Electronic Payments and the ACH Network: Everything a Controller Needs to Know

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1 Electronic Payments and the ACH Network: Everything a Controller Needs to Know Robert Unger Senior Director Product Management and Corporate Relations NACHA-The Electronic Payments Association

2 2 Agenda ACH 101 Increasing ACH Volume ACH Risk New Stuff to Think About

3 ACH 101

4 ACH EFT Debit CTX Electr Remit CCD Credit EDI

5 5 What is EFT What is ACH? EFT (Electronic Funds Transfer) is a general term designating a system or process for electronically transferring funds from one bank account to another. EFT can refer to ATMs, payment cards, wires, SWIFT, ACH, and any other electronic means for transferring funds.

6 6 What is EFT What is ACH? ACH (Automated Clearing House Network) refers to a specific electronic payment network. The ACH Network is used for consumer and business domestic and international payments. Funds are moved between bank accounts by the banks. Payments settle within 1-2 days for classic ACH ; payments settle in the same day for Same Day ACH. The Network is governed by NACHA-The Electronic Payments Association.

7 7 Unique ACH Network Attributes Debits Credits Make / Receive Payments to any Account Robust payment information Check Conversion Zero-dollar transactions Consumer & Business Government Transactions Recurring/One-Time Payments

8 8 NACHA The Electronic Payments Association Provides a common set of rules and formats Establishes the legal foundation for the ACH Network Creates certainty and interoperability no bilateral agreements needed Defines roles and responsibilities

9 What is a NACHA rule? Example. Pay a bill by phone Buy shoes online To use your checking account to pay a bill by phone, or make an online purchase (both are ACH payments), a NACHA Rule specifies: Information the biller or merchant needs to obtain Data formats to be used to collect funds Obligations and warranties for the biller/merchant bank, and your bank Your rights to dispute.. and much more..

10 In the ACH, What is a Credit Payment and What is a Debit Payment? 10 In a CREDIT ACH payment, the customer or buyer pushes funds from the buyer s bank account to a seller s bank account. (Analogy payer can deposit cash directly into seller bank account at a branch if seller s bank account number is known.) Buyer Buyer Bank (also called ODFI) Seller Bank (also called RDFI)

11 In the ACH, What is a Credit Payment and What is a Debit Payment? 11 In a Debit ACH payment, the seller pulls funds from the customer or buyer s bank account for transfer to the seller s bank account. (Analogy paying with a check, where the seller then needs to deposit the check and collect funds.) Buyer Bank (RDFI for debit) Seller Bank (ODFI for debit) Seller

12 12 Credit and Debit Payments Have Wide Applicability Most any payment can be made using credit or debit ACH. ACH can be used to make payments (domestic and international): Direct Deposit of payroll for employees, taxes, bills, invoicebased payments, transferring/concentrating funds, ecommerce/web purchases. ACH payments can be collected in all channels: Mail/lockbox, telephone/ivr, Internet, walk-in, mobile, bankto-bank, point-of-sale In 2015, 23 billion payments worth more than $40 trillion were processed through the ACH Network

13 13 Credit vs Debit ACH Payment ACH Credit Settled upon funds being received into your account the money is yours once funds are deposited In very rare circumstances, the funds may be reversed (i.e., reclaimed) to correct a defined error: Examples: duplicate payment file, wrong account, incorrect calculation of amount Reversals must be initiated within 5 days of the settlement date ACH Debit Settled upon funds being received into your account - the money is yours once funds are deposited Payment can be disputed by customer as to whether payment was authorized: Consumer has 60 days post statement to make claim Business must make claim within 2 days of debit Other risks: invalid account, account closed, insufficient funds

14 14 What is Remittance Advice/Information? Remittance advice (or remittance information) is sent by the buyer of goods/services to the seller of the goods/services for cash application. Information can include: Itemization of invoices being paid Amount of payment Discounts being applied Notification of disputes and adjustments, reasons Other reference information (e.g., bill of lading/freight bill, purchase order number) Other information as needed

15 ACH Payments Can Include Remittance Information ( dollars and data ) ACH B2B payments provide payment instructions (e.g., the check - who to pay, how much, when), and can include up to 800,000 characters of remittance data (e.g., the stub - invoices being paid, discounts taken) Paper check and stub Converted to electronic ACH payment

16 ACH Payments Facilitate Remittance Information Exchange

17 ACH and the Procure to Pay (P2P) Process Determine Supplier Requirements 2. Determine Source 3. Select Supplier and Complete Contract ACH Value Proposition for P2P Lowest cost disbursement option Supports data and dollars using data standards (EDI, XML) - can include up to 800,000 characters of remittance data Reduced fraud risk and enhanced security with automated disbursement controls. Improved cash management with better insight into payables status Supports international payments Backed by the NACHA Rules 8. Pay Supplier Invoice via ACH 7. Complete Invoice Matching 6. Receive Goods or Services 4. Set up Supplier Master 5. Complete Purchase Requisition and Purchase Order

