Same Day ACH Jim Petkovits, AAP,NCP, Vice President of Education

WesPay, as a Direct Member of NACHA, is a specially recognized and licensed provider of ACH education, publications and support. Regional Payments Associations are directly engaged in the NACHA rulemaking process and the Accredited ACH Professional (AAP) program. This material is derived from collaborative work product developed by NACHA ─ The Electronic Payments Association and its member Regional Payments Associations. This material is not intended to provide any warranties or legal advice, and is intended for educational purposes only. © 2016 Western Payments Alliance (WesPay). All rights reserved. NACHA owns the copyright for the NACHA Operating Rules & Guidelines. The Accredited ACH Professional (AAP) is a registered service mark of NACHA.

Unauthorized Return Entry Fees Adjustments Part One February 23, 2010 Agenda N Agenda Same Day ACH Unauthorized Return Entry Fees 3

What a long, strange trip it has been “Early in 1971 the Federal Reserve Bank had guaranteed same day delivery [however] many participants would be unable to participate” - George E Lowther, Wells Fargo Bank, April of 1972, SCOPE (Special Committee on Paperless Entries) 43 years later!!!!

Executive Summary Enables same day settlement for virtually all ACH entries 3 phases Distribute costs & implementation efforts Industry acclimation Mandatory for RDFIs Influences future modernization improvements: Intra-day posting and funds availability of credits Improved risk management Fee of 5.2 cents per entry helps RDFI recover costs Does not affect existing ACH entries Last bullet: impacts of SDA may require back office changes to your core systems on how you post, beyond just changes to your ACH Operation.

NACHA Blueprint If audience is interested in more info, they can go to NACHA’s website, search “blueprint”

Eligible Transactions All domestic ACH transactions under $25,000 Exceptions: IAT entries Entries over $25,000 Includes Prenotes, Notifications of Change (NOC), Zero Dollar Remittance Same Day returns optional for RDFI X Note: RDFI has option to participate in SDA for returns, and can ignore qualifications (IAT, $25K limit) When returning

Phased Implementation Approach Functionality Transaction Eligibility Processing Deadlines New Settlement Times ACH Credit Funds Availability Phase 1 September 23, 2016 Credits 7:30 AM PT & 11:45 AM PT 10:00 AM PT & 2 PM PT End of RDFI's processing day Phase 2 September 17, 2017 Credits & Debits Phase 3 March 16, 2018 5:00 PM RDFI local time

SDA Interbank Fee Desire for rational business justification ODFIs – opportunity to offer SDA services (optional) RDFIs – required to receive SDA to preserve ubiquity Required investment in staff & technology No certainty of recovering costs According to NACHA survey

SDA Interbank Fee Interbank fee is proposed “correcting mechanism” 57% RDFIs would not support SDA without a fee* Fee = (Est. Costs + Reasonable Return)/Est. Volume Estimated Costs = Investment + Operating Costs Opportunity Costs removed from final rule 5.2 cents per transaction Administered by ACH Operators RDFI credited ODFI debited * Results from NACHA’s public Request for Comment on Same Day ACH

Can Same Day Entry Fee Change? 5 years after implementation: If actual volume > 125% of projected volume Then fee changed to 11.5 year recovery cost Second review 8 years after implementation 10 years after implementation: New economic analysis to determine fee amount after 11.5 year initial cost recovery period In all cases, fee cannot increase, can only decrease

Where Will SDA Volume Come From? This slide comes from NACHA’s Same Day ACH RFC issued Dec 8, 2014

Same Day ACH – Moving Payments Faster RDFI considerations

Identification of SDA? RDFI May rely on Settlement Date (Subsection 3.1.9) Julian Date from ACH Operator will have Same Day Date Operator will only deliver SDA in the 2 designated windows Even if ODFI uses optional Company Entry Descriptive Date field, doesn’t change how ACH Operator calculates settlement SUBSECTION 3.1.9 RDFI May Rely on Settlement Date (new subsection) For purposes of fulfilling its obligations under these Rules, an RDFI may rely on the Settlement Date of an Entry, regardless of the Effective Entry Date.

SDA Availability Requirements Subsection 3.1.9 (Same day entries) Phases 1 & 2: SDA credits must be available by end of processing on Settlement Date Funds do not need to be available for withdrawal on the Settlement Date Phase 3: Credit entry must be made available for withdrawal by 5pm on the Settlement Date NOTE: No change to funds availability requirements for PPD Entries made available to the RDFI before 5pm on the day prior to the Settlement Date SUBSECTION 3.3.1.1 General Rule for Availability of Credits For a credit Entry that is not a Same Day Entry, an RDFI must make the amount of each the credit Entry received from its ACH Operator available to the Receiver for withdrawal no later than the end of the Settlement Date of the Entry, subject to its right to return the Entry under these Rules. (Phase 1 & 2) For a credit Same Day Entry, an RDFI must make the amount of the credit Entry available in the Receiver’s account no later than the completion of the RDFI’s processing for that Settlement Date, subject to its right to return the Entry under these Rules. An RDFI is not required to make such funds available for withdrawal on the Settlement Date. (Phase 3) For a credit Same Day Entry, an RDFI must make the amount of the credit Entry available to the Receiver for withdrawal no later than 5:00 p.m. in the RDFI’s local time, subject to its right to return the Entry under these Rules.

