Get on First Base with Same-Day ACH Risks

Transcription

1 Get on First Base with Same-Day ACH Risks EASTPAY 2016 Information Interchange Mary Gilmeister, AAP, NCP President WACHA Fred Laing, II, AAP, CCM, NCP President UMACHA 1

2 Disclaimer NACHA owns the copyright for the NACHA Operating Rules & Guidelines The Accredited ACH Professional (AAP) is a service mark of NACHA This presentation and applicable materials are intended for general education purposes and nothing in this presentation should be considered to be legal, accounting or tax advice You should contact your own attorney, accountant or tax professional with any specific questions you might have related to this presentation that are of a legal, accounting or tax nature 2

3 Agenda The basics of same-day ACH Identifying Same-day transactions ODFI risks Credit, operational, fraud, other RDFI risks Same-day Scenarios Conclusion 3

4 A Phased Approach to New ACH Network Functionality To ease the industry s implementation effort, the new ACH Network functionality will be implemented across three implementation phases. Functionality Phase 1 Sept. 23, 2016 Transaction Eligibility ($25,000 limit; IAT not eligible) Phase 2 Sept. 15, 2017 Phase 3 March 16, 2018 Credits only Credits and debits Credits and debits New Same Day ACH Processing Deadlines 10:30 AM ET and 2:45 PM ET 10:30 AM ET and 2:45 PM ET 10:30 AM ET and 2:45 PM ET New Settlement Time(s) 1:00 PM ET and 5:00 PM ET 1:00 PM ET and 5:00 PM ET 1:00 PM ET and 5:00 PM ET ACH Credit Funds Availability End of RDFI s processing day End of RDFI s processing day 5:00 PM RDFI local time Times shown represent the approximate times for an ODFI s deadlines to transmit same-day ACH transactions to an ACH Operator. 4

5 Eligible Transactions Individual Entries of $25,000 and under Over $25,000 will settle the next day All Standard Entry Class (SEC) codes except for International ACH Transactions (IATs) All Non-Monetary/Zero-Dollar transactions will be eligible for Same Day ACH immediately in Phase I Exception Automated Enrollment Entries (ENRs) Prenotes for future debit Entries (Phase 1 only) 5

6 Phase I Phase I implementation date September 23, 2016 ACH credits become eligible Settlement for same day credits will occur at 1:00pm and 5:00 pm ET RDFIs are required to make funds available (not available for withdrawal) from Same Day ACH credits by the end of their processing day 6

7 Same Day Entry Fee Designed to mitigate operating and investment costs for RDFIs who will all be required to participate in Same Day ACH Approved fee is set at 5.2 cents per Same Day transaction to be paid by the ODFI to the RDFI of the Entry Periodic Reviews of the Same Day Entry Fee will occur and be conducted by NACHA staff at five, eight and 10 years after implementation of the Rule 7

8 IDENTIFYING SAME DAY ENTRIES Same Day ACH for ODFIs 8

9 Identifying Same Day Entries Same-day ACH transactions will be identified/processed by the ACH Operator Utilizing Effective Entry Date field Same-day ACH transactions will be identified by the ODFI and its Originator by using the current day s date in the Effective Entry Date field Stale dated and invalid values in this field will also qualify for Same Day processing 9

10 Identifying Same Day Entries Example: Transactions originated on October 25, 2016 that are intended for same-day processing should include an Effective Entry Date of in the Batch Header Record The NACHA Operating Rules provide that the Effective Entry Date is the date specified by the Originator on which it intends a batch of Entries to be settled. (Appendix Three, Subpart Glossary of Data Elements) 10

11 Identifying Same Day Entries Example: ACH transactions with a current day Effective Entry Date must meet an ACH Operator s submission deadline for same-day processing Transactions originated on Tuesday, October 25, 2016 with an Effective Entry Date of must be submitted to an ACH Operator no later than the 2:45 PM ET deadline for same-day settlement These transactions would be assessed the Same-Day Entry Fee 11

12 Stale Dated Effective Entry Date Research FRB extracted data for October ,740 total batches examined Number of ODFI s with stale-dated batches: 3,198 Number of distinct company names with stale-dated batches: 28,003

