Understanding the ACH Network

12 Pages·2002·0.08 MB·English

2 0 0 2 E L E C T R O N I C P A Y M E N T S R E V I E W A N D B U Y E R ’ S G U I D E
U ACH N :
NDERSTANDING THE ETWORK
A ACH P
N RIMER
T which must be physically handled. according to an arrangement with a
his article is designed to provide
Instead of using paper to carry neces- Receiver. The Originator is usually a
those who are not familiar with
sary transaction information, ACH company directing a transfer of funds
the ACH Network with a basic
transactions are transmitted electroni- to or from a consumer’s or another
understanding of the fundamentals of
cally between financial institutions company’s account. In the case of a
the ACH Network, briefly summariz-
through data transmission. Customer Initiated Entry (CIE), the
ing the Network’s operation, partici-
Originator may be an individual initi-
pants, ACH products and services,
1. Participants ating funds transfer activity from his or
settlement and posting mechanism,
Typically, five participants are her own account. The term “company”
legal framework, and history. For com-
involved in an ACH transaction: is intended to represent the Originator
plete information on ACH processing,
of electronic ACH entries and does not
please refer to the NACHAOperating (a) the originating company or indi-
imply exclusion of other types of
Rulesand the NACHAOperating vidual (Originator),
organizations (i.e., Federal, state and
Guidelines.
(b) the Originating Depository Finan- local government agencies). An
cial Institution (ODFI), Originator may be either a company or
A. ACH Network Operation
a consumer.
The ACH Network is a batch process- (c) the ACH Operator,
ing, store-and-forward system. Trans- (b) Originating Depository Financial
(d)the Receiving Depository Financial
actions received by the financial Institution. The Originating Depository
Institution (RDFI), and
institution during the day are stored Financial Institution (ODFI) is the insti-
and processed later in a batch mode. (e) the receiving company, employee tution that receives payment instruc-
Rather than sending each payment or customer (Receiver). tions from Originators and forwards
separately, ACH transactions are accu- the entries to the ACH Operator. A
mulated and sorted by destination for Definitions of the Participants: depository financial institution (DFI)
transmission during a predetermined may participate in the ACH system as
(a) Originator. The Originator is the
time period. This provides significant a Receiving Depository Financial
entity that agrees to initiate ACH
economies of scale. It also provides Institution (RDFI) without acting as an
entries into the payment system
faster processing than paper checks, ODFI; however, if a DFI chooses to
Figure 1. ACH Participants
ACH Operator(s)
ODFI RDFI
Originator Receiver
Authorization
• Company • Customer
• Employer • Employee
• Customer • Company
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U N D E R S T A N D I N G T H E A C H N E T W O R K : A N A C H P R I M E R
originate ACH entries, it must also 2. ACH Transaction Flow the cable company’s account; the cable
agree to act as an RDFI. In ACH terminology, Originator and access company is the Receiver.
Receiver refer to the participants that
(c) Automated Clearing House Operator. ACH credit transactions involve both
initiate and receive the ACH entries
An Automated Clearing House (ACH) consumer and corporate payments
rather than the funds. Unlike a check,
Operator is the central clearing facility with separate rules and regulations for
which is always a debit instrument, an
operated by a private organization or a each. The most typical consumer ACH
ACH entry may be either a credit or a
Federal Reserve Bank (FRB) on behalf application is Direct Deposit of Payroll.
debit entry. By examining what hap-
of DFIs, to or from which Participating
pens to the Receiver’s account, one can Figure 2 lists some of the more com-
DFIs transmit or receive ACH entries.
distinguish the difference between an mon credits processed through the
In some cases, there are two ACH
ACH credit and an ACH debit trans- ACH system today.
