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Is It Time for XML in the ACH?

Is It Time for XML in the ACH?

The Automated Clearing House (ACH) Network has the flexibility to accommodate XML-formatted payment remittance records in the same manner that it currently transmits EDI-formatted records, according to NACHA - The Electronic Payments Association.

NACHA develops operating rules and business practices for the ACH network. ACH payments include direct deposit of payroll, Social Security benefits and tax refunds, direct payment of consumer bills (preauthorized checking account deductions), B2B payments, federal tax payments, and, increasingly, e-check and e-commerce payments. In 2001 there were almost 8 billion ACH payments made worth $22.2 trillion.

B2B Payments and Remittance in ACH Network
More than 20,000 financial institutions are connected to the ACH network. As B2B e-commerce continues to grow, corporations are increasingly using the ACH for payment transactions. In 2001 corporate electronic payments over the ACH exceeded 1.4 billion, an increase of 11.9% from 2000. The dollar amount of these transactions was more than $16.3 trillion (figures include B2B, business-to-government, and intracash concentration).

In addition to the actual payment, businesses frequently require remittance information in order to reconcile payments within accounts receivable systems; remittance data provides additional information about the payment that is often necessary for reconciling B2B transactions (e.g., why the invoice is not being paid in full).

The ACH permits remittance data to be transmitted with an ACH payment instruction; the remittance data is placed in an "addenda" record, thereby providing additional information about payment as necessary. The NACHA Operating Rules require that the remittance data in the addenda record be structured in Electronic Data Interchange format according to American National Standards Institute (ANSI) American Standards Committee (ASC) X12 Interchange Control Structures (governing body for EDI), or in NACHA-endorsed banking formats. In 2001 there were 143 million such financial EDI payments using the ACH network with 413 million EDI records. Financial EDI payments on the ACH network have grown by 216% since 1997; use of EDI records has grown by 279% during that period.

The ACH's capability to accommodate both payment and remittance information has given financial institutions the opportunity to provide value-added services to their corporate clients. Financial institutions, as a potential revenue source, offer a number of EDI-related products and services to support corporate payment and remittance processing. Such services may include data translation, payment origination/receipt, electronic lockbox, translation software, programming, operations, help line, security, value added network (VAN) relationship management, and so on.

Many financial institutions track their B2B/EDI services as a separate profit center. Others may include the profit/loss statement from these services with another bank product, such as ACH services. While it's difficult to obtain data illustrating the "health" of a standalone B2B/EDI business within the financial services community, anecdotal evidence suggests that these services are a high-cost delivery channel to financial institutions and some wouldn't consider them profitable. Generating more volume is potentially a way to increase profitability, but reaching new markets has been problematic.

Despite the growth of ACH/EDI corporate payments, the overall penetration of B2B e-payments remains low when compared to payments made by check. Gartner estimates that only 14% of all corporate payments are made electronically. While ACH accounts for nearly 87% of these electronic payments, the high implementation costs of using EDI in addenda records limits its use to larger corporations that regularly invoice and pay one another, thus excluding most of the small/medium enterprises (SMEs).

As a way to bridge the gap to the lower-volume trading partners, many corporations (through their vendors) now offer Internet-based EDI services that were previously available only through the use of special software and a VAN connection. For example, Web EDI converts online forms data into EDI formats (suited for low-volume activity), while Internet EDI supports file transfer over the Internet, bypassing the need for a VAN (better for high-volume activity). These EDI developments may help lower some of the B2B e-commerce barriers SMEs face when conducting business with larger entities, particularly related to transaction fees, transmission fees, service costs, network availability, IT infrastructure, and data mapping/integration. However, it remains to be seen if the EDI "bridging" opportunities will increase electronic payment transactions among SMEs.

Summing up...