13 Same-Day ACH Risk Management For All FI s 13

14 Same-day Considerations Interfacing with internal applications DDA, Savings, etc. Identification of same-day entries Education, both internal and external (vendor, customer, individual) Impact on internal processing schedules Impact on contingency planning Testing timeframes and vendor interactions 14

15 ODFI Risk Management Same Day ACH for ODFIs 15

16 ODFI Risk Management - Strategy Have an overall strategy for offering Same Day ACH Should Same Day be offered to all or select consumer and/or corporate customers? Not all Originators may be suitable for same-day origination Not all FI products may be suitable for same-day origination If so, determine how to flag or otherwise set up processes to ensure only those categories permitted to use Same Day ACH are using it 16

17 ODFI Risk Management - Strategy Consider customer s profile (i.e., business model) when offering Same-Day ACH Current credit limits Prefunding and exposure Authentication methods Review files, or have processes in place to determine compliance, with same day eligibility rules 17

18 ODFI Risk Management - Credit ODFIs could reduce their exposure from Originators because of faster settlement of Same Day credits ODFIs have less time on the hook for sameday credits Example: The ODFI is liable for credits put into the system, and more frequent settlement reduces time for an Originator to fail, go bankrupt, or have funds frozen 18

19 ODFI Risk Management - Credit Erroneous Entries may be remedied more quickly by sending Reversals faster Debits (including Reversals of erroneous credits) will not be available until phase 2 A debit in a Reversing File must not contain an Effective Entry date that is earlier than the Effective Entry Date of the credit to which it relates ODFI should review policies for pre-funding particularly in Phase 1 when debits will not be available for Same-Day With $25,000 per Entry limit, off set may not be eligible for Same-Day 19

20 ODFI Risk Management - Credit Issues with balanced Files Phase 1 credit will be same day, debit will be delayed until the next day Consider funding these batches independently (not through the ACH) Could impact your legal lending limit Phase 2 & 3 not the same problem Still need to be aware of lending limit issues 20

21 ODFI Risk Management - Credit Transaction Risk is reduced for same-day debits ODFIs and Originators of same-day debits will receive any Returns at least one day sooner A Return could be even faster if the RDFI uses a same-day window for the Return ODFIs and Originators of next-day debits could see Returns faster if RDFIs use same-day windows for Returns Helping billers, card issuers and other better manage credit risk RDFIs may Return NSF and other unpostable debits faster resulting in faster re-credit 21

22 How Can an ODFI s Credit Exposure Change through the day with Same Day ACH? If an Originator transmits $100,000 in credit Entries in the morning, designated for three different processing windows as follows: Same Day 10:30 AM ET Window: $70,000 Same Day 2:45 PM ET Window: $20,000 Next-Day Window: $10,000 As Files are released and settled throughout the day, the amount of credit exposure the ODFI has outstanding decreases as settlement occurs for each processing window 3:00 AM 4:00 AM 5:00 AM 6:00 AM 7:00 AM 8:00 AM 9:00 AM 10:00 AM 11:00 AM 12:00 noon 1:00 PM 2:00 PM 3:00 PM 3:00 AM - ACH Opens 6:30 PM - Fedwire closes 2:15 AM - ODFI Total Daily Exposure $100,000 Deadline Next-Day First Settlement Window 1:00 PM Transactions Remaining Daily Exposure = $100,000 - $70,000 = $30,000 4:00 PM 5:00 PM 6:00 PM 7:00 PM 8:00 PM 9:00 PM 10:00 PM 11:00 PM 12:00 midnight 1:00 AM 2:00 AM Second Settlement Window 5:00 PM Remaining Daily Exposure = $30,000 - $20,000 = $10,000 Daily Exposure Not Previously Settled $10,000 22

23 ODFI Risk Management - Fraud Fraud Risk may increase marginally but may be mitigated by receiving Returns faster Alerting ODFIs and Originators to potential fraud earlier Corporate Account Takeover fraud potential may increase depending on how well the ODFI authenticates its originators With the increased speed of Same-Day Entries, the importance of strong authentication methods and security around File delivery is paramount Types of Entries to monitor more closely may include new customer Files, A2A, P2P along with WEB and TEL (after phase 1) 23