Operators involved in a transaction,
action. If the Receiver’s account is
one operating as the Originating ACH The example in figure 3 illustrates the
debited, then the entry is an ACH
Operator and the other as the Receiv- ACH credit process.
debit. If the Receiver’s account is
ing ACH Operator.
credited, then the entry is an ACH Example: As illustrated in Figure 3, a
(d)Receiving Depository Financial Insti- credit. Conversely, the offset to an payroll deposit (PPD) credit flows
tution.The Receiving Depository ACH debit is a credit to the Origina- from an account at a company’s finan-
Financial Institution (RDFI) is the DFI tor’s account and the offset to an cial institution to an account at an
that receives ACH entries from the ACH credit is a debit to the Origina- employee’s financial institution. Figure
ACH Operator and posts the entries to tor’s account. 3 also illustrates the flow of a corporate
the accounts of its depositors trade exchange (CTX) credit from an
(a) ACH Credits
(Receivers). account at a company’s financial insti-
ACH credit entries occur when an
tution to an account at a vendor’s
(e) Receiver.AReceiver is a natural Originator initiates a transfer to move
financial institution. Credit entries
person or an organization which has funds into a Receiver’s account. For
must be posted to a Receiver’s account
authorized an Originator to initiate an example, when a consumer uses an
no later than Settlement Date. Con-
ACH entry to the Receiver’s account automated bill payment service at a
sumer (PPD) entries which are made
with the RDFI. AReceiver may be financial institution to pay cable access
available to the RDFI by its ACH Oper-
either a company or a consumer, charges each month, the consumer
ator by 5:00 p.m. (RDFI’s local time) on
depending on the type of transaction. originates the payment through the
the banking day prior to Settlement
ODFI which then initiates the credit
Date must be made available by open-
transaction to transfer the money into
ing of business on the Settlement Date.
Figure 2. ACH Credits
• annuities
• customer-initiated transactions (e.g., telephone bill
payments)
• corporate-to-corporate payments
• dividends
• interest payments
• payrolls-private and government
• pensions-private and government
• Social Security payments
• tax payments
• government vendor payments
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Figure 3. ACH Credit Transaction – Information and Funds Flow
ACH Operator(s)
ODFI $ RDFI
$ $
Originator Receiver
(b) ACH Debits Consumer acceptance is highest in the sumer’s account at a financial institu-
In an ACH debit transaction, funds area of pre-authorized transfers involv- tion to a mortgage company’s account.
flow in the opposite direction. Funds ing regular, recurring payments, such Figure 5 also illustrates a corporate
are collected from a Receiver’s account as mortgage payments, installment cash concentration flow from a com-
and transferred to an Originator’s loans and insurance premiums. Many pany’s local or regional financial insti-
account, even though the Originator corporations also use ACH debits to tution account to a company’s regional
initiated the entry. For example, the consolidate funds deposited in out- or national financial institution
Originator of a preauthorized debit is lying divisions by operating branches account. Debit entries must not be
the company to which the amount is or subsidiaries. posted to a Receiver’s account prior to
owed. Consumers authorize a cable the settlement date.
Figure 4 lists some of the more com-
access company to debit their accounts
mon debit applications processed Atypical transaction as it flows
for their monthly bills. Once a month
through the ACH Network today. through the ACH Network might
the cable access company initiates a
follow the path described below:
debit file through its ODFI to with- The example in figure 5 illustrates the
draw the money from the consumers’ ACH debit process. (cid:2) The Originating Depository Finan-
accounts. The cable company is the cial Institution (ODFI) and the origi-
Example:In figure 5, a preauthorized
Originator, and the consumers are nating company determine, by
mortgage payment flows from a con-
the Receivers.
Figure 4. ACH Debits
• association/club dues
• cash concentration
• distributor/dealer payments
• corporate-to-corporate payments
• contributions to Individual Retirement Accounts, SEP’s, 401Ks, etc.
• government savings bonds purchases
• holiday or vacation club payments
• insurance payments
• mortgage and installment loan payments
• point of sale purchases
• safe deposit box rentals
• utility payments
• tax payments
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Figure 5. ACH Debit Transaction – Information and Funds Flow
ACH Operator(s)
ODFI $ RDFI
$ $
Originator Receiver
agreement, how the information simply retained by the financial retirement, dividend, interest, and
must be delivered to the ODFI. institution and posted to the appro- annuity payments, in addition to edu-
Ideally, the Originator would format priate account. cational benefit reimbursements, pay-
the data in accordance with the ments and advances, and many others.