Exceptions SDA is still optional for returns Determine when you’ll process SDA returns Staffing impacts? SDA qualifications don’t apply to returns i.e. $25K limit, IAT SDA interbank fee doesn’t apply to exceptions Other exceptions eligible for SDA: NOCs Contested Dishonored Returns RDFI - can elect to process returns SDA. RDFIs will need to look at their current schedule to see how SDA impacts your schedule and when returns are processed (next day items vs. SDA). Opportunity to provide RDFIs with a "do it yourself" schedule to fill in? Make sure to document this in your policy and/or procedures. Posting order (potential CFPB concerns). Before SDA, RDFI may process returns in morning and assess NSF fees. After SDA, credits could come in after and put account balance back in black - how to explain that to customer/regulatory issues with doing this? Training for customers. Does RDFI assess NSF fees at end of day, or when it happens?? For above - if RDFI assesses NSF fees "at the time," Originator/ODFI may be asked to compensate. Memopost vs. Hardpost processing differences/impacts to Receivers (NSF fees)? Be aware that the clock starts upon receipt of dishonor/receipt of returns

Same Day ACH – Moving Payments Faster Odfi considerations

Origination Timing Considerations What deadline ODFIs publish for thier Originators? Time needed before ACH Operator deadline? Less time for exceptions! Staffing impact Origination Agreements/Addendum changes? Honor requests to hold same day EED batches out of SDA windows?

SDA Identification 1. Passenger needs right ticket for trip they want Originator needs the right SDA format Effective Entry Date = Today’s date (or stale date) + = 2. Passenger needs to be at correct station on time Originator submits file to ODFI by their SDA deadline ODFI submits file to Operator within SDA window S D A

Optional Company Descriptive Date Optional assistance to validate Originator SDA intent Company Descriptive Date Field: “SD1300” or “SD1700” Positions 64-69 in Batch Header Record ACH Operator only edits on Effective Entry Date So ODFI + Originator still responsible for correct EED and submitting file to Operator in correct window SECTION 8.84 Same Day Entry (new section) (Phase 1) An Entry, other than a debit Entry, for which the Effective Entry Date is the same Banking Day as the date on which the Entry is Transmitted by the ODFI to its ACH Operator, and is Transmitted by the ACH Operator’s deadline for same-day processing and settlement. A Same Day Entry must be for an amount of $25,000 or less... (after Phase 1) An Entry for which the Effective Entry Date is the same Banking Day as the date on which the Entry is Transmitted by the ODFI to its ACH Operator, and is Transmitted by the ACH Operator’s deadline for same-day processing and settlement. A Same Day Entry must be for an amount of $25,000 or less… Appendix 3 Company Descriptive Date: 6 Positions – Company/Batch Header Record – Optional Same Day Entries: At its discretion, an ODFI may require an Originator to use this…. Effective Entry Date: 6 Positions – Company/Batch Header Record – Required (all batches) The Effective Entry Date is the date Banking Day specified by the Originator on which it intends a batch of Entries to be settled. For credit Entries, the Effective Entry Date must be either the same Banking Day …or one or two Banking Days following… Phase 2 For debit Entries, the Effective Entry Date must be either the same Banking Day as the processing date for Same Day Entries, or one Banking Day following … A batch of Entries containing an Effective Entry Date that is stale (i.e., is a Banking Day that is in the past, or is the current Banking Day but is not submitted timely to an ACH Operator for same-day processing and settlement) is settled at the next available settlement opportunity. Settlement Date: 3 Positions – Company/Batch Header Record – Inserted by Receiving ACH Operator (all batches) The Settlement Date inserted by the Receiving ACH Operator is the same as the Effective Entry Date, except as noted below. In the following situations, the Receiving ACH Operator will insert the Banking Day following the Banking Day of processing as the Settlement Date (i.e., the next Banking Day): (1) The Effective Entry Date and the Originating ACH Operator’s processing date are the same, but the Entry is received by the Receiving ACH Operator after its deadline for same-day settlement. (2) The Effective Entry Date and the Originating ACH Operator’s processing date are the same, but the Entry is for an amount greater than $25,000. (3) The Effective Entry Date and the Originating ACH Operator’s processing date are the same, but the Entry bears the IAT Standard Entry Class Code. (4) The Entry bears the ENR Standard Entry Class Code. The following provision (4) would be effective for Phase 1 Only (5) A debit Entry contains an Effective Entry Date that is the Banking Day of processing. Entries with invalid or stale Effective Entry Dates will be settled at the next available settlement opportunity.