24 ODFI Risk Management - Operational Use of prenotes, and responses to prenotes, will enable better quality of Entries and serve to mitigate risk (this is true for Same Day Entries as well as non-same Day transactions) For example, a payroll Entry or bill payment containing an incorrect Receiver account number can be remedied more quickly if response is sent same day 24

25 ODFI Risk Management - Operational Some Originators may attempt to split $25,000+ items into two or more Entries ODFIs should monitor for this and educate Originators The ACH Rules Enforcement Panel will have final authority on any party (ODFI, Originator or Third-Party Sender) attempting to evade the limit 25

26 ODFI Risk Management - Operational Same-Day ACH and the faster movement of money mitigates some risks, for example Operational Risk for ODFIs is mitigated by adding additional processing and settlement windows These provide more frequent and flexible opportunities to recover in the event of missed deadlines or system outages Same-day Reversals could be used to recover from erroneous or duplicate Files At the same time risk routines will need to be run in MUCH shorter windows which may increase risk 26

27 ODFI Risk Management - Operational There are a few NEW operational risks An originator sends a File to an ODFI with a stale Effective Entry Date If that s not repaired the Entry may be run as a Same Day Entry ODFI s need software to view Effective Entry Dates and recognize Files that should not be processed until those deadlines are past An originator sends a File to an ODFI with today s date as the Effective Entry Date but the ODFI knows the Entry isn t supposed to settle until the following day The ODFI needs procedures to ensure this File is not processed until AFTER the same-day deadlines 27

28 ODFI Risk Management - Operational General Risk Management Practices An RDFI that suspects a credit is unauthorized may treat a same-day credit the same as other credit Entries, by researching and notifying the ODFI of any delays ODFI should consider registering for the Emergency Contact Database to be able to more quickly contact or be contacted by another FI if there is a problem Ensure that information included is current and contains contacts specific to same day transactions 28

29 ODFI Risk Management Other Considerations Use of Third-Party Senders Readiness Education needs Updates to Agreements Delivery schedules Use of Effective Entry Date Use of optional identifiers Billing Tracking of transactions needs to be done by the ODFI Fed will bill on a monthly basis, total debits and total credits after phase 1 Billing of your customers for use of the windows needs to come from your internal systems Reputational Risk!! 29

30 RDFI Risk Management Same-day ACH for RDFI s 30

31 RDFI Impacts Receipt of Same Day Entries is not optional for RDFIs For RDFIs the following relationships and areas may be impacted ACH Operator Vendors and processors Enterprise-wide operations Receivers Current ACH processing schedules and offerings will continue without change Same Day ACH offers schedules in addition to the current offerings Making funds available in a timely manner Processing of Files when closing early, closing on Banking Days Dual controls should still be in place 31

32 RDFI Impact with Operator Areas that may be impacted and should be reviewed File receipt and delivery schedules including Return timing Service needs and offerings such as reporting tools Collection/Reporting/Identification of the Same Day ACH Entry Fees Settlement with the ACH Operator(s) Review agreements with ACH Operator(s) 32

33 RDFI Impact with Vendors and Processors Areas that may be impacted and should be reviewed Service offerings What and when? When available for testing? Live processing? Training on updated software? Differentiate between Same Day ACH Entries and non-same Day ACH Entries Will processes be manual or automated? What information will be in the reports? Will there be any Same Day ACH specific reporting information contained within? Error resolution Disaster Recovery/Contingency Planning File receipt and delivery timelines and procedures Agreements Release Notes Ensure statements are updated correctly and accurately 33

34 RDFI Impact (Enterprise-wide Operations) Areas that may be impacted and should be reviewed Internal processing schedules and procedures, including handling of exceptions and Returns Funds availability Disaster Recovery Do Same Day ACH entries have priority over next day entries? Downstream applications and systems Reconcilement with ACH Operator(s) enterprise-wide Education of frontline and call center staff 34

