Payments 101 Terms and Acronyms

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Payments 101 Terms and Acronyms
Utility Payment Conference
October 19, 2008
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Agenda

• Payment Organizations and Associations
• Payment Regulations
• Payment Tenders, Terms and Acronyms
• Miscellaneous Payment Information

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Payment Organizations Associations

• NACHA
• Federal Reserve

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NACHA

• NACHA-The Electronic Payments Association
• (formerly known as the National Automated
  Clearing House )
• Not-for-profit association
• Represents more than 11,000 financial
  institutions through direct memberships
• Network of regional payments associations, and
  650 organizations through its industry councils.
• Develops operating rules and business practices
  for
• Automated Clearing House (ACH) Network
• Electronic payments in the areas of Internet
  commerce, electronic bill and invoice presentment
  and payment (EBPP, EIPP), e-checks, financial
  electronic data interchange (EDI), international
  payments, and electronic benefits services (EBS)

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Federal Reserve

• The Federal Reserve System is the central banking
  system of the United States
• Was created in 1913
• Is a private banking system composed of
• The Board of Governors (responsible for monetary
  policy) in of the Federal Reserve System,
  appointed by the President
• The Federal Open Market Committee
• 12 regional Federal Reserve Banks located in
  major cities throughout the nation acting as
  fiscal agents for the U.S. Treasury
• Each with its own nine-member board of directors
  
• Including numerous private U.S. member banks,
  which subscribe to required amounts of
  non-transferable stock in their regional Federal
  Reserve Banks
• Various advisory councils.

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Payment Regulations

• Regulation E
• Red Flag Fact A 114 315

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Regulation E

• Regulation issued by the Board of Governors of
  the Federal Reserve System
• Authorized under the Electronic Fund Transfer Act
  governing electronic fund transfers from a
  consumers account
• It does not apply to check drafts, credit cards,
  Federal wire transfers, interbank transfers or
  non consumer accounts
• It applies to ACH, ATM and debit card
  transactions to or from a consumer account
• Is a consumer protection statute that assures
  consumer rights are protected with regard to
  electronic transfers by making sure that
  transfers are
• authorized, clearly disclosed to consumers and
  that consumers are granted specifically defined
  rights with regards to error resolution and to
  challenging transactions they claim they did not
  authorize
• Sets limits on consumer liability for
  unauthorized transactions.

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Regulation E Contd

• Imposes specific obligations for recurring
  payments
• Transfer must be authorized by a writing that
  is signed or similarly authenticated
• Writing is on paper or displayed on a computer
  terminal
• Telephone recording alone does not comply with
  writing requirement.
• Similarly authenticated, some methodology is
  needed to confirm identity of person giving
  authorization.
• Example Shared secrets - Credit card number
  and client account number
• Person obtaining the authorization must supply a
  copy to the consumer by mailing or in case of
  Internet, by generating a receipt that can be
  printed
• When the fund transfers vary from month to month,
  Reg. E requires
• Notice be sent of the date and amount of the
  transfer at least 10 days before the scheduled
  date of the transfer
• Consumer may authorize payments within a certain
  range and require notice only when the payment
  falls outside of the range.

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Red Flag

• The Federal Trade Commission and federal
  financial institution
• regulatory agencies released final rules on
  identity theft "red flags",
• which call for financial institutions and
  creditors to adopt written identity
• theft prevention programs by November 1, 2008.
  Section 315 and
• Section 114(B) of the FACT Act mandate that
  institutions manage and
• reduce the risk of identity theft fraud for
  customers.
• The regulations, also called Identity Theft Red
  Flags Rules, implement
• part of the Fair and Accurate Credit Transactions
  (FACT) Act of 2003.
• What Are Red Flags? They are alerts to
  circumstances that signal a
• Potentially high risk situation. Compliance
  professionals have compiled
• lists of red flags for several purposes as
  indicators of potential money
• laundering, fraud, suspicious activity, illegal
  export transactions, etc. In
• the guidance to this new regulation, the agencies
  compiled a list of red
• flags that signal the potential existence of
  identity theft.

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Red Flag Continued

• Any organization, including non-lenders including
  utilities, that use
• Consumer credit data is required to comply with
  Red Flag regulations
• by November 1, 2008. To satisfy Red Flag
  requirements programs
• must include
• Reasonable policies and procedures for detecting,
  preventing and mitigating identity theft
• Ability to identify relevant patterns of activity
  considered red flags, including address
  discrepancies and
• Periodic updates to reflect changes in risks from
  identity theft.
• Identity Theft Red Flags Rules

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Red Flag Continued

• Examples of red flags provided by the regulatory
  agencies
• Personal identifying information provided is
  inconsistent when compared against external
  information sources used. For Example The
  address does not match any address in a consumer
  report or
• The Social Security Number (SSN) has not been
  issued, or is listed on the Social Security
  Administrations Death Master File.
• Personal identifying information provided by the
  customer is not consistent with other personal
  identifying information provided by the customer.
  For example, there is a lack of correlation
  between the SSN range and date of birth.

