Introduction To ACH

1. Introduction To ACH Regis McKenna, AAP AVP Client Services, Western Payments Alliance

2. Western Payments Alliance Who is WesPay? Formerly CACHA, also had been merged with The Banker’s Clearing House “ACH HOTLINE”

3. ACH • How does one get started in ACH? Katrina

4. Reader’s Digest Version Originator (Employer) Receiver (Employee) ACH Operator Originating Depository Financial Institution Receiving Depository Financial Institution

5. Agenda • A Little ACH History • What is the ACH and how does it work?? • Roles and Responsibilities of the players • Rules and Regulations • Different ACH Applications • A Day in the life of the RDFI • Why Originate? • Risk

6. ACH History 101 • SCOPE – Special Committee on Paperless Entries is formed in the early 70’s • 1974 NACHA was formed

7. ACH History 101 Who was an early adopter of the ACH? Do we love acronyms? ARC, RCK, POP For “How long to return an item”, do we say 1 day ? An RDFI must Transmit a Return Entry to its ACH Operator by the ACH Operator’s deposit deadline for the Return Entry to be made available to the ODFI no later than the opening of business on the second Banking Day following the Settlement Date of the original Entry, except as otherwise provided in Subsection 3.8.3

8. What is an ACH Transaction? • Electronic movement of funds or information • Example of funds – direct deposit, loan or bill payment • Example of information – EDI – machine readable docs Quotations, shipment advices, invoices • Debits, credits or information – Government sends death notifications for Social Security recipients • Savings, Checking, General Ledger or Loans • Consumers or businesses • Originally modeled on the check processing system

9. ACH Entry Processing • ACH Entries are processed in batches • ACH Entries can be stored and processed at a later date • Wires • Final at settlement • Credits only • More Expensive • Generally high dollar

10. ACH Participants Originator (Employer) Receiver (Employee) ACH Operator Originating Depository Financial Institution Receiving Depository Financial Institution

11. ACH Participants Originator – A person/organization initiating ACH entries into the payment system Originating Depository Financial Institution (ODFI) – A FI that receives payment instructions from an Originator and delivers them to an ACH Operator ACH Operator – A central clearing facility that receives entries from ODFIs and forwards them to RDFIs; also performs settlement functions Receiving Depository Financial Institution (RDFI) – A FI that receives Ach entries from an ACH Operator and posts them to depositors’ account Receiver – A person/organization that has authorized an Originator to initiate entries it its account

12. Roles and Responsibilities • Third Parties (Processing Centers and Service Bureaus) – Facilitators • Processes on behalf of ACH participants • Compliance with ACH Rules • Compliance with third-party agreements • Annual ACH audit

13. Transaction Flow - Timing Originator (Employer) Day 1 • Originator forwards payment instructions to ODFI. • ODFI may warehouse payment instructions. Originating Depository Financial Institution

14. Transaction Flow - Timing • ODFI forwards NACHA formatted file to ACH Operator. • ACH Operator performs edits, assigns settlement date, and forwards entries to RDFIs. • RDFI collects entries and warehouses until settlement date; (may post credits early) Day 2 NACHA file NACHA file ACH Operator Originating Depository Financial Institution Receiving Depository Financial Institution

15. Transaction Flow - Timing Receiver (Employee) Day 3 • RDFI processes payment entries to accounts. • RDFI posts, returns, or posts and creates an NOC. • If posted, (consumer)receiver must have funds available at opening of business, or 9 AM, whichever is later. return post NOC Receiving Depository Financial Institution

16. Settlement • The actual transfer of funds for ACH entries between FI’s • Process is determined by ACH Operator

17. Rules and Regulations • NACHA’s Operating Rules book • Federal Regulation E • Uniform Commercial Code Article 4A • 31 CFR Part 210

18. NACHA ACH Operating Rules • OR Section/OG Section (operating rules/operating guidelines) • ACH applications • Rules to follow • Rules violations

19. Federal Regulation E • Consumer protection in regard to electronic funds transfer (EFT) including ACH • Requires FIs to provide initial and periodic disclosures • Provides guidelines for reporting and resolving disputes regarding unauthorized transactions

20. UCC4A (Uniform Commercial Code) • Governs wholesale credit entries (business transactions) • 24 hours • Late return • RDFI disclosures • One time disclosure • Choice of Law • Provisional Credit • Notice of Receipt

21. 31 CFR Part 210 – Green Book • Government Payments • Can be either consumer or corporate • The difference is that these are originated by the Federal Government • For RDFIs, there are some specific rules about how to process these entries • There are also different liabilities

22. Standard Entry Class Codes (SEC) – Transaction Code • Standard Entry Class Code – • Three letter code used to identify what type of transaction is being moved through • Used by the RDFI to determine return timeframe (in some cases) • Transaction Code – • Two digit code to identify credit or debit and to what type of account • 22 = Automated Deposit (checking) • 32 = Automated Deposit (savings)

