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The Automated Clearing House
(ACH) is an electronic payment network used by individuals, businesses,
financial institutions and government organizations. Electronic ACH
payments provide better cash management capabilities and lower costs than
traditional paper payments. The nationwide network exchanges funds and
information throughout the 50 states as well as the U.S. territories and
Canada with participation by over 98% of the nation's financial
institutions, including thousands of savings banks and credit unions.
Efforts are underway for the development of a worldwide ACH Network -the
Worldwide Automated Transaction Clearing House (W.A.T.C.H).
The ACH network allows funds to
be electronically debited or credited to a company's or individual's
deposit account. Currently these deposit accounts include checking and
savings accounts. As of September 15, 2000, ACH credit transactions may be
directed to loan accounts and ACH debit and credit transactions to
financial institution general ledger accounts. ACH transactions carry
basic entry details such as the individual name (except Point-of-Purchase
transactions), financial institution routing number, account number,
amount and effective date for the transaction. Additional payment
information may be sent in expanded record formats called addenda records.
The addenda may include payment-related information such as invoice number
or shipping advice.
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How Does ACH Work?
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1. |
A
company/individual (Receiver) authorizes a company/individual
(Originator) to initiate a transaction to their financial
institution account. |
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2. |
The
Originator prepares information about the transactions that
are to be
automated for its customers or employees and passes
it along to an Originating Depository Financial Institution (ODFI). |
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3. |
The
ODFI collects ACH transactions from participating companies,
consolidates the information and presents it to the ACH
Operator. (The ODFI may retain entries for its own account
holders) |
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4. |
ACH
Operator processes transaction files from submitting ODFIs and
distributes it to Receiving Depository Financial Institutions
(RDFls). |
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5. |
The
RDFI receives entries for its customer accounts and posts
entries on the settlement date. Transactions are also reported
on account statements |
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ACH Participants:
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Originator:
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Company
or individual that initiates an ACH transaction
according to an arrangement with a Receiver . |
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Originating
Deposit Financial Institution ODFI:
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The
financial institution that deposits ACH files, on behalf
of the Originator, into the ACH network. |
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ACH
Operator:
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The
central clearing facility operated by a private
organization or a Federal Reserve Bank on behalf of
participating financial institutions, to or from which
financial institutions transmit or receive ACH entries. |
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Receiver:
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Natural
person or organization that has authorized the
Originator to initiate an ACH entry to the Receiver's
account with the RDFI. |
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Receiving
Deposit Financial Institution RDFI:
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The
financial institution that receives ACH entries from the
ACH Operator and posts the entries to the account of its
depositors (Receivers). |
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Third
Party Processors:
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Processors
that participate between any relationship within the ACH
processing flow (i.e., correspondents, sending-point
processors or payroll processors). |
Additional
Commonly Used ACH Terms:
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ACH: |
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The
Automated Clearing House is an electronic payment Network that
exchanges funds via Electronic Funds Transfer (EFT) throughout
the U.S. fifty states and territories. Over 98% of the
nation's banks including the Federal Reserve belong to the
ACH. |
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ACH
Associations: |
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Provide
rules and guideline for the efficient operation of the ACH
Network. There are 36 regional ACH associations whose
memberships include financial institutions and affiliates.
NACHA, the National Automated Clearing House Association forms
the governing foundation for the regional associations.
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Addenda
Record: |
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A record of information that
may be attached to a detail entry record containing additional
payment information (i.e., EDI messages, change and return
information). |
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Authorization: |
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Refers
to the authorization of an ACH transaction by a consumer or
company. Most authorizations must be in writing and must
be retained for a period of two years. There are 3
types: recurring, non-recurring, one-time. |
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Cash
Concentration: |
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Companies
that have decentralized units use the ACH to concentrate cash
into a centralized bank account - replaces wire transfer. |
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Check
Truncation: |
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Stopping
or truncating a paper check by turning it into an electronic
item at the Point of Sale (POS or POP) or in lockbox check
truncation.
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Corporate
Payments:
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Business
to business ACH Network collection and disbursement of funds.
The Federal government is mandating this form of payment for
corporate taxes and payments to government vendors.
