Although new payments rails and formats continue to emerge, all signs point to ACH remaining the dominant payment network. In fact, volume on the network is expected to accelerate, placing a strain on many financial institutions’ longstanding payment infrastructures.
In a recent PaymentsJournal webinar, Finastra’s Radha Suvarna, Chief Product Officer, Payments and Mihail Duta, Director of Global Solution Consulting for Payments, along with James Wester, Co-Head of Payments at Javelin Strategy & Research, discussed the trends driving ACH adoption, the impact on banks’ systems, and why payments modernization has become essential in today’s financial services milieu.
Becoming Forward Compatible
The FedNow and RTP instant payments networks burst onto the scene, fueling speculation about the advent of real-time payments. However, even though these networks have been active for years, ACH continues to serve a critical set of use cases—such as bulk payments, payroll, and government disbursements—and is likely to do so for the foreseeable future.
A recent U.S. government mandate to eliminate paper check payments and adopt electronic disbursements will only drive even more volume to the network.
While this increase may not overwhelm banks’ systems immediately, the mandate signals several important implications: ACH as a payment method must be supported by banks for the long term with additional changes on the horizon.
“One thing that surprised a lot of folks in the payment space is the speed with which this mandate was put in place. The executive order was signed in March and it was in effect at the end of September,” Duta said. “The other question is, what’s going to happen next and how quickly is it going to be implemented? Today, I know about this mandate, but tomorrow there could be another that could throw off the capacity that I have left in my existing solution.”
This growing ACH volume, combined with the dynamic nature of the financial services landscape, highlight the urgent need for payments modernization—enabling financial institutions to adapt to changes with minimal disruption.
Unfortunately, many of the ACH platforms that banks rely on were built decades ago, are mainframe-based, brittle, and not forward-compatible. Maintaining these platforms and integrating with new channels—such as mobile, digital, or ERP systems—has become costly.
Perhaps more importantly, these legacy systems have stymied innovation.
“You have a situation where you have this very important payment method that serves very important use cases for corporates and consumers that will continue to grow, and it’s going to be around for the next decades,” Suvarna said. “However, on the flip side, the platforms are very old and legacy and it is critically important for the industry and for the banks and for the rest of us to come together and make them forward-compatible for the years to come.”
The Compelling Drivers
In addition to the external forces impacting ACH platforms, organizations must also consider compelling business drivers.
One key advantage of a modern platform is its ability to create more value for customers. Commercial clients often separate payments into different files, such as bulk payroll payments versus emergency payments, each requiring distinct routing. Modern platforms streamline these complex workflows, improving efficiency, and reducing errors.
“From a corporate customer perspective, if they could send a list of payments, and depending upon the execution date of the payment, they’re automatically parsed into appropriate rails. That would be the ideal experience, rather than the customer trying to figure out which rail the payment needs to go through,” Suvarna said.
“To deliver those enhanced customer experiences where we obfuscate the complexity of payments from the end customer, it is critically important that ACH is modernized,” he said.
Another important driver is the resiliency that modern payments platforms deliver. While disaster recovery is a critical component of this resiliency, cloud-based third-party platforms offer additional benefits, including scalability and flexibility as payment volumes increase.
Finally, forward compatibility has become essential for financial services companies. The payments industry has undergone a metamorphosis in recent years, driven by innovations like digital assets and real-time payments. Alongside these emerging payment types, new standards like the data-rich ISO 20022 payments protocol have rapidly become the international norm.
“Outside of ACH, most other rails in the U.S. are using ISO 20022,” Duta said. “What I hear more from customers—corporates especially—is asking for the ability of sending an ISO-formatted file that can be transformed and processed through ACH, and I can tell you that the legacy solutions can’t do that.”
“ACH doesn’t live on its own, it has to interact with other rails and ISO,” he said. “It’s a perfect example of how the need for modernization is now versus later, because ISO is present now. It’s going to continue to evolve, and customer expectations are going to continue to evolve. If my current ERP systems can only generate ISO files, I will expect my ACH solution to take in an ISO file and process it for ACH. Only a modern solution can accommodate that—the payments hub in most cases.”
Priority Number Three
Although more financial institutions recognize the need for these solutions, ACH modernization projects are still often relegated to the back burner.
“I think the problem with ACH is it just works so well and always has,” Wester said. “When you look at all the things that financial institutions must do when it comes to payments—whether it’s to connect to new rails, whether it’s to worry about new fraud—the problem with ACH is it always is the perpetual priority number three, where there is always a rotating number one and number two. You always have something that’s more important ahead of it.”
Despite the reliability of existing systems, ACH modernization can no longer be ignored. Fortunately, financial institutions now have solutions available to address these concerns.
Modern payments hubs can be tailored to the needs of businesses ranging from mid-market to enterprise. For mid-market companies, in particular, payments hubs can be transformative, allowing them to leverage the scalability and reliability of cloud-native software-as-a-service (SaaS) solutions.
This eliminates the need for organizations to build and maintain infrastructure themselves. When adjustments are required—whether due to changes in transaction volume or new regulatory requirements—these responsibilities fall under the SaaS provider.
Such advantages are prompting a shift in mindset across many institutions.
“Many years ago, mentioning the words ‘cloud’ and ‘payments’ in one sentence would have led to a very short conversation. Now it’s almost table stakes,” Duta said. “This way I can address the needs for increased volume, I can address the additional use cases that I need to deal with for my customers and I don’t need to worry about reliability.”
“ACH—even though it’s been present for a long time—doesn’t stay still,” he said. “New rules come into place; there are new proposals are out there. If you think of the fact that the Same Day ACH transaction amount has been increased and the fact that there is potentially an opportunity for another Same Day ACH window, all these things point to a modern ACH solution which is tied to a payment hub.”
The Latter Camp
In this landscape, financial institutions have increasingly fallen into two camps. One group has chosen to retain their core ACH processing systems, opting instead to modernize and build around them. While this approach carries relatively low risk in the near term, it doesn’t resolve the inherent challenges posed by mainframe-based monolithic platforms.
The other group is willing to migrate from existing systems in search of forward-look capabilities.
“We at Finastra have a modern ACH platform which is built on microservices, it’s API-based, and scalable,” Suvarna said. “Just last month we took one very large US enterprise bank live, moving from the legacy platform to an API-based platform which is forward compatible. It’s cloud-native, therefore there’s connectivity to third parties and it’s going to be significantly simpler.”
“The other benefit is that ACH sits alongside of other clearings in the United States, which is RTP, FedNow, and Fedwire,” he said. “That brings an additional value proposition, a consistency of experience that each bank will have to make their own choices on, in terms of how important it is for them to modernize around ACH. When it comes to leaving ACH as-is or bringing ACH into the fold of overall payments modernization, we are seeing more banks on the latter side.”
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