Electronic Funds Transfer 101

Office of the State Controller

August 2008

Two Types of EFT

EFT is a generic term Describing two different methods of transferring funds electronically

EFT Wire Transfer ACH

Both performed through Federal Reserve Bank System

(Except for in-bank or on-us transactions)

Common mistake to call an ACH payment a wire transfer

Each are handled by different departments at a bank

Wire Transfer
Wire Transfer Fed Wire Book Transfer Foreign Wire

Between two banks

Within same bank

Foreign bank

Movement of funds is real time effected immediately FRB open for fed wires up to 6:00 p.m. Book Transfers are memo posted up until midnight ZBA (Zero Balance Account) sweeps are book transfers Fed Wire Affects banks Reserve Accounts maintained at the FRB Sending banks account at the FRB gets debited Receiving banks account at the FRB gets credited Foreign exchange and Euro dollars through Clearing House for Inter-bank Payments System (CHIPS) 54 New York Banks

Wire Transfer Utilization

When appropriate to use
Time sensitive - Funds need to be moved same day initiated Large dollar amounts

Examples
Debt Service Payments (preserve States credit rating) Funding ACH payments (e.g. payroll direct deposit) Funding investments (e.g., at custodian bank) Adjusting balances (between depository banks) Remitting ESC payments (to US Treasury) DOR accepts wire transfers from corporate taxpayers on an exception basis only

Initiating Wire Transfers

Banks provide corporate customers ability to initiate their own wires via online banking access Templates are used Repetitive Transfers Pre-established ABA# and acct.# Non-Repetitive - Open wire to anywhere State Treasurer initiates all wire transfers for agencies Via Wachovia Connection and BOA Direct As requested by agencies via Core Banking $ystem Results in debit to agencys disbursing / STIF acct.

Agency Logs in

Disb. Acct. at DST

Online Wire System

DSTs Bank

Payees Bank

ACH
ACH Network A batch-process, store and forward for future settlement

Two types of ACH (Automated Clearing House)

ACH ACH Credits

Direct Deposit. Debit Card Account Direct Deposits Always initiated by sender Senders account is debited and receivers account is credited Receivers Acct
Bank account Debit card account

ACH Debits

Electronic Drafts Initiated by sender or receiver If by sender Sender authorizes a third party to initiate transaction If by receiver Receiver initiates transaction

Also referred to as Direct Payments

ACH Utilization
When appropriate to use Large number of payments in a single file (batch) At least one day is available between initiation and settlement Any size dollar amounts Examples Outbound Payroll direct deposit to bank account (ACH credits) Outbound Payroll direct deposit to debit card account (ACH credits) Outbound Vendor payments (ACH credits) Inbound Taxpayer payments (ACH credits or debits) ACH Transactions can have Addendum Records Remittance data attached Can be interfaced with A/R system DOR requires taxpayers to use TXP format

Governing Org.

ACH Players
3
ACH Operator (FRB)

Trade Group

2
Originating Depository Financial Institution (ODFI)

Receiving Depository Financial Institution (RDFI)

1
Originator (Company / Employer) Receiver (Company / Employee)
Authorization / Enrollment

Primary Differences
Wire Transfers Item Cost - $6.75 Same day funds Transfer almost instantaneous Use for critical payment (e.g. debt service) ACH Item Cost < 1 penny Next day funds One day delay in settlement Used for large batch files (e.g., payroll)

State Checks Average Cost - Range $.74

Electronic Checks
Loosely used term Refers to two different methods
Electronic Checks Online Paper Check ACH Conversions

Online Paper Check Developed by Financial Services Technology Consortium (FSTC) Not-forprofit group of CA banks Initiated using a PIN and digital signature Receiver prints out paper check for deposit ACH Conversions (most common method referred to) Transactions converted to ACH debits (e.g., ARC, POP, WEB, TEL) Services can be provided by third party processors Account verification determined upfront. Guarantees available. Examples of services provided through third-party CyberSource (POP)
Telecheck: CheckFree: AmeriNet: Paymentech:

Applies to consumer checks only, not business checks.

