INTRODUCTION TO SAME-DAY ACH

INTRODUCTION TO SAME-DAY ACH Kevin Olsen, AAP, NCP VP of Payments Education About EastPay Not-for-profit Regional Payments Association Educational Programs & Payments Publications Member Benefits Voice & Representation in National Rule Making and Regulatory Process Payments Hotline Toll-Free Phone Support Discounts on Seminars, Publications, and Conferences 9 ACH Accredited Professionals (AAP) 3 National Check Payments Professionals (NCP) 2 Certified NCP Instructors 1 Certified Treasury Professional (CTP) 1 Certified Cash Manager Professional (CCM) 2 Certified Internal Auditor (CIA) 1 Certified Information Systems Auditor (CISA) 1 Certified Financial Services Auditor (CFSA) 2 1

Disclaimer 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 Image source: Thinkstock 3 Before We Begin random CApitALIZAtiOn Many of the words that are capitalized (Entry, Receiver, Check, etc ) can be found in Article Eight of the 2016 NACHA Operating Rules & Guidelines Article Eight provides a definition of each of the capitalized words 4 2

How did we get here and where are we going? 5 EPS in 2012 Expedited Processing and Settlement NACHA did not receive the 75 percent positive vote that was needed for it to pass X 6 3

Existing Same Day Service FedACH SameDay ACH All SEC Codes except IAT, TRC & TRX Business & Consumer transactions Both Debits & Credits For FedACH customers only Opt-In only 7 Why hasn t FedACH SameDay ACH taken off? Even though the service has been enhanced from its initial service, there has been very limited usage The opt-in approach has been caused limited participation Lack of ubiquity or assurance that enough RDFIs will participate 8 4

How does the UK Faster Payments System work? * User Experience Bank Settlement Risk Management Near real-time Between 15 seconds and 2 hours Input can be made 24/7 Credit transfers only, initiated by accountholder with the funds Initiated by phone or Internet Multilateral deferred net settlement (Bank of England) 3 settlement cycles on banking days: 7 AM cutoff, settlement at 7:15 AM 12:45 / 1:00 PM 3:30 / 3:45 PM * Information from Vocalink presentation to Financial Services Council Meeting 1/29/2009 Liquidity: Deferred net settlement / Liquidity and loss sharing with collateral at BofE Settlement: 10K pounds max per payment Net sending caps Loss sharing Operational Risk: Existing technology 9 Complementary Capabilities: Real-time Payment Messaging and Multiple Same-Day Settlement Windows Same-day settlement and real-time payment messaging are complementary, not duplicative initiatives Real-time messaging built upon an infrastructure with multiple same-day windows takes risk out of the system, while not burdening participants with more frequent settlement A strong foundation on which to build innovative offerings to meet end-user needs into the future Enabling same-day ACH is a first step toward the future of payments, including the option of real-time payment messaging 10 5

Faster Payments Industry Initiatives 11 Five Strategies 1. Actively engage with stakeholders on initiatives designed to improve the U.S. payment system 2. Identify effective approach(es) for implementing safe, ubiquitous, faster payments 3. Reduce fraud risk and advance the safety, security and resiliency of the payment system 4. Achieve greater end-to-end efficiency for domestic and cross-border payments 5. Enhance Federal Reserve Bank payment, settlement and risk management services to address identified gaps 12 6

Five Desired Outcomes 1. Speed 2. Security 3. Efficiency 4. International 5. Collaboration 13 Faster Payments Task Force Faster payments task force established to identify and evaluate alternative approaches for meeting end-user needs for faster authorization, clearing, availability of funds and settlement https://fedpaymentsimprovement.org/ Sign up for notifications Glossary of terms 14 7

Faster Payments Task Force 15 Secure Payments Task Force Provide advice on payment security matters Coordinate with the Faster Payments Task Force to identify solutions for any new or modified payments infrastructure so that it is both fast and secure Determine areas of focus and priorities for future action to advance payment system safety, security and resiliency 16 8

Secure Payments Task Force 17 What is Faster? It depends on the needs of the users? 18 9

Understanding Same-Day ACH 19 What is the Difference between Same Day ACH and Real-Time Payments? Same Day ACH and real-time payments would offer complementary options for users, as they would have distinct functionality and thereby meet distinct needs of various use cases Today s ACH Network supports traditional ACH debit payments bill payments, for example as well as traditional credit payments like payroll Approximately 60% of ACH transactions are debit payments A real-time system would likely provide credit payments only; however, there is benefit to moving both credits and debits faster 20 10