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Direct
Deposit:
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Is
the disbursement of funds to consumer accounts. Includes
payroll, interest, trust disbursements, expense payments,
dividends, pension payments, etc. This is the most widely used
ACH service.
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Direct
Payment:
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The
collection of funds from consumer of business accounts.
This normally would be used to collect payments for monthly
dues as in: health club membership, rent, phone, utility
bills, newspaper bills, trash collection, mortgage payments,
lease payments, etc.
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EFT:
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Electronic
Funds Transfer is the transfer of funds from one bank account
to another bank account utilizing the ACH Network.
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Effective/Settlement
Date:
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The date an Originator
enters on an ACH file to indicate the date they intend the
transactions to post ( effective date ); and the date entries
actually settle through the ACH Operator, as affected by the
timing of delivery for processing.
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Electronic
Check Re-presentment:
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An
ACH Network service that allows for the electronic
re-presentment of a returned paper check marked non-sufficient
funds (NSF). Provided that certain guidelines are
fulfilled the check can be collected electronically.
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Internet
Initiated Entries:
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(WEB)
a consumer authorizes a Receiver or Merchant to debit their
account via the Internet.
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Lockbox
Check Truncation:
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Also
called Accounts Receivable Conversion (ARC) is the
process of turning checks received in the mail by a company or
institution into electronic items.
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NACHA:
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The
National Automated Clearing House Association is the chief
rules making and interpretation body of the ACH. NACHA
is the cooperative governing body for 36 regional ACH
associations.
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Non-Recurring
Payment Authorization:
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An
individual or company authorizes the debit of their account
for a varying period and/or amount. Notification must be
sent 10 days before the effective date with the amount to be
debited.
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Notification
of Change (NOC):
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Notification
of Change is an advice from an RDFI to an ODFI that entry
information requires corrections and includes the correction
details. A
payment message returned by the RDFI via the ACH network,
which supplies data to the ODFI for the correction of payment
information.
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NSF
Check:
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A
paper check that has been returned by the banking system due
to Non Sufficient Funds. These can be electronically
represented through the ACH Network using Electronic
Check
Re-presentment.
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One
Time Payment Authorization:
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An
individual or company authorizes a one-time debit of their
account. The authorization is usually a written
authorization but in some instances a recorded telephonic
authorization may be used.
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Original
Entry:
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A
debit or credit ACH transaction directed to an account at an
RDFI.
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Pre-notifications:
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A zero dollar entry sent
prior to the first live entry to notify the RDFI of future
payments and test account information. (Optional)
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POS:
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Point
of Sale is a term used to describe an ACH transaction at the
time of purchase - for example at the supermarket check out
counter.
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RCK:
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Refers
to Returned Check and represents the electronic check process
for electronic re-presentment of paper NSF checks - Electronic
Check Re-presentment.
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Recurring
Payment Authorization:
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An
individual or company authorizes the periodic debit of their
account for the same period and amount.
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Return
Reason Codes:
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Or
R
Codes are rejections of original ACH entries by the RDFI.
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RDFI:
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The Receiving Depository financial Institution, the financial
institution that receives an ACH transaction for a holder of
an account.
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Return
Entry:
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The
return of an original entry that either could not be posted or
was not able to be identified by the RDFI - closed account,
NSF, wrong account number, etc.
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Standard
Entry Class Code (SEC):
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Three
character code, such as Prearranged Payments or Deposits (PPD),
used in an ACH header record to indicate the ACH format being
used and to identify entries for proper application of rules.
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TEL:
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Telephone
Initiated Entry
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Telephone-Initiated
Entry:
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(TEL)
is an entry initiated through a telephone authorization for a
onetime debit for collection of funds for payment of goods and
services. A TEL is valid only when there is an existing
relationship between the parties or if no existing
relationship, the consumer initiates the telephone call.
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Transaction
Code:
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Two-digit code that
indicates whether an entry is a debit or credit to a checking,
savings, loan or financial institution general ledger account.
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Truncation:
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In
ACH it normally refers to stopping or truncating a paper check
as in POS or lockbox check truncation and turning that paper
check into an electronic item.
