ACH Profitability and Customer Retention

By Dave Jones
Vice President – ACH Division
Goldleaf Technologies, Inc.

As a bank executive, you are held responsible for driving profits. While trying to decipher the hundreds of possibilities for generating fee-income, why not consider ACH? Automated Clearing House (ACH) origination is one of the oldest, most reliable forms of electronic banking. From its inception in the early 1970’s as an electronic alternative to paper checks, ACH continues to grow as a payment system whose upside potential is yet to be defined. Since 1994, annual double-digit growth in the number and dollar value of transactions originated is drawing financial institutions of all types to the burgeoning ACH market. Profitability and customer retention are the fundamental reasons financial institutions should offer ACH origination services.

ACH origination produces a “bottom line” impact through the generation of revenues and reduction of payment processing expenses. Revenues are generated in two main ways: 1) interest earnings and 2) fee income. It is customary for Originators to move a portion, if not all, of their depository relationship to the Originating Depository Financial Institution (ODFI). Interest earnings on new depository relationships are the primary revenue stream generated by ACH origination. ODFIs can also generate ACH fee income, subject to local market competition. Charges based on the number of files, transactions, Notices of Changes (NOC) or returns are just a few possible sources of ACH fee income.

Financial institutions can realize significant processing cost savings utilizing ACH originated payments versus payment by paper checks. The National Automated Clearing House Association (NACHA) estimates that financial institutions saved an average of $1.07 for each payroll check converted to Direct Deposit and $.86 for each dividend payment deposited electronically in 1999. Originators can share in the cost savings, too. Corporations save an average of $1.15 per item in reduced processing costs. Financial institutions report savings of up to $4.11 per item by originating loan payment debits and eliminating related coupons and collection processing costs.

ACH origination is an excellent tool for retaining profitable customers and strengthening key depository relationships. Commercial customers originating reoccurring files with high transaction volume are reluctant to transfer depository relationships to another financial institution with the requisite expertise and re-start the ACH set-up process. Direct deposit payroll and debits for monthly consumer utility bills are prime examples of originator profiles that promote customer loyalty. Other aspects of ACH origination that promote customer loyalty, as well as generate fee income, are the Electronic Federal Tax Payment System (EFTPS) and Financial Electronic Data Interchange (FEDI) translation services. EFTPS is a government mandate that requires most U.S. businesses to pay taxes electronically via ACH. Once a business enrolls in the EFTPS and begins to originate tax payments, moving the designated account to another financial institution triggers re-enrollment in the EFTPS, a process that can sometimes take months. FEDI translation services are the translation of encrypted addenda records attached to a Receiving Depository Financial Institution’s (RDFI’s) incoming file from the Federal Reserve Bank (FRB). FEDI translation services not only generate fee income, but may also help the financial institution identify origination prospects. Both EFTPS and FEDI translation services are basic components of a successful ACH product offering.

Financial institutions would be prudent to consider the opportunity costs of depository relationships lost to competitors by not offering ACH origination services. Not only does ACH origination generate revenues, reduce costs and help retain profitable customers, it also creates cross-selling opportunities for other financial institution services and products. The case for ACH origination is compelling. Financial institutions are urged to evaluate the potential for ACH origination in their local markets, as well as examine the make-up of their incoming file from the FRB. “If a community bank wants to survive, it must become more active in electronic banking in general, and in the ACH network in particular” (Elliot McEntee: President/CEO – NACHA).

Next time your bank decides to go looking for a new source of fee-income, don’t overlook ACH origination.

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