18 ACH and the Order to Cash (O2C) Process Customer Places a Contract or Order 2. The Customer is Set-Up in the Customer Master File 3. The Order is Booked ACH Value Proposition for O2C Guaranteed payment (credits) Supports easy to use debit payments and conversion of checks to ACH Lowers remittance costs and errors caused by re-association Low cost, low risk Accelerated cash flow Backed by NACHA Rules 8. The ACH Payment is Applied 7. The Customer Pays the Invoice via ACH 6. The Order is Invoiced and Booked into AR 4. The Order is Shipped or the Services are Provided 5. Shipping is Confirmed and Revenue is Recognized

19 Increasing ACH Volume

20 20 Business Drivers Why isn t your company already sending/accepting ACH payments? Or, why doesn t your company have the majority of your payments/customers paying electronically?

21 21 Business Drivers: Customer Satisfaction DSO DPO Cost Per Payment CEI ADD Days Sales Outstanding Days Payable Outstanding Collection Effectiveness Index Average Days Delinquent

22 22 Company Conversations Business drivers Goals/strategy Budget Internal processes Bank/ERP/AR vendor/lockbox provider cash file, BAI/other reporting, depository/origination agreements Vendor/customer facing systems Payment channels (bank, web, portal, phone, elockbox) Reps Communications Metrics to measure success

23 23 Payment Mix Strategy Companies are successfully reducing AP/AR costs by strategically managing the mix of payments, using customer segmentation to drive payment choice. Organizations need to think broadly about the portfolio of payments in addition to focusing on the transaction (e.g., impact on cash activity in addition to per transaction expense). Determine - what is the optimal mix of card, ACH and wire payments. For example: Repetitive Payments High Value Low Value & One Off Small Biz Immediate International ACH Card Wire

24 Maximize Cost Reduction and Efficiency Opportunities By Growing ACH Volume 24 The successful ACH super users for receivables: Set goals for ACH adoption Have budgets Communicate during onboarding ACH

25 25 Investing to Change Customer Payment Behavior Offer incentives (e.g., discount or extended DSO/float time) to pay via ACH (important to benchmark costs and benefits, examine impacts on cost structure, advocate for budget) Compensate sales staff for selling ACH payment Offer less expensive options (e.g., Same Day ACH vs wire for time critical payments, ACH rebate vs. card) Require new buyers to pay via ACH Decrease or retract - early pay discount with check and card payments Surcharge card payments Partner with financial institutions, payment vendors and related third parties what are your needs? Outreach, onboarding, maintenance

26 The ACH Scorecard Procure to Pay (P2P) 26 Process Impact Current Metrics (Benchmarks) Goal Cost and Process International Payments Total Number and Percent of Manual Checks Paid to Suppliers % of Manual Checks Paid to Suppliers Cost per Check Disbursement % of Checks vs. Electronic Payments Paid to Suppliers Total Number and Percent of ACH Payments Paid to Suppliers Cost per ACH Disbursement Total Number of Suppliers Accepting Electronic Remittance via ACH % Reduction in Manual Check Production Costs % Reduction in Manual Checks Produced Ratio of Manual Checks vs. ACH Supplier Payments Issued % Increase of Electronic Payments Paid to Suppliers % Increase of Suppliers Accepting ACH Remittance Total Number of International Wires % Use of International ACH Transactions (IAT) Recurring Payments % of Recurring Payments % Increase in the Number of Recurring Payments Paid Via ACH Internal Controls Total Cases and Costs of Supplier Disbursement Fraud % Reduction In Supplier Disbursement Fraud Total Number of Escheatment Issues % Reduction in Number of Escheatment Issues Customer Service Current Supplier Satisfaction Rate Number of Supplier Issues Reported % Improvement in Supplier Satisfaction Actual (MTD, QTD, YTD) Action Plan 2015 NACHA The Electronic Payments Association. All rights reserved.