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How ACH Funds Are Settled
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Settlement
is the actual transfer of funds for ACH entries between
financial institutions provided by the Federal Reserve Bank.
The net debit and credit positions of financial institutions
are calculated and posted to the reserve accounts of financial
institutions (or to the account of their correspondent).
The
timing of settlement is based upon the effective entry date
indicated on the ACH file and the time of its delivery to the
ACH Operator. ACH debits may be delivered to the ACH Operator
no earlier than one banking day prior to the settlement date.
ACH credits may be delivered no earlier than two banking days
prior to the settlement date.
When
the ACH Operator processes an ACH file, the effective entry
date is read and entries are settled according to that date.
If the ACH Operator cannot settle on the effective entry date
due to untimely file delivery, a stale date, weekend, or
holiday, the ACH Operator will apply a settlement date of the
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What
Is the Legal Framework for ACH?
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Participants
in the ACH network must abide by the ACH Rules published
by the NACHA. The ACH Rules define the required
methods, procedures and record specifications for the
processing of commercial ACH transactions.
Federal
Regulation E
places
additional obligations on the RDFI and defines consumer rights
regarding all electronic payments. The Uniform Commercial
Code Article 4A (UCC-4A) places requirements upon ODFls
originating wholesale credit (corporate) transactions as well
as the RDFls that receive such entries. Federal Government
payments must also conform with certain Codes of Federal
Regulation commonly referenced in The Green Book.
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Rules
Affecting Originators
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Prior
to the origination of an ACH transaction an Originator must: |
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Enter
into an agreement with the ODFI.
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Obtain
authorization from the Receiver. (For consumer debits the
authorization must be in writing and a copy of the
authorization must be provided to the consumer. For corporate
entries, the authorization may take the form of a written
agreement. ) |
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Maintain
the authorization up to 2 years beyond the life of a
transaction. |
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Send
a non-dollar test entry called a pre-notification (optional). |
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2. |
The
Originator must notify a consumer 10 days in advance of a
change in the amount or 7 days in advance of a change in the
posting date of an ACH debit |
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3. |
The
Originator cannot recall valid transactions after they reach
the ACH Operator. Allowances are made, however, for the
reversal of erroneous transactions. |
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4. |
Transaction
file records must conform to ACH format specifications. |
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5. |
Originators
must not reinitiate payments that have been returned as
unauthorized or are incorrect until the problem is solved;
they may, however, reinitiate a transaction if the original
entry was returned for insufficient or uncollected funds. |
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Rules
Affecting ODFIs
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1. |
Prior
to the origination of entries subject to UCC-4A (wholesale
credits), the ODFI must make certain disclosures regarding
Transaction Settlement, Security Procedures, Choice of State
Law and Provisional Payment. |
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2. |
The
ODFI also makes the following warranties that: |
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Originated
entries are in accordance with a valid authorization. |
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Entries
are timely; that each debit entry is for a valid payment. |
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Entries
comply with the Rules. |
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The
Originator has complied with PIN Management Security standards
if applicable (such as for debit card transactions). |
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Transaction
information complies with the Rules. |
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Reclamation
entry information is accurate, complete and timely. |
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(ODFI
warranties and liabilities apply to entries originated
directly or through the use of a sending point to the ACH
Operator.)
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Rules
Affecting RDFIs
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1. |
An
RDFI may request a copy of an authorization from the
Originator but is not required to keep authorizations on file. |
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2. |
RDFIs
must verify the account number on the pre-notifications they
receive and must either return invalid pre-notification
entries or send notifications of change to the ODFI which
detail necessary corrections. |
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3. |
RDFI
may rely solely upon the account number for purposes of
posting to a Receiver's account. |
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An
RDFI must make funds available for consumer credit entries no
later than the date of settlement. If entries are available by
5:00 p.m. on the day prior to settlement, funds must be made
available at the opening of business on the settlement date. |
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5. |
An
RDFI may not post a debit entry to a Receiver's account prior
to the settlement date. |
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6. |
An
RDFI must initiate any returned entries in accordance with
procedures and deadlines provided by the ACH Rules. |
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Legal
Agreements Necessary
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All
ACH transactions between Originators and Receivers must be
backed by valid authorizations. Authorization requirements
differ for the various ACH transactions. While a verbal or
other non-written form of authorization is permitted for
consumer credit transactions, a written authorization form provides
proper authorization for consumer debits. This authorization
must be readily identifiable as a debit authorization, the
terms must be clearly stated and procedures for revoking
authorization must be explained. The authorization may specify
that transactions will be for a fixed or variable amount.
