Automated Clearing House Update

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• Automated Clearing House Update
• COHEAO Mid-Year Meeting
• Philadelphia, PA
• Robert Unger, Senior Director, Electronic Billing
  Payment Services
• NACHA - The Electronic Payments Association
• Herndon, Virginia
• runger_at_nacha.org
• 703-561-3913

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Agenda

• ACH and NACHA Basics
• eCheck Applications in the ACH
• Other NACHA Initiatives
• Participating in the Evolution of the ACH

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Some Acronyms

• PBR - Consumer Cross-Border Payment
• PPD - Prearranged Payment
  and Deposit
• POP - Point of Purchase
• POS - Point of Sale
• PPD Prearranged Payment Deposit Entry
• RCK - Re-presented check
• RDFI - Receiving Depository Financial Institution
• SEC - Standard Entry Class
• TEL - Telephone -Initiated ACH Debit
• UCF - Uncollected Funds
• WEB - Internet-Initiated ACH Debit

• ACH - Automated Clearing House
• ARC - Accounts Receivable
• CBR - Corporate Cross-Border Payment
• DFI - Depository Financial Institution
• DRTC - Deposited and Returned Truncated Check
• EDI - Electronic Data Interchange
• FI - Financial Institution
• MICR - Magnetic Ink Character Recognition
• NSF - Non-Sufficient Funds
• ODFI - Originating Depository Financial
  Institution

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What is the ACH Network?

• ACH stands for Automated Clearing House.
• The ACH Network is an electronic banking system
• Batch processing, store and forward
• Transactions are stored during the day and sent
  to the network in batches, usually in the
  afternoon and/or evening
• Transactions are not real-time or online.
• The ACH Network processes both credits and debits.

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Who Participates in the ACH Network?

• Originator The organization or individual who
  initiates a transaction (credit or debit).
• Originating Depository Financial Institution
  (ODFI) The financial institution - bank, savings
  loan, credit union - that transmits
  transactions into the network.
• ACH Operator Central clearing facility.
• Receiving Depository Financial Institution
  (RDFI) The financial institution - bank, savings
  and loan, credit union - that receives the
  transactions from the network.
• Receiver The organization or individual who
  receives the transaction (credit or debit).

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Rules Bind Participants

• Through contract law a series of multilateral
  contracts
• Agreement between ACH Operator and ODFI
• Federal Reserve Operating Circular
• ODFI-Originator Agreement
• Originator-Receiver Agreements (Authorization)

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Major Rules Applicable To ACH Transactions

• NACHA Rules (private law)
• Consumer transfers Regulation E, 12 CFR pt. 205
  (Federal Reserve regulation)
• Corporate credit transfers UCC Article 4A (state
  law)
• Treasury Department regulation on federal ACH
  payments (31 CFR pt. 210)
• Treasury Department regulation on ACH payments on
  government securities (31 CFR pt. 370)

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ACH History - Recurring, Low Risk Payments

• Primarily United States only
• Direct Deposit
• Direct Payment
• Corporate Payments
• Cash concentration
• Financial EDI

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What are Common Uses of ACH Network? Credits

• Direct deposit of pay
• Direct deposit of government benefits, such as
  Social Security
• Direct deposit of investment proceeds or
  dividends
• Corporate-to-corporate payments
• Pensions
• Tax payments

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What are Common Uses of ACH Network? Debits

• Student loan payments
• Utility payments
• Club dues
• Corporate-to-corporate payments
• Insurance payments
• Purchases at the point of sale
• Purchases over the telephone or the Internet
• Bill payments

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NACHA The Electronic Payments Association

• Develops the rules for the ACH Network.
• Enforces the rules.
• Serves as national ACH trade association.
• Develops new ACH services.
• Provides education, marketing, research
  services.
• Governs councils open to financial
  institutions, retailers, vendors, processors,
  associations, regulators, networks, others.
• NACHA is NOT an ACH Operator.

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NACHA The Electronic Payments Association
NACHA Members Payment Associations
Direct Financial Institutions NACHA
Councils and Programs Affiliates Forum
Corporate Payments Council Council for
Electronic Billing and Payment EBS
Council Electronic Check Council
Global Payments Forum Internet
Council National Association for Check
Safekeeping National Council for Uniform
Interest Compensation
New!
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ACH VOLUME (millions)
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2
,000 1,000 0
Approx 25 trillion

6,122
7,990
8,940
10,017
5,340
6,882
1998 1999 2000
2001 2002 2003
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Agenda

• ACH and NACHA Basics
• eCheck Applications in the ACH
• Other NACHA Initiatives
• Participating in the Evolution of the ACH

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Suite of eCheck Services

• At the cash register or in an office
• POP - Point of Purchase
• In the back office
• RCK - Re-presented Check
• Through the mail or at a dropbox
• ARC - Accounts Receivable
• Over the Internet
• WEB - Internet-initiated ACH Entries
• Over the phone
• TEL - Telephone-initiated ACH Entries

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Why the Growth in eCheck Services?

