Comparing Experiences: United States-Canada ACH

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Comparing ExperiencesUnited States-Canada ACH

• Presentation to
• Payments in the Americas
• Federal Reserve Bank of Atlanta
• October 9, 2004
• Larry Schulz
• Vice President
• Retail Payments Office
• Federal Reserve System

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U.S.-Canada ACH ServiceFirst Test of a Shared
Vision

• Origin in demand for efficient non-urgent
  cross-border payments in globalizing economy
• Industry devised model Federal Reserve and
  Toronto Dominion put into practice
• Operationally successful basis for expansion to
  other countries
• Limited acceptance points way to improvements in
  the model

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History of U.S.-Canada ACH Service

• 1993 NACHA formed the Cross-Border Council in
  anticipation of NAFTA
• Idea was to interconnect the ACH systems in
  Canada, Mexico, and the U.S.
• Developed cross-border operating rules
• 1994 NAFTA adopted

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History of U.S.-Canada ACH Service

• 1996-1998 Federal Reserve studies, surveys, and
  industry meetings suggested demand for
  cross-border
• But infrastructure and industry offerings were
  still limited
• Fed decided to take an active role to stimulate
  development

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History of U.S.-Canada ACH Service

• Why the Fed? Dual public-private sector role
• Traditionally provided US government with
  electronic payments to Canada
• In the business of ACH as provider of services
• Largest ACH operator in U.S.
• Trusted intermediary
• Encourages use by banks that might be concerned
  about confidentiality of customer information
  through private sector gateway operator
• Public policy perspective saw Canada link as way
  to improve the efficiency of the payment system

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History of U.S.-Canada ACH Service

• 1999 Fed partnered with Toronto Dominion on a
  one-year pilot program
• Limited to 10 financial institutions
• Determined successful in late 1999
• Offered as a standard Fed product in 2001

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How the Service Works

• NACHA Gateway Operator Concept
• Gateways are Toronto-Dominion Bank and the Fed
• Agree to provide access to all accounts in
  domestic payment system
• Agree to handle format and foreign exchange
  conversions
• Agree to manage service level conditions
• Timing of credit, integrity of principal

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How the Service Works

• Flow only from United States to Canada credits
  and debits
• Two currency options
• - Convert to Canadian Dollars
• credit/debit to Canada on Day 1
• - Payment in U.S. dollars
• credit/debit to Canada on Day 2
• F/X rate fixed at 100 bp over daily Bank of
  Canada rate
• Cross-border surcharge 0.039 per item

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Experience to date

• The process works well
• 750 payments a month
• Return rate under 2
• But participation remains well below expectations
• About 20 DIs with regular volume

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Some Observations

• Primarily U.S. payments
• Median payment is about 1,400
• Suggests that service is being used for classic
  ACH-type payments
• But average is closer to 30,000
• Coupled with the predominance of U.S. payments,
  suggests that many payments are non-urgent larger
  dollar payments

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Challenges General

• Low awareness among banks
• Low awareness among bank customers
• Difficult to target potential users
• Numerous alternatives for U.S.-Canada payments
• Cross-border formats not sufficiently robust

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Challenges Specific to Current Structure

• No southbound payments
• Foreign Exchange
• Good alternative for smaller bank (one without
  F/X desk)
• Not attractive to large banks
• Inability to specify target amount of Canadian
  dollars

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Lessons Learned

• Canada experience did not help prepare Fed for
  OFAC issues
• Lack of inbound payments to the U.S.
• Build it and they will come?
• Cannot expect banks to adopt without extensive
  marketing, sales effort
• Cross-border formats too limited

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Next Steps

• Meet OFAC needs for all services
• Improve international formats
• Study F/X options

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Relevance for Payments in the Americas

• There is a market for commercial cross border ACH
• Neither remittances nor U.S. Treasury payments
  have been a driving force in Canada Service
• Gateway operator model is successful
• Countries considering cross-border ACH
• Consider how F/X is factored into the service
• Work through format issues in advance