Regulator Governance
Regulation E, per Electronic Funds Transfer Act (EFTA)

Issued by Federal Reserve Bank Covers ACH and debit cards (but not wires or credit cards) Consumer protection oriented Some protection afforded the consumer does not apply to corporate or government customers

NACHA Operating Rules

National Automatic Clearing House Association Applies to ACH transactions only Applicable to both consumer and corporate (including government)
Uniform Commercial Code (UCC) Article 4A

Applies to Wire Transfers Only

Uniform Commercial Code (UCC) Articles 3 and 4 and Reg CC

Applies to negotiable instruments (checks) Reg CC issued by Federal Reserve - Applies to checks not EFT Check 21 (Check image conversion) governed by Reg CC, not Reg E

ACH Terminology
Typical ACH Standard Entry Class Codes PPD Prearranged Payments and Deposits (Consumer payments) CCD - Cash Concentration or Disbursements (Corporate payments) CCD+ - Corporate payments with 180 character addenda record TXP Addendum format for Tax Payments (Used by DOR) Check Conversion Standard Entry Class Codes POP Point-of-Purchase / Face-to-face (e.g., Wal-Mart) ARC Accounts Receivable Conversion Non-face-to-face (e.g., Lockbox) BOC Back Office Conversion Face-to-face, but later converted (Mar 07) Check Conversions not eligible for use with corporate or government checks and have an amount limit of $25,000 Other Standard Entry Class Codes (Debit entries) WEB Internet-initiated entries against a consumer account TEL Telephone-initiated entries against a consumer account RCK Represented check (representment of a non-sufficient funds check)

Daylight Overdraft
Federal Reserve charges bank interest per minute for overdrafts in their Fed account Banks do not allow wire transfers to be made from account if available balance is not sufficient
Over-the-counter deposits not posted until night ACH credits are posted in mornings (6:30 and 8:30) Could pose problems when need to wire funds out

Some banks will assign an allowable daylight overdraft limit

Based upon customers credit risk Based upon bank overdraft cap at the FRB States arrangements with banks are handled by DST

Check 21
Federal legislation Result of 9/11 when planes could not fly Became effective October 2004 Banks have option of presenting substitute checks instead of original check Also referred to as Image Replacement Documents (IRDs) Originals paper checks are to be destroyed Substitute document is legally same as original Check 21 is different than Check Conversion (POP/BOC/ARC)
POP, BOC & ARC - Check converted to ACH transaction Therefore POP, BOC & ARC subject to NACHA Rules not UCC POP, BOC & ARC only applicable to consumer checks Check 21 applicable to both consumer & commercial Check 21 has no amount limit Check Conversion limit is $25,000

EFT Milestones
1972 SCOPE (Special Committee on Paperless Entries) 1974 NACHA (National Automated Clearing House Association) 1977 Retirement System began using Direct Deposit for retirees 1979 Central Payroll began using Direct Deposit for employees 1980s University Payroll Centers began using Direct Deposit - employees 1984 GMTS (Governmental Moneys Transfer System) implemented by DST for paying local units of government (Replaced by STEPS) 1988 DOT Payroll began using Direct Deposit for employees 1992 STEPS (State Treasurers Electronic Payments System) implemented for local units (two-way street). (Ended 2003, except Retirement) 1994 DOR implemented EFT for corporate tax collections 1990s LEAs and community colleges implemented direct deposit for employees (costs being paid for by DST) 1999 SB 222 enacted, giving OSC responsibility for EFT 2002 Common Payment System implemented (DMV-IRP first) 2005 OSC initiated expansion of Electronic Commerce Program

States E-Commerce Program E States Cash Management Legislation (G.S. 147-86.11) requires State Controller to develop policies regarding cash management practices, including E-Commerce. Two Master Services Agreements (MSAs) procured
MSA for Electronic Funds Transfer Services Wachovia Bank MSA for Merchant Card Services SunTrust Merchant Services

Agencies and local units of governments eligible participants Each participant must execute an Agency Participation Agreement (APA) Paying for Services In accordance with MSA fee schedule
Agency pays in most cases EFT for payroll and NCAS payments DST pays

E-Commerce Inbound Programs

Utilizes Both Merchant Cards and EFT

States E-Commerce Structure Inbound Payments

Agency POS Terminals

NC@YourService Yahoo! Store

Agency Windows Client Agency Web Store Front Agency A/R System
Citizen (Taxpayer)

Gateway ( CPS or Other )

Acquiring Processor

Wachovia Web ACHieve (Debits) Agencys 3rd Party Data Collection Center Payors Bank ACH Credit
States EFT Bank (ODFI)

$
Card Transactions ACH Transactions

States Depository Bank

E-Commerce Outbound Programs

Utilizes EFT Only

States E-Commerce Structure Outbound Payments

Agency / Univ A/P System
Wachovia Web ACHieve (Credits)

Gateway ( CPS or Other )

Payee (Citizen / Vendor/ Employee)
States EFT Bank (ODFI)

NCAS E-Payments Central Payroll DOT Payroll University Payrolls Community College Payrolls Local Schools Payrolls Child Support Payments
ACH Transactions

Fed Reserve Bank

Payees Bank

More Information
Office of the State Controller Web Site
www.ncosc.net
David C. Reavis E-Commerce Manager (919) 871-6483 Amber Young Central Compliance Manager (919) 981-5481

Support Services Center (919) 875-HELP (4357)

August 2008 Robert Powell State Controller