• Cuts costs of check processing and handling.
• Improves funds availability.
• Speeds returns on bounced payments.
• Provides greater consumer protection.
• Gives customers the choice of writing checks.
• In the future Cuts use of paper and fuel.

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E-Check Growth 2001-2003 (not including on-us)
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At the Cash RegisterOr In an OfficePoint of
Purchase (POP) Check Conversion
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Point of Purchase (POP)

• How the service works
• Consumer hands cashier a check in payment.
• Cashier uses a MICR reader to scan and capture
  data from MICR line and keys in amount.
• Consumer signs authorization for check to be
  converted customer receives check back, then and
  there.
• Payment is processed electronically through ACH
  and debits customers account.

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POP Transaction Flow
Check presented at POS
MICR Information Captured
Authorization Signed by Consumer
Check, receipt handed back to consumer
Electronic Paper
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POP Rules(Effective September 1999)

• Convert only consumer checks.
• Establish no dollar cap on payments.
• Require full written authorization.
• Mandate returning check to customer at time of
  transaction.
• Operate under Regulation E.
• Provides consumer protection for electronic
  banking transactions.

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POP Rules(Added since September 1999)

• September 2000 Established Standard Entry Class
  Code POP
• March 2002 Limits number of pings to three
  One original attempt and two more tries.
  (Formerly No limit) (Applies to all ACH debits)

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In the back officeRe-Presented Check (RCK)
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RCK How It Works

• A payment that was presented as a ordinary paper
  check...
• Bounced for NSF or UCF and
• Instead of being re-presented on paper, is
  transmitted electronically through the ACH
  Network as a debit entry.

RCK applies only to bounced checks, not to
bounced ACH transactions
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RCK Transaction Flow

Format and Batch for ACH
NSF
Eligible NSF Checks
Converted to Electronic Check
Merchant Collection Process


ODFI
RDFI

Merchant Deposit Debit Merchant Account/ Update
Merchant Authorization System
Consumer Account Debited Or Return Items Back to
ODFI
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RCK Rules(Effective September 1998)

• Items that can be RCK-ed
• Are drawn on consumer accounts
• Are under 2,500
• Are not more that 180 days old
• Have bounced only because of NSF or uncollected
  funds (that is, no stop payments, no closed
  accounts and the like) and
• Have not been presented more than twice as a
  paper item.
• RCK items are not subject to Regulation E but
  stay under check law.

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RCK Rules(Added since September 2000)

• September 2002 Established Standard Entry Class
  Code RCK
• March 2002 Added option of making copy of
  check, then destroying check.

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Through the mail or at a dropbox Accounts
Receivable
Or dropbox, messenger, courier, express
service, overnight delivery, carrier pigeon, etc.
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ARC How It Works

• Biller notifies customer of the check conversion
  service.
• Consumer mails check payment (or drops it in a
  dropbox) to biller. Sending the check is
  authorization to convert it.
• Biller captures information from the MICR line
  and enters non MICR information ().
• Biller converts check at the point of receipt to
  an ACH debit (ARC).
• The entry flows through the ACH Network and is
  posted to the customers account.

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ARC Transaction Flow
Converted to Electronic Check
Format and Batch for ACH
John Doe Super Store One Million Dollars
Jon Doe
Customer sends through mail or drops in dropbox
ODFI
RDFI
Merchant Deposit Debit Merchant Account/ Update
Merchant Authorization System
Consumer Account Debited
Or Return Items to ODFI
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ARC Rules Effective March 15, 2002

• Implement Standard Entry Class Code ARC.
• Adopt a Regulation E legal framework.
• Require that source documents (check) be
  destroyed no later than14 calendar days after
  settlement and that a copy be made.
• Convert only consumer checks.
• Allow payments deposited in a dropbox to be
  converted to ARC entries.
• Do not establish a dollar cap.
• Permit notice authorization approach

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New ARC Rules

• December 2003 Make copying the back of the
  check (source document) optional. (Require-ment
  to copy front of check remains in force.)
• Brand new Originators have to allow consumers
  to opt out of having their checks converted.

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Over the Internet Internet-initiated ACH
transactions WEB
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WEB How it Works (Single Entry)

• Customer is purchasing item or paying a bill
  through a web site.
• Merchant offers payment option of electronic
  debit to account.
• Consumer provides authorization, including keying
  in routing number and account number, usually
  from the MICR data.
• Merchant sends debit through the ACH Network
  (possibly through a processor) to debit the
  consumers account.

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WEB Transaction Flow
Merchant collection process
Merchant sends debit through ACH Network
(possibly through a processor)
Consumer purchases goods or services on a website
ODFI
RDFI
Merchant Deposit Debit Merchant Account/ Update
Merchant Authorization System
Consumer Account Debited Or Return Items to ODFI
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WEB RulesEffective March 16, 2001

• Accepts consumer payments (consumer
  accounts) only.
• Establish new SEC code WEB.
• Define WEB entry as authorization with financial
  information obtained over the Internet.
• Addresses critical risk and security issues.
• Adopts a Regulation E framework.
• Establishes no dollar cap on payments.