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Payment Tenders, Terms and Acronyms

• ACH
• ARC
• Authorized
• BOC
• Check21
• Contracted
• CTX
• EBPP
• Electronic Check Conversion

• EDI
• Internet payments
• IRD
• IVR
• M-payments
• MICR
• NOC

• Non-contracted
• P2P
• POP
• PPD
• RCK
• RDFI
• ODFI
• Unauthorized

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ACH

• ACH - Automated Clearing House
• The ACH network is a highly reliable and
  efficient nationwide batch-oriented electronic
  funds transfer system
• Governed by the NACHA operating rules
• Provides for the interbank clearing of electronic
  payments for participating depository financial
  institutions
• The Federal Reserve and Electronic Payments
  Network act as
• ACH Operators, central clearing facilities
  through which financial institutions transmit or
  receive ACH entries
• The ACH network can be used to send either debits
  (payments) or credits (refunds)
• A credit sends funds to a Receivers account
• A debit takes funds from a Receivers account

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How ACH Works
In accordance with the rules and regulations of ACH, no financial institution may simply issue an ACH transaction (whether it is debit or credit) towards an account without prior authorization from the account holder (known as the Receiver in ACH terminology). An ACH entry starts with a Receiver authorizing an Originator to issue ACH debit or credit to an account. An Originator can be a person or a company (such as the gas company, a local cable company, or one's employer). Depending on the ACH transaction, the Originator must receive written (ARC, POP, PPD), verbal (TEL), or electronic (WEB) authorization from the Receiver. Written authorization constitutes a signed form giving consent on the amount, date, or even frequency of the transaction. Verbal authorization needs to be either audio recorded or the "Originator" must send a receipt of the transaction details before or on the date of the transaction. A WEB authorization must include a customer reading the terms of the agreement and typing or selecting some form of an "I agree" statement.

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ACH Continued
Once authorization is acquired the Originator creates an ACH entry to be given to an Originating Depository Financial Institution (ODFI), which can be any financial institution that does ACH origination. The ACH entry is then sent to an ACH Operator (usually the Fed) and is passed on to the Receiving Depository Financial Institution (RDFI), where the Receiver's account is issued either a credit or debit, depending on the ACH transaction. The RDFI may reject the ACH transaction and return it to the ODFI with an appropriate reason Insufficient funds in the account Account holder indicated that the transaction was unauthorized An RDFI has a prescribed amount of time in which to perform returns, ranging from 2 to 60 days from the receipt of the ACH transaction. The majority of transactions, if going to be returned, are done so within 24 hours from midnight of the day the RDFI receives the transaction.
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ACH Continued
An ODFI receiving a return of an ACH entry may re-present the ACH entry two more times, or up to three total times, for settlement. Again, the RDFI may reject the transaction. After which, the ODFI may no longer represent the transaction via ACH.
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ACH Transaction Terms

• ARC Accounts Receivable Conversion (mail)
• BOC Back Office Conversion
• ODFI Originating Depository Financial
  Institution
• POP Includes check serial number
• PPD Pre-authorized Payment and Deposit (auto
  draft)
• RCK Return Check
• RDFI Receiving Depository Financial
  Institution
• TEL Phone
• WEB Internet

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ACH Volumes

• ACH Volumes
• Nearly 16 billion automated clearing house (ACH)
  payments were made in 2006, a 14.5 increase
  over 2005. This includes consumer, business, and
  government transaction types. Annual ACH volume
  continues to double every 5 years.
• In 2006, nearly 8 billion consumer bill payments
  were collected via the ACH Network which included
  pre-authorized debits, checks converted to ACH
  payments, and Internet and telephone.
• PPD increased by 6.1 to 3.3 billion payments
• ARC increased by 30 to 2.8 billion payments
• WEB increased by 35 to 1.8 billion payments (85
  percent of Internet-initiated ACH payments are to
  
• pay bills via companies or billing services web
  sites)
• Direct Deposit is still the most widely used type
  of ACH payment. The number of Direct Deposits in
  2006 increased by 5.5 percent to 4.7 billion
  payments.