Same Day ACH and Real-time Payments as defined by NACHA and TCH initiatives 21 Why Same Day ACH? Same Day ACH is an immediate step we can take to enhance the payment system, demonstrating that financial institutions can work together to advance payments Same Day ACH creates a foundation on which to build other services 22 11

Major Use Cases for Same Day ACH are Projected to Generate 1.4 Billion Transactions C2B Bill Pay ecommerce POS check conversion Merchant debit Collections C2C Person-to-Person Account-to- Account B2B Multiple uses, such as trading partner payments, duedate and late invoice payments B2C Payroll Insurance, refunds 23 B2C (Business to Consumer) Payroll Faster payroll payments for hourly or temporary workers, and faster options for off-cycle payments such as bonuses or emergency payments Urgent claims payments and refunds Quick payout of insurance claim payments, disaster assistance payments, and other rebates, refunds and reimbursements 24 12

B2B (Business to Business) Invoice and tax payments Faster payment of invoices on or after the due date, and sameday remittance of tax payments 25 C2C (Consumer to Consumer) Person-to-Person payments Quicker delivery of funds for transfers among family members or friends Account-to-Account payments Movement of funds between accounts at different financial institutions, or funding of a prepaid or mobile account 26 13

C2B (Consumer to Business) Bill Payment Faster payment of bills on or after the due date Online/Internet payments Faster payments for ecommerce Point-of-Sale Check Conversions Quicker collection of funds for check conversion Collection payments Enabling same day payoff of past-due accounts Merchant debit payments Faster returns for consumer payments 27 Same-Day ACH vs. Wires Will Same-Day ACH cannibalize or compliment wire transfers? 28 14

Same Day ACH vs. Wires Normal Use Feature ACH Wire Low value/ high volume transactions High value / low volume transactions Processing Batch Individual transaction Transaction limit $25,000.00 $9,999,999,999.99 Network delivery Twice a day Real time Funds availability End of day*(phase 3?) Immediate Transaction Cost Low Dollar (plus transmission fee) Higher Dollar Typical deadlines 10:30 AM ET & 2:45 PM ET 5:30 PM ET Remittance information CTX 9,999 addenda records (799,920 characters) Up to 9,000 characters (may require special processing) 29 Phased Approach to Same-Day ACH Functionality Phase 1 Sept. 23, 2016 Transaction Eligibility ($25,000 limit; IAT not eligible) New Same Day ACH ODFI Processing Deadlines New Settlement Time(s) ACH Credit Funds Availability Phase 2 Sept. 15, 2017 Phase 3 March 16, 2018 Credits only Credits and Debits Credits and Debits 10:30 AM ET and 2:45 PM ET 1:00 PM ET and 5:00 PM ET End of RDFI s processing day 10:30 AM ET and 2:45 PM ET 1:00 PM ET and 5:00 PM ET End of RDFI s processing day 10:30 AM ET and 2:45 PM ET 1:00 PM ET and 5:00 PM ET 5:00 PM RDFI local time End of Processing Day = The time in which an organization ceases their daily processes 30 15

Same-Day ACH Processing Schedule Window 1 10:30 AM ET ODFI Deadline for Same Day Window 12:00 PM ET RDFI availability (anticipated) 1:00 PM ET Settlement for Same-Day Transactions Window 2 2:45 PM ET ODFI Deadline for Same Day Window 4:00 PM ET RDFI availability (anticipated) 5:00 PM ET Settlement for Same-Day Transactions What will be your cutoff time(s)? How will this effect your current operations? 31 File Pick up and Schedules Transmission Window Target Distribution Settlement Schedule ACH Operators Forward Future Dated Items 10:30 a.m. ET (1030 ET) 2:45 p.m. ET (1445 ET) 8 p.m. (2000 ET) 2:15 a.m. (0215 ET) 12 noon ET (1200 ET) 4 p.m. ET (1600 ET) 10 p.m. ET (2200 ET) 6 a.m.et (0600 ET) For all: 8:30 a.m. ET (0830 ET) Next Business Day ACH Operators Forward Same Day Items 10:30 a.m. ET (1030 ET) 2:45 p.m. ET (1445 ET) ACH Operator Returns 10:30 a.m. ET (1030 ET) 2:45 p.m. ET (1445 ET) 4 p.m. ET (1600 ET) 8 p.m. (2000 ET) 2:15 a.m. (0215 ET 12 noon ET (1200 ET) 4 p.m. ET (1600 ET) 12 noon ET (1200 ET) 4 p.m. ET (1600 ET) 5 p.m. ET (1700 ET) 10 p.m. ET (2200 ET) 6 a.m. ET (0600 ET) 1 p.m. ET (1300 ET) Current Business Day 5 p.m. ET (1700 ET) Current Business Day 1 p.m. ET (1300 ET) Current Business Day 5 p.m. ET (1700 ET) Current Business Day 5:30 p.m. ET (1730 ET) Current Business Day 8:30 a.m. ET (0830 ET) Next Business Day 8:30 a.m. ET (0830 ET) Next Business Day 32 16

