Comparing Experiences: United States-Canada ACH Presentation to Payments in the Americas Federal Reserve Bank of Atlanta October 9, 2004 Larry Schulz Vice President Retail Payments Office Federal Reserve System

2 U.S.-Canada ACH Service: First Test of a Shared Vision  Origin in demand for efficient non-urgent cross-border payments in globalizing economy  Industry devised model; Federal Reserve and Toronto Dominion put into practice  Operationally successful; basis for expansion to other countries  Limited acceptance; points way to improvements in the model

3 History of U.S.-Canada ACH Service  1993 NACHA formed the Cross-Border Council in anticipation of NAFTA  Idea was to interconnect the ACH systems in Canada, Mexico, and the U.S.  Developed cross-border operating rules  1994 NAFTA adopted

4 History of U.S.-Canada ACH Service  Federal Reserve studies, surveys, and industry meetings suggested demand for cross-border But infrastructure and industry offerings were still limited But infrastructure and industry offerings were still limited Fed decided to take an active role to stimulate development Fed decided to take an active role to stimulate development

5 History of U.S.-Canada ACH Service  Why the Fed? Dual public-private sector role: Traditionally provided US government with electronic payments to Canada Traditionally provided US government with electronic payments to Canada In the business of ACH as provider of services In the business of ACH as provider of services Largest ACH operator in U.S. Largest ACH operator in U.S. Trusted intermediary Trusted intermediary Encourages use by banks that might be concerned about confidentiality of customer information through private sector gateway operator Encourages use by banks that might be concerned about confidentiality of customer information through private sector gateway operator Public policy perspective: saw Canada link as way to improve the efficiency of the payment system Public policy perspective: saw Canada link as way to improve the efficiency of the payment system

6 History of U.S.-Canada ACH Service  1999 Fed partnered with Toronto Dominion on a one- year pilot program Limited to 10 financial institutions Limited to 10 financial institutions Determined successful in late 1999 Determined successful in late 1999 Offered as a standard Fed product in 2001 Offered as a standard Fed product in 2001

7 How the Service Works  NACHA Gateway Operator Concept Gateways are Toronto-Dominion Bank and the Fed Gateways are Toronto-Dominion Bank and the Fed Agree to provide access to all accounts in domestic payment system Agree to provide access to all accounts in domestic payment system Agree to handle format and foreign exchange conversions Agree to handle format and foreign exchange conversions Agree to manage service level conditions Agree to manage service level conditions Timing of credit, integrity of principalTiming of credit, integrity of principal

8 How the Service Works  Flow only from United States to Canada – credits and debits Two currency options – Two currency options – -Convert to Canadian Dollars -Convert to Canadian Dollars credit/debit to Canada on Day 1 credit/debit to Canada on Day 1 -Payment in U.S. dollars -Payment in U.S. dollars credit/debit to Canada on Day 2 F/X rate fixed at 100 bp over daily Bank of Canada rate F/X rate fixed at 100 bp over daily Bank of Canada rate Cross-border surcharge: $0.039 per item Cross-border surcharge: $0.039 per item

9 Experience to date  The process works well  750 payments a month Return rate under 2 % Return rate under 2 %  But participation remains well below expectations About 20 DIs with regular volume About 20 DIs with regular volume

10 Some Observations  Primarily U.S.$ payments  Median payment is about $1,400 Suggests that service is being used for classic ACH-type payments Suggests that service is being used for classic ACH-type payments  But average is closer to $30,000 Coupled with the predominance of U.S. $ payments, suggests that many payments are non-urgent larger dollar payments Coupled with the predominance of U.S. $ payments, suggests that many payments are non-urgent larger dollar payments

11 Challenges: General  Low awareness among banks  Low awareness among bank customers Difficult to target potential users Difficult to target potential users  Numerous alternatives for U.S.-Canada payments  Cross-border formats not sufficiently robust

12 Challenges: Specific to Current Structure  No southbound payments  Foreign Exchange Good alternative for smaller bank (one without F/X desk) Good alternative for smaller bank (one without F/X desk) Not attractive to large banks Not attractive to large banks Inability to specify target amount of Canadian dollars Inability to specify target amount of Canadian dollars

13 Lessons Learned  Canada experience did not help prepare Fed for OFAC issues Lack of inbound payments to the U.S. Lack of inbound payments to the U.S.  “Build it and they will come”? Cannot expect banks to adopt without extensive marketing, sales effort Cannot expect banks to adopt without extensive marketing, sales effort  Cross-border formats too limited

14 Next Steps  Meet OFAC needs for all services  Improve international formats  Study F/X options

15 Relevance for Payments in the Americas  There is a market for commercial cross border ACH Neither remittances nor U.S. Treasury payments have been a driving force in Canada Service Neither remittances nor U.S. Treasury payments have been a driving force in Canada Service  Gateway operator model is successful  Countries considering cross-border ACH: Consider how F/X is factored into the service Consider how F/X is factored into the service Work through format issues in advance Work through format issues in advance