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Electronic Check Conversion

• is a process in which your check is used as a
  source of information for the check number, your
  account number, and the number that identifies
  your financial institution.
• The information is used to make a one-time
  electronic payment from your account- an
  electronic funds transfer.
• The check itself is not the method of payment.
• Transaction types include
• ARC Accounts Receivable Conversion
• BOC Back Office Conversion
• POP Point of Purchase
• http//www.federalreserve.gov/pubs/checkconv/what
  

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Check Conversion Benefits

• Privacy personal information is seen by fewer
  people when a check is turned into an electronic
  payment.
• Secure and protected customers have more
  protection with electronic payments than with
  paper checks.
• ARC transactions are governed by federal laws
  that apply to electronic banking
• (Electronic Funds Transfer Act and Regulation E)
• Rules indicate customer has 60 days from the date
  a bank statement was sent, to notify your bank of
  a problem. The bank then has up to 45 days to
  investigate.

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Check Conversion Benefits Contd

• Information the name of the originating company
  and a descriptive statement appear on your bank
  statement rather than an entry that just says
  check.
• This helps in reconciling and balancing your
  account and an account statement that includes
  this information serves as proof of payment.
• Environmental - there is an environmental impact
  to using paper checks. In addition to the natural
  resources used to manufacture/print paper checks,
  processing the checks relies heavily on our
  nation's transportation systems including trucks
  and airplanes.
• It takes a considerable amount of fuel to ship
  our country's millions of checks each year
  between companies, financial institutions, and
  your home.

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Check21

• The Check Clearing for the 21st Century Act
  (Check 21) was signed
• into law on October 28, 2003 and became effective
  on October 28,
• 2004
• Check 21 is designed to foster innovation in the
  payments system and to enhance its efficiency by
  reducing some of the legal impediments to check
  truncation
• The law facilitates check truncation by creating
  a new negotiable instrument called a substitute
  check which permits banks to truncate original
  checks to banks that want to continue receiving
  paper checks
• A substitute check is the legal equivalent of the
  original check and includes all the information
  contained on the original check
• The law does not require banks to accept checks
  in electronic form nor does it require banks to
  use the new authority granted by the Act to
  create substitute checks
• Check21 is represented by
• IRD Image Replacement Document
• POP Point of Purchase
• http//www.federalreserve.gov/pubs/checkconv/what
  

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Accounts Receivable Conversion (ARC)

• ARC (Accounts Receivable Conversion) - Through
  electronic Accounts Receivable Check (ARC)
  Conversion, eligible consumer checks received at
  a lockbox or drop box can be converted into
  electronic debits and processed through the ACH
  network.
• Checks drawn on consumer accounts payable in U.S.
  dollars are eligible for ARC conversion.
• Checks are machine read to capture the Magnetic
  Ink Character Recognition (MICR) information
• routing number, account number and check serial
  number along the bottom of the check
• The data elements, along with the check amount,
  are used to create an ACH record. Typically, the
  biller's bank account is credited the next
  business day.

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Back Office Conversion (BOC)

• In March, 2007 Under the new BOC rules, retailers
  and other billers can convert eligible checks to
  Automated Clearing House (ACH) debits in a
  controlled environment in the back-office rather
  than at the point-of-sale or at manned bill
  payment locations. 
• Businesses no longer have to obtain a signature
  authorization for conversion or have scanners
  installed at each checkout or bill payment
  location. 
• A business needs only to disclose to its
  customers that their check will be converted into
  electronic transactions by means of a notice at
  the register and on a document that customers
  take with them, such as the back of a receipt. 
  Checks that contain auxiliary on-us fields or
  those over 25,000 are ineligible for BOC.

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Image Replacement Document (IRD)

• Is the legal equivalent of the original check if
  it has the following requirements
• Accurately represents all information on the
  front and back of the original check
• Contain the legend This is a legal copy of your
  check. You can use it the same way you would use
  the original check.
• Must conform to industry standards applicable to
  the MICR line
• Must conform to the industry standard for the
  physical characteristics of checks (size, paper,
  etc.)

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Point of Purchase (POP)

• Is the location where payment takes place and
  where the purchaser and seller are both present
  and
• Information from the consumer's check is used to
  create the electronic transaction

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Corporate Trade Exchange (CTX)

• Is a corporate ACH format which allows for up to
  9,999 addenda records with approximately 800,000
  characters.
• The CTX payment format combines payment
  information and a variable length record (called
  an addendum record) with related information,
  such as invoice numbers, allowing multiple
  payments to creditors or billers in a single
  transfer of funds.