(cid:2) The ACH Operator sorts the entries
requirements of the NACHAOperat- Consumer ACH debit applications
by RDFI routing number and trans-
ing Rulesand transmit the informa- include, among others, the collection of
mits the payment information to the
tion to the ODFI, but some financial insurance premiums, mortgage and
appropriate RDFI(s) for posting.
institutions may take unformatted rent payments, utility payments,
data as a service to their client com- (cid:2) On Settlement Date, all parties to the installment payments, a variety of
panies. The ODFI establishes transaction effect the appropriate membership dues, and other recurring
processing schedules and cutoff settlement of funds. obligations. The ACH Network is also
times with its Originators so that widely used to settle consumer trans-
entries may be processed and trans- B. Consumer vs. Corporate Payments actions made at automated teller
mitted in sufficient time for settle- ACH transactions are typically cate- machines and point-of-sale terminals.
ment to occur on the dates desired gorized as either consumer payments
Corporate ACH applications include
by its Originators. or corporate payments, depending on
cash concentration and disbursement,
the relationship of the parties involved
(cid:2) The company delivers the file to its corporate trade payments, state and
in the transaction and the type of
ODFI. The timing of delivery must Federal tax payments and financial
Receiver account. In addition, pay-
conform to appropriate schedules in electronic data interchange (EDI). Cash
ments are distinguished as Federal
order for the payment to settle on concentration and disbursement
Government payments (representing
the intended date. allows companies to achieve efficien-
automated disbursements originating
cies in cash management through
(cid:2) The ODFI generally removes from the United States Government,
timely intra-company transfer of
“on-us” entries and transmits the such as Social Security benefits,
funds. Corporate trade payments
remaining entries to the originating military and civilian payrolls, retire-
enable corporations to exchange both
ACH Operator by the ACH Opera- ment benefits, tax refunds, and dis-
data and funds with trading partners,
tor’s processing deadline. An bursements for state and federal
facilitating an automated process of
“on-us” transaction is one in which revenue sharing programs) or com-
updating their accounts receivable and
the Receiver and the Originator both mercial payments (initiated by both
accounts payable systems.
have accounts at the same financial individual consumers and corpora-
institution. Therefore, the trans- tions). Consumer payments currently
action need not be sent through the made via the ACH Network include
ACH Network but instead may be credit applications such as payroll,
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C. Payment Applications MTE - Machine Transfer Entry POS/SHR - Point of Sale Entry/Shared
The ACH Network supports a variety The ACH Network supports the clear- Network Transaction
of payment applications. An Origina- ing of transactions from Automated These two Standard Entry Class Codes
tor initiating entries into the system Teller Machines, i.e., Machine Transfer represent point of sale debit applica-
will code the entries in such a manner Entries (MTE). tions in either a shared (SHR) or non-
as to indicate the type of payment, shared (POS) environment. These
such as a debit or credit, and whether PBR - Consumer Cross-Border transactions are most often initiated by
an entry is consumer or corporate in Payment the consumer via a plastic access card.
nature (i.e., the funds transfer affects This Standard Entry Class Code is
either a consumer account or a corpo- used for the transmission of consumer PPD - Prearranged Payment and
rate account at the RDFI). Each ACH cross-border ACH credit and debit Deposit Entry
application is identified and recog- entries. This SEC Code allows cross- Direct Deposit
nized by a specific three-digit code, border payments to be readily identi- Direct deposit is a credit application
known as a Standard Entry Class Code fied so that financial institutions may that transfers funds into a consumer’s
(SEC Code), which appears in the apply special handling requirements account at the Receiving Depository
ACH record format. The SEC Code for cross-border payments, as desired. Financial Institution. The funds being
identifies the specific computer record The PBR format accommodates deposited can represent a variety of
format that will be used to carry the detailed information unique to cross- products, such as payroll, interest,
payment and payment-related infor- border payments (e.g., foreign pension, dividends, etc.
mation relevant to the application. exchange conversion, origination
Preauthorized Bill Payment
Following is a list of Standard Entry and destination currency, country
Preauthorized payment is a debit
Class Codes and the different products codes, etc.).
application. Companies with billing
each code supports.
