Payments 101 Terms and Acronyms

Utility Payment Conference

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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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NACHANACHA-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 consumer’s 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 Cont’d…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 Administration’s 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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ACHACH - 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 Receiver’s account A debit takes funds from a Receiver’s account

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How ACH WorksIn accordance with the rules and regulations of ACH, no financialinstitution may simply issue an ACH transaction (whether it is debitor credit) towards an account without prior authorization from theaccount 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 VolumesACH 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 Cont’d… 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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Check21The 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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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

Internal Voice Response Payments (IVR)

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

completion of payment

Internet Payments (WEB)

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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

Over time, more of these consumers will migrate to electronic payments

Perception of more control over finances

Confidence that biller receives payment

Typically more payment types are available

Perception of more control over finances

Convenience of paying multiple bills at once

Eliminates the cost of postage

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*

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