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Electronic Data Interchange (EDI)

• Is a set of standards for structuring information
  that is to be electronically exchanged between
  and within businesses, organizations, government
  entities and other groups.
• Is considered to be a technical representation of
  a business conversation between two entities,
  either internal or external.
• Documents generally contain the same information
  that would normally be found in a paper document
  used for the same organizational function.
• Standards were designed to be independent of
  communication and software technologies.
• Can be transmitted using any methodology agreed
  to by the sender and recipient.

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Internal Voice Response Payments (IVR)

• Can be either PPD or TEL Entry
• Requires written authorization if treated as PPD
• One-time or recurring for PPD
• If no written authorization on file then can
  complete only per TEL rules. This requires
  written receipt or tape recording (actual oral
  authorization)
• TEL one-time payment
• Setting up PPD Payments via IVR is complex,
  normally IVR should be a TEL entry

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Notice of Change (NOC)

• Information sent by an RDFI to notify the ODFI
  that previously valid information for a receiver
  has become outdated or that information contained
  in a pre-notification is erroneous.

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Pre-Authorized Payment Deposit (PPD)

• Used to credit or debit a consumer account.
  Popularly used for payroll direct deposits and
  preauthorized bill payments.

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Return Check (RCK)

• A physical check that was presented but returned
  because of insufficient funds may be represented
  as an ACH entry.

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Internet Payments (WEB)

• One-time or recurring
• Should include Terms Conditions
• Privacy statement
• Appropriate authorization language
• Receipts / confirmations delivered electronically
  upon completion of payment

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Electronic Bill Presentment Payment (EBPP)

• On the Internet, electronic bill presentment and
  payment (EBPP) is the process that enables bills
  to be created, delivered and paid over the
  Internet
• The service has applications for many industries,
  from financial service providers to
  telecommunications and utilities.

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Lockbox

• A service offered by banks to companies where the
  company receives payments by mail to a post
  office box and
• The bank picks up the payments
• Deposits them into the company's account multiple
  times
• Notifies the company of the deposit
• It enables the company to put the money to work
  as soon as it's received.
• The amounts must be large in order for the value
  obtained to exceed the cost of the service.

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Mobile Payment (M-payment)

• Is a point-of-sale (POS) payment made through a
  mobile device cell phone, Smartphone or personal
  digital assistant (PDA)
• A person with a wireless or text enabled device
  can pay a variety of bills, including a utility
  bill, at anytime without interacting with anyone.
• A customer would enroll for the service and
  select the biller(s) they want to pay
• A customer is usually provided with an account
  number and personal identification number (PIN)
  for authorization purposes.

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Person To Person (P2P)

• Is the ability to transfer monies with a mobile
  phone from person-to-person (P2P)

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Walk-in Bill Payment

• Customers are able to pay in person at locations
  that accept and process utility payments
• The agent may or may not be authorized or
  unauthorized dependant on the utility and or 3rd
  party vendor relationship
• Customers generally receive a receipt for their
  payment
• A cashier may swipe a bill stub or key in the
  billing details into a data terminal
• A receipt with payment transaction information is
  provided to the customer
• Depending on the utility and their processing
  capabilities, some authorized pay agents may
  offer 'real-time' payment posting.
• Walk-in bill payment can be by
• Kiosk customer initiated
• Terminal store or cashier initiated

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Miscellaneous Payment Information

• Authorized or Contracted
• Un-authorized or Non-contracted

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Authorized or Contracted

• A utility (or its contractor) have entered into
  an official contract with a payment vendor
• The vendor is authorized to accept payments for
  the utility
• The agent usually is able to accept cash, check
  and money order tenders
• The utility usually advertises or notifies their
  customers about the (authorized) payment options
  available to their customers to use

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Un-authorized or Non-Contracted

• A business or retailer that accepts
  biller/utility payments and the utility (or its
  contractor) have NOT entered into an official
  contract
• Typically an un-authorized pay agent will only
  accept cash as tender
• There is usually a 2 - 5 (business) day delay
  from the time a payment is accepted and until
  it's actually received and posted by the biller
• The consumer will pay a convenience fee of 1 -
  5 for the ability to generate their payment.

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Payment Vendors

• Visit the Joint Payment Center Conference booths
  to learn more about the services available to you
  from our supporting vendors

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Consumer Payment Evolution
For the first time, electronic bill payments
exceeded bill payments made by paper check among
the 82.5 million estimated U.S households using
the Internet
Over time, more of these consumers will migrate
to electronic payments

• Perception of more control over finances
• Convenience of paying multiple bills at once
• Eliminates the cost of postage

• Perception of more control over finances
• Confidence that biller receives payment
• Typically more payment types are available

Source Harris Interactive and the Marketing
Workshop 2007 Consumer Bill Payment Survey
Electronic Transaction Association