operations may participate in the ACH
POP- Point-of-Purchase Entry
through the electronic transfer (direct
1. Consumer Applications This Standard Entry Class Code is
debit) of bill payment entries. Through
ARC - Accounts Receivable Entry used as an ACH debit application by
standing authorizations, the consumer
Effective March 15, 2002, this new Originators as a method of payment
grants the company authority to initi-
Standard Entry Class Code will enable for the in-person purchase of goods or
ate periodic charges to his or her
Originators to convert to a Single Entry services by consumers. These non-
account as bills become due. This con-
ACH debit a consumer check received recurring debit entries are initiated by
cept has met with appreciable success
via the U.S. mail or at a dropbox loca- the Originator based on a written
in situations where the recurring bills
tion for the payment of goods or authorization and account information
are regular and do not vary in
services. The consumer’s source docu- drawn from the source document (a
amount—insurance premiums, mort-
ment (i.e., the check) will be used to check) obtained from the consumer at
gage payments, and installment loan
collect the consumer’s routing number, the point-of-purchase. The source doc-
payments being the most prominent
account number, check serial number, ument, which is voided by the
examples. Standing authorizations
and dollar amount for the transaction. merchant and returned to the con-
have also been successful for bills
sumer at the point-of-purchase, is used
where the amount does vary, such as
CIE - Customer Initiated Entry to collect the consumer’s routing
utility payments.
Customer Initiated Entries are limited number, account number, and check
to credit applications where the con- serial number that will be used to
sumer initiates the transfer of funds to generate the debit entry to the
a company for payment of funds owed consumer’s account. This Standard
to that company, typically through Entry Class Code enables ACH partici-
some type of home banking product or pants to readily identify point-of-
bill payment service provider. purchase entries.
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A U T O M A T E D C L E A R I N G H O U S E S E R V I C E S
RCK - Re-presented Check Entry 2. Corporate Applications and that the RDFI will attempt to post
Are-presented check entry is an ACH CBR - Corporate Cross-Border the payment to the Receiver’s account.
debit application used by Originators Payment Acknowledgment entries initiated in
to re-present a check that has been response to a CCD credit entry utilize
This Standard Entry Class Code is
processed through the check collection the ACK format. Acknowledgments
used for the transmission of corporate
system and returned because of insuf- initiated in response to a CTX credit
cross-border ACH credit and debit
ficient or uncollected funds. This entry utilize the ATX format.
entries. This SEC Code allows cross-
method of collection via the ACH Net-
border payments to be readily identi-
ADV - Automated Accounting Advice
work, compared to the check collection
fied so that financial institutions may
process, provides Originators with the This Standard Entry Class Code repre-
apply special handling requirements
potential for improvements to process- sents an optional service to be pro-
for cross-border payments, as desired.
ing efficiency (such as control over tim- vided by ACH Operators that
The CBR format accommodates
ing of the initiation of the debit entry) identifies automated accounting
detailed information unique to cross-
and decreased costs. advices of ACH accounting informa-
border payments (e.g., foreign
tion in machine readable format to
exchange conversion, origination
TEL- Telephone-Initiated Entry facilitate the automation of accounting
and destination currency, country
This Standard Entry Class Code is information for Participating DFIs.
codes, etc.).
used for the origination of a Single
COR - Automated Notification of
Entry debit transaction to a con- CCD - Cash Concentration or
Change or Refused Notification
sumer’s account pursuant to an oral Disbursement
of Change
authorization obtained from the con-
This application, Cash Concentration
sumer via the telephone. This type of This Standard Entry Class Code is
or Disbursement, can be either a credit
transaction may only be originated used by an RDFI or ODFI when
or debit application where funds are
when there is either (1) an existing rela- originating a Notification of Change or
either distributed or consolidated
tionship between the Originator and Refused Notification of Change in
between corporate entities. This appli-
the Receiver, or (2) no existing relation- automated format. It is also used by
cation can serve as a stand-alone funds
ship between the Originator and the the ACH Operator that converts
transfer, or it can support a limited
Receiver, but the Receiver has initiated paper Notifications of Change to
amount of payment related data with
the telephone call. This SEC Code facil- automated format.
the funds transfer.
itates access to the ACH Network by
DNE - Death Notification Entry
providing an alternative authorization CTX - Corporate Trade Exchange
method, oral authorization via the tele- This application is utilized by a Federal
The Corporate Trade Exchange appli-
phone, for certain types of consumer Government agency (e.g., Social
cation supports the transfer of funds
debit entries. Security Administration) to notify a
(debit or credit) within a trading part-
depository financial institution that the
ner relationship in which a full ANSI
WEB - Internet-Initiated Entry recipient of a government benefit pay-
ASC X12 message or payment related
This Standard Entry Class Code is ment has died.