How Does the Same Day ACH Schedule for ODFIs Compare to Existing ACH? This chart illustrates the current ACH schedule for ODFIs (#1) along with the Same Day ACH schedule (#2 and #3), creating a total of three daily settlements 3 :0 0 A M 4 :0 0 A M 5 :0 0 A M 6 :0 0 A M 7 :0 0 A M 8 :0 0 A M 9 :0 0 A M 1 0 :0 0 A M 1 1 :0 0 A M 12 :00 noon 1 :0 0 P M 2 :0 0 P M 3 :0 0 P M 4 :0 0 P M 5 :0 0 P M 6 :0 0 P M 7 :0 0 P M 8 :0 0 P M 9 :0 0 P M 1 0 :0 0 P M 1 1 :0 0 P M 12 :00 m idnight 1 :0 0 A M 2 :0 0 A M 3:00 AM - ACH Opens 6:30 PM - Fedwire closes 2:15 AM - ODFI Next Day ACH 1 8:30 AM - Settlement Deadline Next-Day Transactions Same Day ACH All times Eastern Time 2 10:30 AM - ODFI Deadline for Same Day Window 1:00 PM - Settlement for Same-Day Transactions 2:45 PM - ODFI Deadline for Same Day Window 3 5:00 PM - Settlement for Same-Day Transactions 33 Any Conflicts? At 12 PM ET & 4 PM ET? 34 17

Eligible Entries Virtually all types of ACH payments, including both Credits and Debits, would be eligible for same day processing Only international transactions (IATs) and high-value transactions above $25,000 will not be eligible Eligible transactions account for approximately 99 percent of current ACH Network volume 35 To get on the Same-Day ACH Train You must have the right ticket and be at the station on time A C H File must include current day s date in the Effective Entry Date field (or stale/invalid date) and meet eligibility requirements for Same Day ACH Entries File must be received by the ACH Operator during one of the two Same Day ACH Entry windows 36 18

Handling of Stale/Invalid Effective Entry Dates (catching the train) A C H Today s date: Oct. 25, 2016 Batch EED: 161025 Batch submitted by 10:30 AM ET Batch submitted by 2:45 PM ET Batch submitted after 2:45 PM ET Batch settled 10/25/16, 1:00 PM ET Same Day Entry Fee charged Batch settled 10/25/16, 5:00 PM ET Same Day Entry Fee charged Batch settled 10/26/16, 8:30 AM ET No Same Day Entry Fee charged 37 Handling of Effective Entry Dates (EED) Case study: A batch of Entries is submitted on Tuesday, October 25, 2016 after 3:00 PM ET with an Effective Entry Date of Tuesday, October 25 (i.e., with content 161025 in the Effective Entry Date field). Because the time of submission is after the ACH Operator s deadline, this Effective Entry Date is stale; the batch is settled at the next available settlement opportunity, which is the next day, Wednesday, October 26, at 8:30 AM ET Transactions are settled on the next day, and therefore not assessed the Same Day Entry Fee ODFIs whose Originators use default Effective Entry Dates of the current day could submit their files after 2:45 PM ET and not be settled on the same day or assessed the Same Day Entry Fee 38 19

FRB Stale Date Research Data extracted for October 2015 155,740 total batches examined Number of ODFIs with stale-dated batches: 3,198 Number of distinct company names with stale-dated batches: 28,003 39 Identifying a Same-Day ACH Entry Example of portion (positions 21-78) of Company/Batch Header Records sent on October 25, 2016 Company Discretionary Data Company Identification S E C Direct Deposit 9111111119 P P D Company Entry Description Company Descriptive Date Effective Entry Date Settlement date (Julian) Direct Pay 161025 Inserted by Operator Effective Entry Date the ACH Operator will use the content of this field to determine if an Entry should be processed as same-day, regardless of the content of other fields 40 20

