Emerging Technologies Transformations

Blockchain for ACH Payments

IDC expects blockchain spending to grow at a robust pace over the 2018-2022 forecast period with a five-year compound annual growth rate (CAGR) of 76.0% and total spending of $12.4 billion in 2022.


Let me give a high-level overview of Blockchain for ACH Payments, specifically B2B funds transfer and cross-border payments. There is already a range of solutions available for corporates to do funds transfer. Apart from the credit card networks, there are other options like FedwireCHIPSFedACHAutomated Clearing Houses (ACH)The Clearing House (TCH)SWIFT (for messaging), etc. The Nacha’s ACH is the most popular among these with nearly 23 billion payments with a total value of $51.2 trillion in 2018. However, many of these solutions – (i) take a long time to process (typically 1 to 7 days), (ii) have high transaction fees (around 2 to 3 percent and can be as high as 10%), (iii) are complex, lengthy, and with multiple parties, and (iv) require banks to maintain accounts and balances with the payment system providers. While there are efforts to make the traditional solutions better, faster, and cheaper (e.g., Same-Day ACHFedNowReal-Time Payments (RTP) etc.), blockchain-based solutions are emerging as an alternative to traditional solutions. 

Gartner defines blockchain-based ACH payments as:

Blockchain-based ACH payment describes payment solutions that use core blockchain technologies to supplement or replace existing domestic bulk payments systems — most commonly known as ACH payments systems, after the Automated Clearing Houses that invariably supply and support these domestic payment systems.

Blockchain technology simplifies the payment/transaction process by eliminating the need for intermediaries (e.g., correspondent banks, clearing houses). It’s encrypted distributed ledgers are secure and provide real-time verification of transactions. The distributed nature of blockchains would mean greater transparency and immutability (data recorded in blockchains cannot be altered). Many of blockchain solutions can be integrated into the existing payment systems of a company via APIs, and will help in cutting down costs. McKinsey estimates that blockchains applied to cross-border payments could save about $4 billion a year, conservatively.

Blockchain technology was initially used to support bitcoins. But now, there are many solutions that support stablecoins. For example, Ripple connects banks and payments providers via RippleNet, providing payout capabilities in 40+ currencies or Ripple’s own XRP cryptocurrency. The Interbank Information Network (IIN) with more than 75 participating banks is another example. IBM Blockchain World Wire, for cross-border payments that will use both stablecoins backed by U.S. dollars and cryptocurrency to make near-real-time cross border financial transactions. Other examples include, JPM CoinVisa B2B Connect, and MasterCard Blockchain. According to CoinDesk, an anonymous whitepaper titled “Promise: A Decentralized, Peer-to-Peer, Proxy Repayment Protocol,” plans to replace the entire ACH system of banking.

Gartner has positioned blockchain for ACH payments technology at a very early stage on the Hype Cycle for Digital Banking Transformation-2019, and believes that the base blockchain and distributed ledger technologies remain very immature. Gartner recommends that Bank CIOs and digital business leaders to gain knowledge of blockchain capabilities; aim for an implementation of bulk payment system that will ultimately allow integration with the wider blockchain ecosystem.