23. ARC* BOC* IAT* CCD/CTX* CIE COR* DNE* ENR POP* POS/SHR PPD* RCK* TEL* XCK WEB* * Most popular codes Standard Entry Class Codes

24. PPD – Prearranged Payment and Deposit Entry • Direct Deposit • Direct Payment • Consumer applications • PPD+

25. CCD – Corporate Credit or Debit • Business to business • May carry one addenda record (CCD+) CTX – Corporate Trade Exchange • Business to business • Similar to CCD but… • Carries up to 9,999 addenda records

26. Addenda Records • This is payment related information that the receiver may need to reconcile the payment within their A/P A/R systems • RDFIs are required to provide information in addenda records to the corporate receiver if requested • How long do they have to give to customer? • RDFI may charge for the service • 80 characters long • Can have up to 10,000 addenda records

27. CIE – Consumer Initiated Entries • Consumer to consumer • Consumer payment to biller • Credits only • May have one addenda record

28. ARC – Accounts Receivable Entry • Truncation at A/R lockbox or drop box or manned location • Consumer or Corporate check • Originator maintains check or image for 2 years • Originator must provide copy if requested, within 10 banking days • Notice = Authorization BOC – Back Office Conversion • Consumer and corporate check • $25,000 limit • Check is completely filled out and signed • Checks taken at the point of purchase and converted at a later time • Notice = Authorization

29. A Day In the Life on an RDFI – RDFI Rights and Responsibilities • Prenotes • Returns • Notification of Change • Reversals/Recall

30. Prenotes • Optional use by the Originator • RDFI is to verify entry information (not required to match name) • Return or NOC • Optional customer notification • Reduce Liability – “test entry” • If used, must be sent at least 6 banking days prior to transmission of first live entry • ACH Returns • Valid Reason for Return • Timely Returns • 2 days for your NSF, Acct Closed, Unable to locate, Unauthorized (corporate), stop payments • 60 days for “unauthorized”

31. Notification of Change (NOC) • To be used by the RDFI when they want to correct inaccurate information on a file they receive • C01-C13 • RDFI Liability • Policy Considerations • RDFI must return within 2 banking days to ODFI • ODFI must return within 2 banking days to Originator • Originator must make the change within 6 banking days or before the next file goes out

32. Reversals • Process to correct previously sent entry(s) that were originated in error • The reversing entry must be transmitted to the RDFI by the 5th banking day following settlement of the erroneous entry • Originator to make reasonable effort to notify the receiver • Can be returned for valid reason • Can be returned as Unauthorized as well

33. Your customer wants you to! You have to remain competitive Benefits Maintain and expand customer base Generate fee income Improved cash management Why Originate? ?

34. Responsibilities – Originators • Execute agreement with ODFI • Obtain proper authorizations from Receivers • Create origination files and deliver to ODFI • Comply with rules and regulations

35. ACH Authorizations • Originator and Receiver • Written • Oral • Notice = authorization • Clearly state terms • Terms of cancellation

36. Warranties of ODFIs • Properly authorized • Complies with Rules • Timely • Authorization not revoked at time of entry • Indemnification to all parties

37. Still More Warranties of ODFIs The ODFI indemnifiesthe RDFI, ACH Operator and Association against loss when breaching any of these warranties SUBSECTION 2.4.4.1 Indemnity for Breach of Warranty An ODFI shall indemnify every RDFI, ACH Operator, and Association from and against any and all claims, demands, losses, liabilities, and expenses, including attorneys’ fees and costs, that result directly or indirectly from (a) the breach of any warranty made to such party by the ODFI under these Rules, or (b) the debiting or crediting of an Entry to a Receiver’s account in accordance with the terms of the Entry

38. Responsibilities – ODFI (cont.) • Risk Management • Monitor credit exposure • Overall processing security • ODFI is responsible for all entries it originates into the ACH Network • Its own activities • Activities of its originating companies – recourse only to the extent agreed to in contract between them

39. Originator Education and Support • ODFI should serve as the primary source of ACH information to its customers • ACH Contact at ODFI should • Provide support for daily processing • Handle customer inquiries • Notify originators of any rules changes that may affect them

40. 5 Types of Risk • Credit Risk • Reputational Risk • Operational Risk • Fraud Risk • Systemic Risk

41. You Made It! • What is the ACH? • Roles and Responsibilities • Rules and Regulations • Difference ACH Applications • A Day in the life of the RDFI • Why Originate? • Different Types of Risk

42. Contact Info Western Payments Alliance 300 Montgomery St., Ste 400 San Francisco, CA 94104 Phone: 415-373-1182 Fax: 414-433-1370 rmckenna@wespay.org Website: www.wespay.org