Optional Company Descriptive Date If used, how does ODFI treat conflicting EED and CDD fields? Hold file for next day processing window? Suspend/reject and contact Originator? Override/edit EED based upon CDD description? Originator Agreement modifications needed? Stale date/invalid EEDs become SDA batches! Invalid = blank or “garbage” Only applies to SDA windows! No matter what ODFI decides, Originators need training!!!

ODFI Edits How to handle invalid SDA batches? Talk to your ODFI Invalid SDA formats submitted in SDA window IAT > $25K (could be valid SDA entries in this batch) Talk to your ODFI Update your policies/procedures May require updated Origination Agreements Will require Originator training! APPENDIX TEN – RULES ENFORCEMENT instances in which the National Association believes an ODFI, Originator, or Third-Party Sender has attempted to evade the $25,000 per-Entry limitation on Same Day Entries.

Processing Considerations Reversals SDA can increase chances of original entry and reversal posting same day Reversal cannot settle prior to original entry! If ODFI creates reversal: code or procedures needed If Originator creates reversal: what is ODFI’s control? Benefit of originating in 1st SDA window Reversals can process in 2nd SDA window of day SUBSECTION 2.8.3 Time Limitations on Initiation of Reversing Files Any debit Entry within the Reversing File must not contain an Effective Entry Date that is earlier than the Effective Entry Date of the credit Entry to which it relates. SUBSECTION 2.9.1 General Rule for Reversing Entries (phase two) A debit Reversing Entry must not contain an Effective Entry Date that is earlier than the Effective Entry Date of the credit Entry to which it relates.

Processing Considerations Prenotes Debit SDA prenotes not allowed until Phase 2 Originators may see variability in prenote return times from RDFIs who send SDA returns and those who don’t SDA may (but no guarantee) reduce timeframe between prenote and dollar transactions

Processing Considerations Reinitiations (Redeposits) Will ODFI offer SDA reinitiations? Value in redeposit posting ASAP? Interchange fee applies Balanced files If settlement entries sent to ACH Operator: $25K per SDA entry limit Debit settlement can’t be SDA until Phase 2

Same Day ACH – Moving Payments Faster Use cases

Major Use Cases 10 Primary Use Cases 63 Total Sub-Use Cases C2B C2C Over 60% of estimated Same Day ACH volume expected to come from existing ACH 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, due-date and late invoice payments B2C Payroll Insurance, refunds Use Cases for Same Day ACH are Projected to Generate 1.4 Billion Transactions 10 Primary Use Cases 63 Total Sub-Use Cases

10 Major Use Cases Business-to-Business (B2B) Payments Person-to-Person (P2P) Payments Account-to-Account (A2A) Transfers Expedited Bill Payments E-Commerce Payments Check Conversion Merchant Debit Collections Same Day Payroll Business-to-Consumer Same Day Payments NACHA has actually defined over 60 scenarios where same day ACH payments can be implemented. Listed here are 10 of what are viewed as the most probable use for this new type of payment. (note: as part of our handouts, we can consider giving out the portion of the Rules proposal that listed all the possible uses)

Same Day ACH – Moving Payments Faster risk

Risk RDFI Considerations Tools to borrow from other industries? SDA Debits pose greater operational and fraud risk OFAC & BSA/AML monitoring Posting order impact to Receivers Recovery/penalty procedures for missed deadlines Consider NACHA’s Emergency Contact Database Tools to borrow from other industries?

Risk ODFI Considerations Tools to borrow from other industries? Reduced credit origination risk Increased operational and fraud risk “Faster” intraday deadlines Authentication protocols (account takeover risk) Recovery/penalty procedures for missed deadlines Same day reversals possible Consider NACHA’s Emergency Contact Database Tools to borrow from other industries? Wire security protocols?

Resources Your ODFI NACHA Same Day ACH page: https://www.nacha.org/content/same-day-ach

Improving ACH Network Quality Effective: October 3, 2016 Unauthorized Entry Fee Establishes a fee paid by the ODFI to the RDFI for returns for unauthorized debits (R05, R07, R10, R29 & R51) Fee $4.50 Revaluate in 3 years Additional data on RDFI cost will continue to be gathered to validate fee amount

Improving ACH Network Quality Fees will be collected and distributed by the ACH Operators via monthly statements NACHA is not a beneficiary of the fees; the entire fee will be passed to the RDFI IAT debits excluded

Questions? Please contact us at: Western Payments Alliance 300 Montgomery St, Suite 400 San Francisco, CA 94105 Phone: 415-433-1230 Fax: 415-433-1370 memberservices@wespay.org Payments Hotline - 415-373-1200 or info@wespay.org www.wespay.org

Thank you for participating PLEASE – Complete your evaluation