UN/EDIFACT information is sent
used for the origination of debit entries
with the funds transfer. The ANSI ASC
ENR - Automated Enrollment Entry
(either recurring or Single Entry) to a
X12 message or payment related
consumer’s account pursuant to an This optional SEC Code allows a
UN/EDIFACT information is placed in
authorization that is obtained from the depository financial institution to
multiple addenda records.
Receiver via the Internet. This SEC transmit ACH enrollment information
Code helps to address unique risk 3. Other Applications to Federal Government Agencies via
issues inherent to the Internet payment the ACH Network for future credit and
ACK/ATX - Acknowledgment Entries
environment through requirements for debit applications on behalf of both
These optional Standard Entry Class
added security procedures consumers and companies.
Codes are available for use by the
and obligations.
RDFI to acknowledge the receipt of RET - Return Entry
ACH credit payments originated using
This Standard Entry Class Code is
the CCD or CTX formats. These
used by ACH Operators that convert
acknowledgments indicate to the Orig-
paper returns to automated format. It
inator that the payment was received
may also be used by ODFIs that are
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originating Dishonored Returns when Advantages to Companies (cid:2) Enhanced public recognition
the return that is being dishonored (Originators or Receivers) through provision of effective,
carried the Standard Entry Class (cid:2) Reduction of administration and efficient, and innovative payment
Code RET. operating expenses. services.
(cid:2) Elimination of time lost by employ-
TRC/TRX - Truncated Entries E. Settlement and Posting
ees who deposit checks during
This Standard Entry Class Code is Settlement is the actual transfer of the
working hours.
used to identify batches of truncated value of funds between financial insti-
checks. For more information on check (cid:2) Reduction of clerical cost for account tutions to complete the payment
truncation, please see the National reconciliation. instruction of an ACH entry.
Association for Check Safekeeping
(cid:2) Elimination of stop payment charges The Federal Reserve provides settle-
Guidelines available from NACHA.
and check reissue costs. ment services for ACH entries
processed by the Federal Reserve and
XCK - Destroyed Check Entry (cid:2) Reduced remittance processing costs
for private sector ACH Operators that
This application can be utilized by a (paper handling) resulting from the
process ACH entries. The Federal
collecting institution for the collection absence of the check.
Reserve ACH Operator calculates the
of certain checks when those checks
(cid:2) Accelerated availability of funds. net credit and debit positions of finan-
have been destroyed.
cial institutions and applies those
(cid:2) Better cash management forecasting.
credits or debits to the reserve accounts
D. Advantages to Participants
(cid:2) Improved business relationships. of the financial institutions (or their
Each participant in the ACH Network
correspondent banks) that are
benefits through improvements in (cid:2) Certainty of delivery.
maintained on the books of the
service and reductions in operating
(cid:2) Possible reduction of bank service Federal Reserve.
costs. The following specific
charges.
advantages have been identified for In addition to the Federal Reserve,
each participant: there are also three private sector ACH
Advantages to the Originating
Operators that provide settlement
Depository Financial Institution
Advantages to Consumers services for participants in the ACH
(cid:2) Reduction of costs through
(cid:2) Direct deposit offers the following Network: (1) the American Clearing
increased automated processing.
benefits to the recipient: House Association, (2) the Electronic
(cid:2) New opportunities for increased Payments Network, and (3) VisaNet
• Elimination of time and cost
business through expanded services. ACH Services. These private sector
involved in depositing checks.
ACH Operators have entered into an
(cid:2) Enhanced public recognition
• Consistent availability of funds on agreement, called Private Sector
through provision of effective,
a timely basis, even during vaca- Exchange or PAX, in which they
efficient, and innovative payment
tion, illness, or business trips. exchange ACH entries among them-
services.
selves, bypassing the Federal Reserve
• Elimination of the possibility of
ACH system.
lost or stolen checks. Advantages to the Receiving
Depository Financial Institution
The following are the three main par-
(cid:2) Debit applications provide the fol- (cid:2) Reduction of costs through auto-
ticipants (ODFI, ACH Operator, RDFI)
lowing benefits to the consumer: mated processing of electronic
and their responsibilities concerning
entries and elimination of handling
• Convenience of not having to settlement and posting.
individual items.
write checks.
(cid:2) Alleviation of teller-line congestion 1. ODFI
• Elimination of postage expense
Settlement with the ODFI for entries
during peak periods (particularly on
and the risk of late payments.
originated usually occurs using the
payday).