27 The ACH Scorecard Order to Cash (O2C) Process Impact Current Metrics (Benchmarks) Goal Cost and Process ACH Payments ACH Remittance Cash Application Total Number of Manual Checks Collected from Customers % of Manual Checks Collected From Customers Cost per Check Received Total Number of ACH Payments Collected from Customers % of ACH Payments Collected from Customers Cost per ACH Payment Collected Total Number of Non-Standard Remittance % of Non-Standard Remittance DSO Impact Current DSO Internal Controls Customer Service Current First Time Cash Application Hit Rate % Reduction in Manual Checks Received % Increase of ACH Payments Collected from Customers % Improvement in Standard Remittance via the ACH % Improvement in First Time Cash Application Hit Rate % Improvement in DSO % Improvement in Cash Flow Number of AR Fraud Cases % Reduction In AR Fraud Number of Cash Application Errors % Reduction in Cash Application Errors Current Customer Satisfaction Rate Number of Customer Issues Reported % Improvement in Customer Satisfaction Actual (MTD, QTD, YTD) Action Plan 27

28 Managing ACH Risk

29 Managing ACH Risk Best Practices Mitigating ACH Risk ACH Debit Block: Prohibits all ACH debit withdrawals from the account. ACH Debit Filters: Only ACH debit transactions that match criteria you set base on payee, and dollar amount are permitted ACH Positive Pay: Allows the accountholder to review ACH debit requests and credit payments before they are paid, presents exceptions for decisioning Cash Account Reconciliations: Timely reconciliation of accounts to identify anomalies Continuous Monitoring: Frequent monitoring of cleared banking transactions to catch unauthorized transactions (recall: disputed debit to account must be made in 2 days) Tokenization: when applied to data security, is the process of substituting a sensitive data element with a non-sensitive equivalent, referred to as a token that has no extrinsic or exploitable meaning or value. Tokenization is a process by which the primary account number (PAN) is replaced with a. surrogate value called a token.

30 New Stuff to Think About

31 The New Same Day ACH Opportunity for Businesses Same Day ACH provides a ubiquitous capability for moving ACH credit and debit payments faster. Payments initiated within designated time frames are received and settled the same day. Using Same Day ACH is optional for making payments. It is required to receive Same Day ACH payments, and to provide credit for the same day. Existing one-day and two-day ACH processing and settlement capabilities will not be impacted.

32 Same Day ACH Benefits Making Payments Payers Uses include: Benefits Emergency payments, off-cycle disbursements and corrections or payouts, time critical/due-date payments, account transfers, errors/payment re-initiation, etc. Reduced cost/payment for expedited transactions, improved cash flow/hold ledger balance/funds longer, decrease days payable outstanding (DPO) and invoice processing/payment cycle time, improved supplier cash application with inclusion of remittance Lowest cost, ubiquitous option to expedite payments only option for including rich remittance too Same Day ACH payments can be sent to any bank account in the U.S. Pay today! ACH Wire Card Check Expedited option X Remittance Unlimited structured Limited unstructured Limited structured Unlimited unstructured Reach All DDAs All DDAs Card acceptors All postal addresses Cost Low High Low Low

33 33 Same Day ACH Benefits Receiving Payments Payment Receivers Uses include: Benefits Expedited credit ACH receipt, debit ACH collection and error correction Lowest receipt and collection cost/payment compared to other expedited options Improvement to days sales outstanding (DSO) reduction, average days delinquent (ADD), collection effectiveness index (CEI) Better cash application cycle time when remittance included, improving cash flow management/cash position Reduced risk for collections quicker cycle for account verification/returns Positive impact to logistics cycle/disbursements of goods/services, improved product throughput with faster availability of good funds

34 Classic and Same Day ACH: Payment Comparison Payment Due Dec Classic ACH Send payment on Nov. 30 Biller/supplier will receive payment on Dec. 1 Same Day ACH Send payment in time for window #1 on Dec. 1, or Send payment in time for window #2 on Dec. 1 Biller/supplier will receive payment on Dec. 1

35 AR Trend Increasing Receivables Costs Driven By Pcard/Credit Card Payments Accounts payable card payments growth: Fueled by reward/rebate model (AP as profit center) Funded by AR Pros Lower risk, easy process Cons Costs Remittance data 35 Purchasing card spending growth in the past two years in the corporate segment (was) (31%). Going forward, the predicted purchasing card growth is about 10.8% per year average over the next five years RPMG Research Corporation

36 ISO Integration and ACH Formats 36 Interbank Clearing and Settlement Debtor Agent / ODFI* ISO Messages pain.001 pain.008 pain.002 pain.007 camt.05x NACHA File Formats Mapping Guide used to translate ISO format to NACHA file formats B2B Credit CCD, CTX, IAT and remittance B2B Debit Prenotes, Consumer Returns ACH Operator NACHA Operating Rules NACHA File Formats B2B Credit CCD, CTX, IAT and remittance B2B Debit Prenotes, Consumer Returns Creditor Agent / RDFI* NACHA File Formats EDI BAI remt.00x Camt.05x Custom Reports Integrated Receivable Purchase Invoice Debtor / Originator* Creditor / Receiver* 2016 NACHA The Electronic Payments Association. All rights reserved. IMPORTANT/CONFIDENTIAL: This document is confidential and contains information regarding NACHA Board matters. It should not be shared with other parties.

37 37 Questions.. Resources: NACHA Corporate Relations page Case studies, best practices ACH for Business free newsletter (or send to me