solutions

Card networks are responding to provide card-based and ACH-based solutions. Visa Direct and Mastercard Send are two such card-based examples. Rather than having a debit card payment “pulled” from their bank account by the network, Visa Direct and Mastercard Send allow cardholders to “push” a debit card payment from their bank account through the network in real time. The catch is that the transactions require a debit card and utilize the card payment networks, thereby preserving card networks’ interchange and related fee income.

Other solutions, such as Mastercard’s Fast ACH, are ACH-based solutions. Mastercard is enabling UK ACH network Vocalink (acquired in 2016) with real-time payment capabilities and seeks to build out ACH options in other countries.  While doing so comes with significant hurdles, the strategy may help Mastercard penetrate emerging global markets requiring lower-cost electronic payment options, thereby giving it a stronger voice at the domestic regulatory table and allowing for the possibility of added value services to compensate for the revenue hit it could take on processing ACH transactions. The option also plays a role in the evolving Mastercard B2B Hub multi-payment solution, so it provides choice will preserving card-based options.

A global view of ACH and electronic payments

In many parts of the world, interchange and other network-driven fees are much lower than they are in the United States, and recent regulation initiatives in various parts of the world have driven them further downward. Meanwhile, major emerging markets, such as India, require lower-cost methods of harnessing electronic payments than traditional POS costs may allow. This creates margin compression issues for major international card networks while opening a wide door to other, less expensive electronic methods of payment, such as ACH.

From the standpoint of gaining market share across many of the world’s emerging markets—and even in European advanced markets—the Fast ACH strategy Mastercard has embarked on makes sense, assuming it can traverse country-by-country regulatory hurdles. And added-value services will need to play a key role. In 2016, Vocalink had $240 million in revenue on 11.7 billion transactions, which translates to 2 cents per transaction.

Commercial card growth hums along

While the future of Fast ACH plays out, the commercial cards market continues to hum along. 2016 U.S. electronic B2B payment value share of 3.7% is up from 3.3% in 2012. Packaged Facts forecasts 2016-2020 U.S. commercial card payment value to grow at a 6.8% average annual rate and non-U.S. payment value to grow at a 14.3% average annual rate, with growth in Latin America, Europe and Asia each expected to outstrip that in the U.S.

-- David Morris, market research analyst