Corporate
(non-consumer) applications require more complex agreements
that address the processing of payment-related data or the
transfer of large dollars. The required authorization is
generally included within a trading partner agreement that
defines the responsibilities of each party under the
agreement.
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Agreements |
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Originators
must enter into an agreement with their Originating Depository
Financial Institution. All participating financial
institutions, by act of receiving or sending ACH entries,
agree to comply with the applicable ACH rules and agree that
those rules shall govern relationships between the sending and
receiving institutions (and other parties involved in items
covered by those rules). Financial institutions execute an
agreement with the Federal Reserve Bank (or ACH Operator),
that defines their processing relationship.
Originating
companies are legally bound to comply with the ACH rules
through written agreement with the Originating Depository
Financial Institution. The rules as they apply to originating
companies should be addressed in this agreement. The agreement
binds companies to the ACH rules and covers such items as
compensation, communication between the parties and error
resolution.
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How
Do Companies Benefit From ACH Applications?
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Direct Deposit |
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Streamlines
the reconcilement process. |
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Eliminates
critical delivery of checks since funds are automatically deposited. |
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Eliminates
special checks for employees away from work or on vacation. Minimizes
storage and security of check stock. |
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Reduces
employee time lost due to personal banking business on payday. Additional
employee benefit for little or no cost. |
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Direct Payment |
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Funds
collected are available on a scheduled date such as the billing due date.
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Check
handling and manual payment processing are eliminated.
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Costs
associated with printing and mailing monthly bills may be eliminated. Item
processing costs are reduced.
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Delinquencies
of receivables are significantly reduced.
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Eliminates
erroneous checks (i.e., no signature or wrong amount). Reduces the
possibility of insufficient funds.
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Eliminates
costs associated with billing and second notices.
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Allows
businesses to offer additional customer payment service.
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Cash Concentration |
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Funds
are collected on predetermined dates |
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Cash
flow forecasting and funds management are improved. Provides next-day
funds availability from outlying locations. Provides the conveniences of
automated transactions. Reduces the need for expensive wire transfers. |
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Corporate Payments |
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Improves
cash flow forecasting |
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Assures
payment discounts for predetermined payment dates. Reduces internal
processing costs. Reduce bank service charges |
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Improve
vendor relationships as a result of more timely payments |
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Re-presented Check Entries |
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Improved
collection rate on returned checks. Lower costs. |
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Faster
notice of returned re-presented check entries via the ACH. Ability to
transmit entries on specified dates. |
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Point-of-Purchase Entries |
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Faster
collection of funds, Lower costs.
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Faster
notification of returned entries.
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How Are ACH
Payments Used? Direct Deposit
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Direct
Deposit is used to disburse funds to consumer accounts. Direct Deposit of
Payroll is the most widely used of the ACH deposit services. The feature
is also used to distribute other recurring or one-time deposits. The U. S.
Government uses Direct Deposit to disburse nearly 87% of Social Security
benefit payments. Some other commonly used applications include: |
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Dividends |
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Pension
Benefits ~ Interest |
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Commission
Disbursements ~ Trust Disbursements |
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Expense
Reimbursements ~ IRS Tax Refunds |
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Child
Support Disbursements |
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Direct Payment |
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Direct
Payment provides the ability to collect funds from consumer accounts.