Identifying a Same-Day ACH Entry Examples of portion (positions 21-78) of Company/Batch Header Records sent on October 25, 2016 using optional indicators Company Discretionary Data Company Identification SEC Company Entry Description Company Descriptive Date Effective Entry Date Settlement date (Julian) Direct Deposit 9111111119 PPD Direct Pay SD1300 1 161025 Inserted by Operator SD Direct 9111111119 PPD Direct Pay 161025 Inserted by Deposit 2 Operator 41 Identifying a Same-Day ACH Entry 1. Company Descriptive Date An ODFI may choose to use this field with their Originators to include an optional indicator for Same Day Entries. If the optional indicator is used, this field should include either SD1300 (for Entries the Originator would like to settle at 1:00 PM ET) or SD1700 (for Entries the Originator would like to settle at 5:00 PM ET) ACH Operator will not look at content of this field 42 21

Identifying a Same-Day ACH Entry 2. Company Discretionary Data ODFIs have the option to use specific codes in this field to designate specific processing instructions ODFI may decide with its Originator to include a code in this field to indicate intent for same day processing In this example an SD is include to indicate same day processing, but this content would be solely at the discretion of the ODFI and Originator Content of this field will not be reviewed by the ACH Operator 43 Transmitting Balanced Files (Phase 1) Credit File of Same Day Entries Effective Entry Date of October 18, 2016 $200.00 $2000.00 $1000.00 $600.00 Total of: $3800.00 Settlement will occur on October 18 44 22

Transmitting Balanced Files (Phase 1) Offsetting Debit File for $3800.00 Effective Entry Date of 18, 2016 however, Same Day Debit Entries cannot be processed during Phase 1 Settlement will occur after October 18 Regardless of when the Debit File is sent on October 18 the Effective Entry Date will be pushed to the next eligible settlement window RISK ALERT! Consider when processing balanced files: Credits will settle before the funding Debit File and could fail to settle after the Credit File has been released 45 Eligible Non-monetary Transactions Prenotifications Notifications of Change (NOCs) (NO FEE) Remittance information (using CCDs and CTXs) Death Notifications (DNEs)* *For now, the federal government will not be participating in phase 1 of the Same Day ACH implementation Therefore, any Entry originated from, or received by, the federal government will not be eligible for same day settlement and will continue to settle on a future date 46 23

Eligible Non-monetary Transactions Automated Enrollment Entries (ENRs) will not be processed as same-day Entries ENRs do not use Effective Entry Dates, so there is no way to differentiate same-day from next-day 47 Reversals Reversals are eligible for same-day processing using the same eligibility criteria as other forward transactions Any same-day reversal is limited to $25,000 per transaction, so if, for example, the erroneous forward Credit is a next-day $100,000 Credit, the Debit to reverse it could not be same-day Any reversal that is processed same-day will be assessed the Same Day Entry Fee Effective Entry Date of a Debit to reverse a Credit Entry or file containing Debits must not be earlier than the Effective Entry Date of the Credit(s) 48 24

Reversals Phase 1 is Credits-only, so a Debit that reverses a Credit Entry will not be eligible for same-day processing during Phase 1 Debits become eligible in Phase 2, so at that time the Debit to reverse a Credit could be sent same-day 49 Return Processing All returns are eligible for same day processing, regardless of whether the forward Entry was Same Day or not RDFIs will not be required to send same-day returns; use of same day windows for returns is optional Dollar limit and IAT restrictions do not apply to returns Same Day Entry Fees will not be charged on returns 50 25

Living on Fed Time FedACH Services Announce September 2016 Processing Schedule Update 10/8/15 PDF All times are E.T. Still A, B, C, & D for most 51 Let s Settle This Please note that there will be a total of four settlement times 1 p.m. ET (1300 ET) - Current Business Day 5 p.m. ET (1700 ET) - Current Business Day 5:30 p.m. ET (1730 ET) - Current Business Day (FedACH Returns only) 8:30 a.m. ET (0830 ET) - Next Business Day 52 26

POP QUIZ! 53 Is the over $25,000 value limit applied to a single item or to a batch? The over $25,000 value limit applies to a single item In all three Same Day ACH implementation phases, no single item over $25,000 will be eligible for same day settlement 54 27