• Avoidance of late or interest same procedures used for settlement of
charges through prompt, timely (cid:2) Ability to offer improved services to entries received. If the scheduled
payments. both consumer and corporate settlement date of a credit entry is not a
account holders. banking day for the ODFI, but the
• Establishment of excellent pay-
applicable Federal Reserve office is
ment and credit records.
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open on that date, settlement has advised the ACH Operator to Date field. If the ACH Operator cannot
shall occur on the scheduled Settle- delay settlement to the next business settle on the Effective Entry Date due
ment Date. day of the RDFI. If the ACH Operator to a stale date, weekend, or holiday, the
agrees to delay settlement, the RDFI ACH Operator will insert the Julian
Specific procedures and timing of
must pay for any costs of float result- Date of the next business day into the
settlement between the ODFI and the
ing from the deferral of settlement. Settlement Date field reflecting that
Originator are solely at the discretion
settlement will occur on that date.
of the ODFI and the Originator and, ACH creditswill be delivered to an
therefore, governed by agreement RDFI no earlier than two banking days Settlement information is produced by
between them. It is the ODFI’s prior to the settlement date. It is recom- the ACH Operator as ACH entries are
responsibility to monitor the credit- mended that credits be posted on the processed. This information is
worthiness of its corporate customers settlement date; credit entries may, accumulated based on the type of
to ensure that the ODFI’s risk in however, be posted prior to the settle- entry (debit or credit) by settlement
originating ACH payments is man- ment date if the RDFI cannot ware- date. These settlement totals are
aged efficiently. house the entry. NACHAOperating reported to the RDFI or its settlement
Rulesrequire that credit entries must member correspondent.
2. ACH Operator be available for withdrawal or cash
The ACH Operator may provide ACH
ACH Operators calculate settlement withdrawal by the customer no later
settlement information in a machine-
totals owed to and by Participating than the settlement date of the entry.
readable format to facilitate the
DFIs based on the effective entry dates Further, according to NACHAOperat-
automation of settlement accounting
and processing dates contained within ing Rules, each PPD credit entry that is
for correspondent RDFIs.
batches of transactions. ACH Opera- made available to an RDFI by its ACH
tors provide information to partici- Operator by 5:00 p.m. (RDFI’s local Settlement totals should be balanced
pants on the dollar amounts that will time) on the banking day prior to the daily against totals posted to the
be settled for each institution on each settlement date must be made avail- RDFI’s customer accounts and against
Settlement Date. ACH entries able to the Receiver for withdrawal or any rejects that may occur. Rejects and
processed by the Federal Reserve ACH cash withdrawal at the opening of other differences must be resolved
Operator are settled against the business on the settlement date. For immediately.
Participating DFI’s settlement account the purposes of the preceding sen-
ACH settlement procedures are the
held at the Federal Reserve. Settlement tence, opening of business is defined as
same for consumer and corporate
for transactions processed by the later of 9:00 a.m. (RDFI’s local time)
transactions. In view of the large-dollar
private sector ACH Operators is or the time the RDFI’s teller facilities
entries that flow through the ACH
determined by an arrangement with (including ATMs) are available for cus-
Network for corporate customers,
the Federal Reserve. tomer account withdrawals.
RDFIs should have internal procedures
3. RDFI (b) Settlement.Settlement between the in place to monitor large-dollar settle-
(a) Posting. The RDFI is responsible for Originator and the ODFI is governed ment totals.
posting entries and for providing by agreement. Settlement between the
funds availability, both of which are RDFI and the Receiver is determined F. Legal Framework
determined by the Settlement Date in by the NACHAOperating Rules, The ACH process operates from begin-
the Company Batch Header Record. Federal Reserve availability schedules, ning to end through a series of legal
and agreement. agreements. Before any transaction is
ACH debitswill be delivered to an
initiated, the Originator and ODFI exe-
RDFI no earlier than one banking day When an ACH file is processed by the
cute an agreement to use the ACH Net-
prior to the Settlement Date. NACHA receiving ACH Operator, the ACH
work to originate payments. Among
Operating Rules state that debits cannot Operator will read the Effective Entry
other things, the agreement should
be posted prior to the Settlement Date. Date in the Company/Batch Header
bind the originating company to the
Record and settle according to that
If an RDFI is closed for business on the NACHAOperating Rules, define the
date. If the file has been delivered to
scheduled settlement date of a debit parameters of the relationship between
the ACH Operator so that the ACH
entry, but the Receiving ACH Operator the two parties, identify processing
Operator is able to settle on the Effec-
is open, the RDFI will be debited on requirements for the specific applica-
tive Entry Date, it will insert the corre-
the scheduled Settlement Date unless it tion(s), and establish liability and
sponding Julian Date in the Settlement
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accountability for procedures related to G. History of the ACH Network occurred in New York and Chicago,
certain application(s). TheNACHA The ACH Network is a processing and where private clearing houses were
Operating Rulesgovern interregional delivery system that provides for the formed to handle ACH transactions.