  • Corporations prefer "data and dollars" together, and the ACH has a well-established process for facilitating ACH B2B payment and remittance processing.
  • The volume of EDI payment/remittance data through the ACH has been increasing considerably in recent years.
  • Financial institutions have a range of revenue opportunities available by providing a number of support services in this area.
  • Using EDI in this process increases costs for some users as well as for the service providers.
  • The high costs to financial institutions for providing ACH B2B remittance processing and EDI-based services means that this isn't a profitable venture for some organizations.
  • Overall, the penetration of ACH B2B payments remains low compared to check payments, and usage is primarily confined to larger corporations with established trading partners.
  • Internet and Web-based EDI may be an opportunity to incorporate SMEs into e-commerce programs, and may expand the potential market for financial institution services.
Proposed Use of XML in the ACH
As noted previously, ACH rules currently permit the transmission of remittance data with a payment file, provided that the remittance data is in an approved EDI X12 format. The essential proposition in the ACH-XML remittance model, as described in the Internet Council's white paper, is whether XML-formatted remittance data may be used in addition to EDI-formatted remittance data. The difference in the XML model is that the remittance data in the addenda record would be in an XML rather than an EDI format. All of the remaining ACH processes would remain the same.

The tremendous amount of XML activity directed toward B2B supply-chain transactions led the Council to study the potential usage of XML-formatted remittance data in the ACH. A key value proposition to examine is whether this option would increase usage - and revenue opportunities - for ACH stakeholders.

Based on a similar process model, the financial institutions' revenue model for supporting XML remittance services would also be similar to the EDI remittance services model. That is, financial institutions could still offer the same range of services cited earlier, and the services could be based on XML or EDI.

However, adding XML to the mix may increase the servicing costs for a corporate product that has historically been marginally profitable at best. Supporting XML remittance processing will require a significant investment in startup costs to upgrade corporate payment and remittance services, including software/hardware changes and additional staff with new skills (or training of current staff). This can be profitable only if the service can drive increased volume, and perhaps the more compelling allure of XML for financial institutions is the potential to expand the e-business community and reach new customers.

Similar to the targeted users of Internet EDI services noted earlier, the obvious potential market for XML-based payment and remittance services is SMEs ($1 million to $500 million in annual revenue), which historically have been unable to engage in e-commerce due to the high entry costs associated with EDI and data integration. According to one estimate, only 15% of SMEs have e-commerce capabilities at the moment. While the traditional ACH community is migrating toward Internet and Web EDI as a bridge to SMEs, others see XML as the key enabler for this market.

The assumption here is that a growing installed base of XML-enabled SMEs will translate into a greater demand for electronic payment and remittance services from financial institutions. However, while SMEs transition toward e-commerce for front-end applications (e.g., order placement, negotiation, status check), there remains the more difficult task of integrating data on the back end (e.g., accounts payable and accounts receivable), which affects the payment networks. In fact, according to a survey conducted by the Association of Financial Professionals, "The major barrier to increased use of electronic payments continues to be the lack of integration between an organization's electronic payment and accounting systems." Simply allowing SMEs to integrate with larger companies via a Web browser does little to solve the SME data integration issue, and doesn't necessarily promote more demand for electronic payment and remittance services.

Even if XML availability were to stimulate greater demand for electronic payments, the lack of standards further complicates potential use of XML in payments and remittance processing. In contrast to EDI, there may be as many as 500 XML specifications. A number of these are payment-related DTDs that are in production under the auspices of standards bodies or industry consortia (e.g., Open Financial Exchange [OFX], Interactive Financial Exchange [IFX], RosettaNet, XMLPay, xCBL, ebXML...the list goes on). The lack of a recognized industry-wide standard inhibits the integration of payment systems into the XML supply chain, meaning that payment will continue to be performed outside the supply chain system.

Summing up...

