Yet another reason bitcoin will destroy the ACH system

The automated clearing house network (better known as ACH) is an electronic payment network used by banks in the United States. It’s what you use to transfer money to your online brokerage for instance or to send an echeck payment to your utility company. Separate from credit card networks, the ACH system processed “nearly 22 billion ACH transactions with a total value of $38.7 trillion” in 2013.

Though the system has been around since the 1970s, it realizes its engaged in a technological war with bitcoin and ripple. NACHA, which sets the rules for the system (along with the Federal Reserve) has been rapidly trying to modernize in recent years. The problem is, their solutions aren’t coming fast enough. Ripple can process financial transactions in seconds. Bitcoin can do the same in 10 minutes. The ACH system can’t even do same-day transactions!

On top of that, the ACH network doesn’t work 24/7. It’s shuts down on weekends and Federal banking holidays. It also handles transactions in batches (at 6:30pm EST, 12:30am EST, and 3:00am EST). Why? Because ACH is a closed system. That means that banks on both sides of any transaction must verify a money transfer before it’s approved.

Bitcoin, of course, solves that problem with a public ledger. Once you open up the network, nearly instantaneous transactions become possible. In a closed network, for instance, one person might get away with sending the same $1,000 to two different recipients. Their ruse will eventually be uncovered, but it could take a day or longer for the so-called “double spend” to be detected. With a public ledger, everyone can see that rogue spender already spent their $1,000. The first transaction will go through, but the second one won’t.

ACH must adapt or die. To that end, on Tuesday, NACHA offered up a proposal on how the network could handle same-day transactions. Keep in mind we’re not talking about instant transactions. We’re just talking about same-day transactions. The kicker? Banks will have to pay dearly for this functionality.

“A flat fee of 8.2 cents per transaction would be paid by the originating banks to the receiving financial institutions, to help recover costs related to technology upgrades,” American Banker writes. $0.082 per transaction!

The fee would decrease as same-day transactions increase, but it still boggles my mind that NACHA would consider implementing such a costly system when Ripple (and bitcoin) both have the technology to do the same thing for almost nothing.

Recently, I wrote about Ripple becoming a card-carrying member of NACHA, but it doesn’t look like they (or bitcoin) have succeeded in selling their technology to their peers. If they don’t succeed soon, NACHA won’t have to worry about adapting; it’ll have to worry about its very existence.

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1 comment

  1. Fred Marion
    Fred Marion

    When I posted this on Reddit, I got some interesting comments on bitcoin’s fees:

    Currently, bitcoin’s “transaction fee” is calculated north of $11 per transaction! We don’t pay that, though, because fees are subsidized by miners. That makes transactions nearly free, but that will change over time. Andresen recently proposed a future transaction fee of $0.41! As mentioned on Reddit: Ripple’s default fee is currently 0.00001 XRP (or about $0.00000018). Because mining’s not involved, transaction fees are almost nil with ripple.

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