ACH transactions and also cover distribution and settlement of elec-
In 1974, the National Automated
intraregional ACH transactions unless tronic credits and debits among finan-
Clearing House Association (NACHA)
a regional ACH association has imple- cial institutions. The ACH Network
was formed to coordinate the ACH
mented a local rule to supersede a pro- was developed in response to the
movement nationwide. Through the
vision of the NACHAOperating Rules. astronomical growth of check pay-
joint efforts of NACHAand the Fed-
ments and the many technological
While the NACHAOperating Rulesis eral Reserve System, local ACHs were
advances in the mid-twentieth century
the primary document addressing the linked electronically on a nationwide
and functions as an efficient, electronic
rules and regulations for the commer- basis in 1978. The main benefits
alternative to paper checks. Through a
cial ACH Network, Federal Govern- associated with the use of the ACH
nationwide telecommunications net-
ment ACH payments are controlled by Network are cost reduction and
work, each ACH Operator is able to
the provisions of Title 31 Code of Fed- improved productivity over paper
communicate with other ACH Opera-
eral Regulations Part 210 (31 C.F.R. check transactions.
tors to exchange entries quickly and
Part 210). The Financial Management
efficiently, regardless of geographic In an effort to improve the payments
Service (FMS) of the U.S. Department
distances involved. The ACH Network system, Congress enacted the Mone-
of the Treasury is the agency responsi-
offers an assortment of technical for- tary Control Act in 1980. As a result of
ble for establishing Federal Govern-
mats that can be used for a variety of that Act, private sector ACH Operators
ment ACH policy. In 1999, 31 C.F.R.
payment applications, products and were encouraged to compete with the
Part 210 was revised by FMS to adopt
services. The ACH Network is gov- Federal Reserve, which could no
the provisions of the NACHAOperating
erned by operating rules and guide- longer offer its services free of charge
Rulesas the regulations governing the
lines, which are developed by the and was required to recover its operat-
transmission and receipt of Federal
actual users of the system, and is ing costs. Aprivate sector adjustment
Government ACH entries, with certain
administered through a series of factor (i.e., profit margin) is included in
exemptions to address matters of Fed-
agreements among financial institu- Federal Reserve processing so that the
eral law. FMS also publishes The Green
tions, customers, trading partners, and Federal Reserve Bank charges as
Book, a procedural manual for Federal
ACH Operators. though it were operating on a “for
Government ACH payments.
profit” basis.
The ACH movement began in the
Other laws that have a direct bearing
early 1970s when a group of California
on ACH operations are the Uniform NACHA and the Regional Payments
bankers formed the Special Committee
Commercial Code Article 4, which Associations
on Paperless Entries (SCOPE). In direct NACHAoversees America’s largest
governs check transactions, and Article
response to the rapid growth in check electronic payments network.
4A, and the Electronic Funds Transfer
volume, the Committee was chartered NACHA’s primary roles are to develop
Act as implemented by Regulation E.
to explore the technical, operational, and maintain the NACHAOperating
Certain other activities related to ACH
and legal framework necessary for an Rules, to promote growth in ACH
payments are affected by The Right to
automated payments system. volume, and to provide educational
Financial Privacy Act, Regulation D
services to its members and other ACH
regarding reserve requirements, Regu- SCOPE laid the groundwork for the
participants. NACHA’s member pay-
lation CC regarding funds availability, first Automated Clearing House
ments associations serve over 12,000
and other regulatory agency directives. (ACH) association, which began oper-
financial institutions across the United
Agreements are also required between ation in 1972. The establishment of this
States, which in turn provide services
RDFIs and the ACH Operators for ACH association led to the formation
to over 3.5 million corporations and
ACH Operator services. Relationships of similar groups in other parts of the
one-hundred million consumers, with
between the consumer as Receiver and country. Agreements were made
a transaction volume of 8 billion pay-
the RDFI are generally governed by between the emerging regional ACH
ments and a dollar value $22.2 trillion
Regulation E and the NACHAOperat- associations and the regional Federal
in 2001.