  • The XML remittance proposition corresponds with the EDI model preferred by corporate users, and leverages the current ACH infrastructure for an additional use.
  • Financial institutions would be able to offer a range of payment/remittance services as a way to generate revenue.
  • There is no national standard for using XML in payments and remittance.
  • Most businesses (particularly SMEs) don't have integrated systems and aren't ready for "end-to-end" processing.
  • The large size of XML files may impact data storage needs and file transmission throughput.
  • Costs for everyone will likely increase during a lengthy "migration" period during which both XML and EDI need to be supported.
  • Current XML usage in the supply chain is negligible, and demand from end users remains low.
  • XML implementations for payment/remittance may cost less than comparable EDI installations, and software vendors are developing a range of solutions (some free).
  • Major corporations have announced their intention to migrate toward XML in supply chain-related activities. If the whole supply chain moves toward XML, it probably makes sense for the payment/remittance function to migrate as well.
  • SMEs may become more involved in e-commerce, with XML providing a more flexible interface, thus increasing the potential market for payment/remittance services.
  • Will the XML remittance option be a sufficient reason to convert the large number of check writers to e-payments?
  • Does the proposition make it easier for XML-enabled "intelligent" hubs - or vendor-hosted solutions - to intervene in the current ACH processing and revenue models?
Future of Internet-Based B2B Payments and Remittance
What are the requirements for the future of Internet-based B2B payments and remittance? What are the emerging models for meeting the expectations? What are the prospects for legacy systems like the ACH? These are some of the key questions to evaluate, and the various scenarios described will have different implications for the applicability of XML-formatted remittance data in the ACH.

The anticipated growth in B2B e-commerce indicates these issues will significantly impact how the payments and related-services pie is sliced among current and emerging participants. No one is predicting a decline in B2B e-commerce. At the moment, the ACH is by far the dominant method for facilitating electronic B2B payment and remittance exchanges, but Internet commerce may challenge this status.

It's difficult to divine how the future of B2B payments and remittance services will evolve. However, it's possible to identify some of the key issues that will help determine the future direction of this industry, including, for example, user requirements and network (i.e., private versus public) participation. The question remains whether having XML capability would impact any of these scenarios; a more in-depth discussion is available in the white paper.

Financial institutions, which are responsible for the governance of the ACH, will need a clear understanding of the return-on-investment before promoting a change in the current B2B payment process to support XML remittance data. Coupled with negligible end-user (i.e., corporate ACH users) demand and no clear direction on the future of B2B electronic payments, there are no stakeholders propelling this issue to the forefront. Meanwhile, usage of the current ACH/EDI processes continues to grow.

Payment systems in themselves aren't necessarily e-commerce drivers, and adding the XML remittance data option doesn't present a clear business case at the moment for even early market leaders. Yet significant interest remains in the potential for using XML in the ACH, and there is a desire to track related payment developments. The Internet Council has identified some triggers that may lead the membership to propose that the question of XML remittance data be reevaluated. Triggers are marketplace events that would change the environment, or perception, for answering the XML-in-the-ACH question. Examples include, but are not limited to, the following:

  • Competitive concerns (e.g., a competing bulk-payment network commits to XML remittance data, and the network users adopt this new practice)
  • Customer/constituent requests (e.g., large-volume financial institutions, ACH operators, or other dominant payment industry companies request this capability)
  • Government/regulatory demands (e.g., a new law or regulation requires the use of XML-formatted remittance data)
  • Legal/risk assessments (e.g., if stakeholders are somehow at risk - or have some liability - for not providing this capability)
  • Related industry developments (e.g., the banking community adopts and begins to use a particular XML payment standard).
These examples aren't exhaustive, nor are they weighted in any particular order of importance. The purpose is to provide some general guidance for when a reevaluation of the XML-formatted data question may occur.

More Stories By Robert Unger

Robert Unger is the Director of Electronic Billing and Payment with NACHA – the Electronic Payments Association. In this capacity, Mr. Unger directs the Council for Electronic Billing and Payment, which promotes electronic billing and payment services for consumer and business applications. Members – including financial institutions, technology companies, billing companies – cooperate on education and standards development to further the growth of electronic billing and payment.

Previously, Mr. Unger directed the Student Aid Modernization Partnership Forum, a public/private initiative – led by NACHA – focused on developing e-commerce interoperability standards to improve the delivery of student financial aid and related services.

Prior to joining NACHA, Mr. Unger served as Director of Education with Research and Management Systems, a technology firm providing software and management solutions for research, education and e-commerce in government and higher education.

Mr. Unger has also worked in information systems support and sponsored programs management at the Johns Hopkins University and the University of Maryland at Baltimore. He holds a Bachelor of Arts degree in Philosophy and a Master of Arts degree in Technology Education.

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