35 RDFI Impact with Receivers Areas that may be impacted and should be reviewed Corporate Receivers may want their remittance information delivered faster (premium value added service) Corporate Receiver of credit must update records to reflect Originator's payment as having been received as of date no later than Settlement Date, has reasonable amount of time to update records 35

36 RDFI Risk Management Considerations Policies and procedures related to Returns and NOCs should be reviewed to allow for Returns and NOCs have more available windows for transmission Allows these Entries to be sent from the RDFI to the ODFI more quickly Reduced credit risk when Entries are Returned sooner, but RDFIs are not required to send Returns faster Erroneous Entries may be remedied more quickly because Reversals may be received sooner Debits, including Reversals of erroneous credits, will not be available until Phase 2 A debit in a Reversing File must not contain an Effective Entry Date that is earlier than the Effective Entry Date of the credit to which it relates 36

37 RDFI Risk Management Considerations Funds availability requirements change with Same Day ACH, RDFIs need to have resources to ensure funds are available at the required time Phases 1 & 2 Funds must be available at end of RDFI s processing day Phase 3 Funds must be available for withdrawal by 5:00 PM local time for RDFI An RDFI that suspects a credit is unauthorized may treat a same day credit the same as other credit Entries, by researching and notifying the ODFI of any delays Voluntary Exception Rule RDFIs may consider registering for the Emergency Contact Database to be able to more quickly contact or be contacted by another FI if there is a problem 37

38 Scenario 1 In phase 1, a batch is submitted to the ACH Operator at 11:45 pm ET on Tuesday, October 4, 2016, with an Effective Entry Date of October 3, 2016 (stale-dated) Since the batch was submitted prior to the 2:15 am ET deadline and is not future dated, it will settle at 8:30 am ET on Wednesday, October 5, 2016 No Same Day Entry Fee will apply

39 Scenario 2 In phase 1, a balanced File with an Effective Entry Date of December 7, 2016, is submitted to the ACH Operator on December 7, 2016 prior to 2:45 pm ET The File contains a single PPD debit Entry for $12,500 and multiple PPD credit Entries when added together, equal the $12,500 debit Entry The credit Entries are eligible for same day but the debit is not The credit Entries will settle on December 7, 2016 at 5:00 pm ET and the debit Entry will settle on December 8, 2016 at 8:30 am The credit Entries are subject to the Same Day Entry Fee; the debit Entry is not

40 Scenario 3 In phase 1, a batch containing PPD Entries with an Effective Date of October 1, 2016, is submitted to the ACH Operator at 2:30 pm ET on October 19, 2016 (the batch is stale-dated) The batch contains several credit Entries and one debit Entry for $12,500; one credit Entry is for $96,100 and all other credit Entries are under $25,000 Assuming there are no edit errors, the batch will be processed at the 2:45 pm ET deadline For the eligible Same Day Entries (the credit Entries under $25,000), the output Files will be distributed by 4:00 pm ET with settlement occurring at 5:00 pm ET on October, 19, 2016 The credit Entry for $96,100 and the debit Entry for $12,500 will be included with the 4:00 pm output File, but they will settle the next Business Day, October 20, 2016 at 8:30 am ET The eligible Same Day Entries will incur the Same Day Entry Fee

41 Scenario 4 In phase 2, a CCD Entry is submitted to the ACH Operator on March 10, 2018 at 2:00 pm ET with an Effective Date of March 11, 2018 (future dated) The Entry is for $23,000 Even though the CCD Entry was submitted to meet the 2:45 pm ET same day deadline, the Entry was future-dated and will settle on March 11, 2018 at 8:30 am ET No Same Day ACH Entry Fee is applied

42 Scenario 5 In phase 3, a forward Entry is processed as a next-day Entry and settles on August 4, 2018 at 8:30 am ET The Entry must be Returned Option 1: Return the Entry Same Day (August 4, 2018) to settle at 5:30 pm ET. Submit the Entry by 4:00 pm ET Option 2: Return the Entry next day (August 5, 2018) to settle at 8:30 am ET on August 6, Submit the Entry by 2:15 am ET August 6, 2018 Settlement of the Return Entry must occur no later than the opening of business on the second Business Day following Settlement

43 Questions? 43