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Over the Phone Telephone-initiated ACH
Transactions TEL
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How TEL Works

• Customer calls company or, in some cases, company
  can call customer.
• Company offers debit to checking account as way
  to pay.
• If customer agrees, customer provides the MICR
  information from the check. Company has to
  provide certain authorization information.
• Company sends payment through the ACH Network
  and debits customers account.

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TEL Transaction Flow
Merchant Collection Process
Customer initiates call (unless there is an
established relationship) and agrees to pay for
goods and services
Merchant sends debit through ACH Network
(possibly through a processor)
ODFI
RDFI
Consumer Account Debited Or Return Items to ODFI
Merchant Deposit Debit Merchant Account/ Update
Merchant Authorization System
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TEL RulesEffective September 14, 2001

• Allow consumers to provide authorization orally
  for Single Entry ACH debits.
• Use new SEC TEL.
• Provide for recording authorization or sending
  written notices, setting information requirements
  for both.
• Establish no dollar cap on payments.

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New TEL RulesEffective June 2003

• Provides that if NACHA receives data that
  suggests a given Originator has an unauthorized
  return rate exceeding 2.5, NACHA may require the
  ODFI to provide data either refuting the 2.5
  rate or explaining what it (the ODFI) is doing to
  lower the rate.
• Further provides that an ODFI that does not
  respond appropriately may be fined.

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And dont forget good, old fashioned Direct
Payment

• Direct Payment is a method of collection used in
  the ACH Network where the party that is owed
  money obtains an authenticated authorization from
  its customer to create a transaction which
  automatically debits the customers account and
  credits its account on the due date of the
  payment.

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How Direct Payment Works

• 1. The consumer authorizes a company in writing
  to debit payments from a given checking or
  savings account.
• 2. If the amount of monthly payments varies, the
  company sends the customer a notification of the
  payment amount 10 days prior to the payment
  transaction.
• 3. The company may create test entries called
  prenotifications.
• 4. The company prepares the ACH file for delivery
  to its financial institution one or two days
  prior to the effective date in a pre-arranged
  format.

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How Direct Payment Works

• 5. The companys financial institution processes
  the information, extracting transactions for its
  own customer accounts and delivering the
  remaining transactions to the ACH Operator for
  distribution.
• 6. On settlement date, the ACH Operator posts
  settlement to the companys financial
  institution.
• 7. The customers financial institution reports
  the transaction monthly on the customer account
  statements.

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Agenda

• ACH and NACHA Basics
• eCheck Applications in the ACH
• Other NACHA Initiatives
• Participating in the Evolution of the ACH

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Sample of Other NACHA Initiatives

• Network Return Entry Fees
• Return Entry Monitoring
• New WEB security rules
• Third Party Service Provider Agreements
• Council for Electronic Billing and Payment
• Account switch proposal
• The credit pilot - EBIDS (electronic bill
  information delivery service)
• Billers Guide to Consumer and Corporate ACH
  Receivables

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Agenda

• ACH and NACHA Basics
• eCheck Applications in the ACH
• Other NACHA Initiatives
• Participating in the Evolution of the ACH

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Rules Process - How the ACH Evolves

• New idea
• Formation of Rules Workgroup (RWG) - study and
  analysis
• Participation is open to any stakeholder
• Request for Comment
• RWG comment review - prepares ballot
• Rules and Operations Committee ballot decision -
  may include NACHA Board review
• Ballot sent to voting membership

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Rules Making Initiatives

• ARC Opt Out Provisions
• Would allow consumer to opt-out of conversion -
  business check clarification
• Third Party Service Provider Issues
• Recognizing when ODFI and Originator dont have
  an agreement because TPSP is intermediary
• ACH Data Security
• Expanding WEB security requirements to all ACH
  entries being sent over unsecured electronic
  networks

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Rule Making Initiatives

• System of Fines
• New issues include staff submitting to System,
  ineligible ARC items
• Reversals
• Inconsistency with acceptance/return of original
  entry and reversal
• Risk Management
• WEB authorization issues, expansion of monitoring
  of return codes, TEL and WEB registration
• Returns
• Investigating new return codes for fraudulent
  entries and invalid SEC usage ODFI monitoring
  and reporting for all SEC codes

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For More Information

• CEBP web site http//cebp.nacha.org
• NACHA web site http//www.nacha.org
• A Guide to Implementing a Point-of-Purchase Entry
  Program
• A Guide to Implementing a Re-Presented Check
  Entry Program
• A Guide to Implementing an Accounts Receivable
  Check Entry Program
• A Guide to Implementing a Telephone-Initiated
  Debit Entry Program
• Understanding Internet-Initiated Payments
• ACH Rules Book
• Regulation E
• Uniform Commercial Code
• Fed Regulations CC, D, E, J, others

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For More Information

• NACHA conferences and publications
• Affiliate Membership Program http//www.nacha.org
  /affiliates
• Electronic Check Council web site
  http//ecc.nacha.org
• Electronic Benefits Services Council
  http//ebt.nacha.org
• Global Payments Forum http//gpf.nacha.org
• Internet Council http//www.internetcouncil.nacha
  .org
• Risk Management for the New Generation of ACH
  Payments
• Regional Payment Associations

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? Questions ?