Returns Does the Return timeframe change? NO What can be returned? Anything Is there a fee for Same-Day Returns? NO Do Returns have to be done same day? NO 55 Forward Entries Example 1 ODFI ACH Operator Received 2:30 PM 10/19/2016 (Wednesday) 56 28

Forward Entries Example 1 Settlement Date & Time PPD Credit $24,999 Wednesday October 19, 2016 5:00 PM Settlement Date & Time PPD Credit $96,100 Debit $12,500 Thursday October, 20 2016 8:30 AM 57 Forward Entries Example 2 ODFI ACH Operator Received 10:00 AM 12/06/2016 (Tuesday) 58 29

Forward Entries Example 2 Debits are not allowed in phase 1 Batch will be processed as next day, with output delivered at 12 noon p.m. ET on December 6, 2016, and settlement occurring at 8:30 a.m. ET on December 7, 2016 Settlement Date & Time WEB Debit $2,500 Thursday December, 7 2016 8:30 AM Debits are not allowed until phase 2 September 15, 2017 59 Forward Entries Example 3 ODFI ACH Operator Received 9:00 AM 10/14/2016 (Thursday) 60 30

Forward Entries Example 3 Settlement Date & Time WEB Credit $100 Friday October 14, 2016 1:00 PM Settlement Date & Time WEB Debit $50 Monday October, 18 2016 8:30 AM 61 Forward Entries Example 4 ODFI ACH Operator Received 1:45 PM 12/07/2016 (Wednesday) 62 31

Forward Entries Example 4 Settlement Date & Time PPD Credits $25,000 Wednesday December 7, 2016 1:00 PM Settlement Date & Time CCD Debit $25,000 Thursday December, 8 2016 8:30 AM 63 What About the Risk? 64 32

Same-Day ACH & Risk? Reduces Transaction risk for debits Originators and ODFIs receive returned debits at least one day earlier Helps billers of all types better manage credit risk RDFIs return debits faster faster recredits Increases Fraud risk Funds will move out of accounts more rapidly, determine which customers are offered SDA Strong authentication and security around file delivery RDFI review of exception processing for returns 65 Same-Day ACH & Risk? Reduces Counter party risk Less exposure to settlement risk of others by more frequent interbank settlement Reduces Operational risk For ODFIs by adding more windows that can be utilized to mitigate missed windows, operational delays or system outages Same-day reversals to repair duplicate files Reduces Credit risk ODFIs have less time on the hook for same-day credits Can lower Originator exposure or credit limits with multiple deposits/day 66 33

Homework (What Do I Need To Do?) Will you offer Same-Day ACH? To all Originators? How will you identify Same-Day ACH? Talk to EVERYONE, your sending/receiving points, core/software providers? Does everyone in the financial institution understand the impact of Same-Day ACH (IT, Loans, Tellers, Call Centers, Sales, etc.)? Review all processes and procedures Review all products Review website Agreements, policies, procedures, disclosures, do they need to be updated? Testing Same-Day ACH before going live? 67 Continuing Education Credits AAP Continuing Education Credits Session title: Introduction to Same-Day ACH Session is worth 1.8 AAP CE (continuing education) credits Topic area: Marketing & Products Date conducted: 4/46/16 Conducted by EastPay Some of our sessions may also be eligible for other industry certification renewal credits Check with your certifying organization for eligibility requirements 68 34

Kevin Olsen, AAP NCP VP of Payments Education kolsen@eastpay.org 800.681.4224 ext. 1103 70 35

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Learn More Online ACH Audits According to the Rules ACH Risk Mitigation Intro to Payment Regulations ACH Fundamentals 101 & 201 Defining the ACH - Understanding Article Eight? Welcome Aboard! Originator Onboarding Risks vs. Rewards Facts about High Risk Originators Originator Agreements What Does it Say? Identifying Online Fraud Protecting Against Online Fraud Components of a Well-Defined Policy (RDC, ACH) Business Continuity Planning for ACH Handling IRS Tax Payments: Understanding RDFI Liability Government Payments: Digging Deeper into Garnishments, Misdirected Payments and Titling of Accounts Mobile Remote Deposit: Risks, Rewards & Deposits 75 Learn More In Person Payments University (Two-days) Richmond, VA, Greensboro, NC & Tampa, FL Starting Line: AAP Preparation Miami, Charlotte, Richmond, Tampa, Raleigh, & Orlando Approaching the Finish Line: A Final Review Before You Test Miami, Charlotte, Richmond, Tampa, Raleigh, & Orlando Information Interchange Orlando, FL 76 38