Companies with billing operations participate through the automation of
bill payment entries. This application is used for recurring bills that
are either regular fixed amounts, or varying amount bills, such as utility
payments. Some examples of Direct Payment applications include. |
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Insurance
Premiums ~ Utility Bills |
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Mortgage
Payments |
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Subscription/Membership
Dues ~ Loan Payments |
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Monthly
Pledges ~ Rents/Leases |
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Tuition
Payments |
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Cash
Concentration |
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Cash
Concentration through the ACH is a widely used and profitable cash
management function. Often used by companies operating branches or sales
outlets, and local governments to accumulate funds rapidly into a central
corporate account. Cash Concentration through the ACH may replace the use
of depository transfer checks or expensive wire transfers. Overall, this
system improves a company's total cash management capability. |
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Corporate
Payments |
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Corporate
Payment applications through the ACH network provide the ability to
collect and disburse funds between companies. They are used by businesses
paying one another for goods or services. These applications continue to
grow and are currently being used by the U.S. Treasury Department in the
Vendor Express program to pay government suppliers.
Corporate Payments replace checks with an electronic process of debiting
and crediting for invoices between the financial institutions of
participating companies. ACH Corporate Payments allow payments to be
accompanied by additional payment information, such as the details of the
invoices being paid. This is done by adding an ACH addenda record to the
payment format. Some commonly used applications for Corporate Payments
include those listed below:
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Vendor
Express Payments > Invoice Payments |
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Federal
and State Tax > Trade Payments |
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Royalty
Payments > Debt Repayment |
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Financial
Electronic Data Interchange (FEDI) |
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FEDI
is an enhancement to Corporate Payments, which utilizes the ACH addenda
record. It provides for the exchange of machine-readable documents and
information between businesses. For example, a payment may be sent to a
vendor with details of the invoice being paid in an electronic format for
automated posting to a receivable accounting program. FEDI is also used
with zero-dollar transactions to exchange information such as requests for
quotations, order placements and shipment advice's. |
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Customer
Initiated Entries |
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Telephone
bill payment services are a common application of the ACH network's
Customer Initiated Entry option. This application provides the ability for
a consumer to initiate non-scheduled payments to a company or consumer
account. Payment information may be submitted manually, by the consumer,
to the ODFI or through a mechanical device (i.e., telephone, ATM or
computer). |
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Re-presented
Check Entries |
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A
re-presented check entry is an ACH debit application used by Originators
to collect funds for paper checks that have been processed through the
check collection system and returned due to insufficient or uncollected
funds. Originators of re-presented check entries must provide notice to
the check writer, prior to the receipt of the check, informing the check
writer that any insufficient or uncollected funds returned checks might be
collected electronically. An interim rule effective September 18, 1998
through September 14, 2000 provides a rules framework for transmitting
these entries using the PPD standard entry class code. Effective September
15, 2000, a new SEC code of RCK was established to be used to re- present
insufficient or uncollected paper checks electronically. |
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Point-of-Purchase
Entries |
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A
point-of-purchase entry is an ACH debit application, used by Originators
(merchants, billers, etc.) as a method of payment for the in- person
purchase of goods or services by consumers. These non-recurring ACH debits
entries are initiated by the Originator based on a written authorization
and account information drawn from the source document (check or share
draft) obtained from the consumer at the point of sale. The source
document, which is voided and returned to the consumer at the point of
sale, is used to collect the consumer's routing number, account number and
check serial number that will be used to generate the debit entry to the
consumer's account. An interim rule effective September 17, 1999 through
September 14, 2000, provides a rules framework for transmitting these
entries using the PPD standard entry class code. Effective September 15,
2000, a new SEC code of POP will be established for the transmission of
point-of-purchase entries. |
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Lockbox
Truncation (Accounts Receivable Conversion - ARC) |
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Consumers
mail their bill payments to companies, realizing some advantages of mail
and collection float associated with such payments. For companies, the
cost of processing and collecting these checks is high. There are methods
that remittance processors or billers may use to increase efficiencies
within the lockbox or biller's process by reducing collection float and
other check float collection costs, through the truncation of paper checks
to electronics via the ACH.
Truncation
in this instance means that the payer issues a paper check and sends it
through the mail to the payee; at the point of receipt (Lockbox), the
check is converted to an electronic payment. Presentment is made to the
payer’s financial institution electronically and the paper check or
image is stored for a legally specified period of time by the remittance
processor.
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