ing Rules. In some cases, agreements Reserve Banks to provide facilities,
exist between the RDFI and the equipment, and staff to operate Regional payments associations pro-
Receiver, particularly if the Receiver is regional ACH networks. Two notable vide management, education, assis-
a corporate or government entity. exceptions to this type of arrangement
18
U N D E R S T A N D I N G T H E A C H N E T W O R K : A N A C H P R I M E R
tance, and services to link all types of have selected that ACH Operator Banking Day
financial institutions (commercial to perform ACH services (intra- Any day on which a participating
banks, saving banks, and credit ACH Operator services), and depository financial institution is open
unions) across the United States. Sev- (b) exchange transactions with to the public during any part of the
eral of these associations also develop other ACH Operators (inter-ACH day for carrying on substantially all its
and implement local ACH rules that Operator exchange); banking functions.
apply specifically to their own member
(d)process and edit files based on the
financial institutions. The regional pay- Batch
requirements of these rules;
ment associations offer a wide variety Agroup of records or documents con-
of educational sessions ranging from (e) evaluate the credit worthiness of sidered as a single unit for the purpose
origination and receipt operations to and apply risk control measures to of data processing.
audit and control. their Participating DFIs;
Consumer Account
H. ACH Terminology (f) adhere to the Federal Reserve’s Adeposit account held by a financial
Policy Statement on Privately institution and established by a natural
This section is intended to provide
Operated Multilateral Settlement person primarily for personal, family,
users of this book with an overview of
Systems (as applicable); and or household use and not for commer-
basic ACH terminology. ACH terms, as
cial purposes.
defined specifically for purposes of the (g) adhere to any National ACH
NACHAOperating Rules, may be found Operator Performance Standards of
Corporate-to-Corporate Payments
within Article Thirteen of the NACHA the National Association.
Any of the class of automated payment
Operating Rules.
formats developed for the ACH Net-
Addenda Record
work that allow concurrent exchange
ACH Operator An ACH record type that carries the
of funds and remittance information
means (1) a Federal Reserve Bank that supplemental data needed to com-
between trading partners.
performs all of the following, or (2) an pletely identify an account holder(s) or
entity that executes an annual agree- provide information concerning a pay-
Credit Entry
ment with the National Association in ment to the RDFI and the Receiver.
An entry to the record of an account to
which the entity agrees to comply with
represent the transfer or placement of
or perform all of the following: Authorization
funds into the account.
Awritten agreement with the originat-
(a) adhere to these rules (except to the
ing company signed or similarly
extent inconsistent with the policies Data Transmission
authenticated by an employee or cus-
or practices of the Federal Reserve The electronic exchange of information
tomer to allow payments processed
Banks) and other applicable laws, between two data processing points.
through the ACH Network to be
regulations, and policies;
deposited in or withdrawn from his or
Debit Entry
(b) execute agreements with a mini- her account at a financial institution. An entry to the record of an account to
mum of twenty independent (i.e., Can also be a written agreement that represent the transfer or removal of
not owned by the same holding defines the terms, conditions and legal funds from the account.
company) Participating DFIs that relationship between trading partners.
bind such entities to the ACH For ACH credit entries, authorization Direct Debit
Operator’s rules and to these rules may also be by verbal or other non- Amethod of collection used in the
(except that a Federal Reserve Bank written means. ACH for certain claims, generally
shall not be required to bind a Par- those that are repeated over a period of
ticipating DFI to any provision of Automated Clearing House (ACH) time, under which the debtor gives his
such rules of the National Associa- Network or her financial institution authoriza-
Afunds transfer system, governed by
tion that is not incorporated by the tion to debit his or her account upon
the NACHAOperating Rules, that
Uniform Operating Circular of the the receipt of an entry issued by a
provides for the interbank clearing of
Federal Reserve Banks); creditor.
electronic entries for participating
(c) (a) provide clearing, delivery, and financial institutions.
settlement services for ACH
entries, as defined by these rules,
between Participating DFIs that
19