Automated Clearing House

Automated Clearing House (ACH) is an electronic network for financial transactions in the USA. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit payroll and vendor payments. ACH direct debit transfers include consumer payments on insurance premiums, mortgage loans, and other kinds of bills. Debit transfers also include new applications such as the Point-of-Purchase (POP) check conversion pilot program sponsored by NACHA-The Electronic Payments Association. Both the government and the commercial sectors use ACH payments. Businesses are also increasingly using ACH to collect from customers online, rather than accepting credit or debit cards.

Rules and regulations governing the ACH network are established by NACHA (formerly the National Automated Clearing House Association) and the Federal Reserve (Fed). In 2002, this network processed an estimated 8.05 billion ACH transactions with a total value of $21.7 trillion. (Credit card payments are handled by separate networks.)

The Federal Reserve Banks are collectively the nation's largest automated clearinghouse operator and in 2005 processed 60% of commercial interbank ACH transactions. The Electronic Payments Network (EPN), the only private sector ACH operator in the U.S., processed the remaining 40%. FedACH is the Federal Reserve's centralized application software used to process ACH transactions. EPN and the Reserve Banks rely on each other for the processing of some transactions when either party to the transaction is not their customer. These interoperator transactions are settled by the Reserve Banks.

  
Uses of the ACH payment system

• Direct deposit of payroll, Social Security (USA) and other government payments, and tax refunds
• Direct debit payment of consumer bills such as mortgages, loans, utilities, insurance premiums, rents, and any other regular payment
• Business-to-business payments
• E-commerce payments
• Federal, state, and local tax payments
• Bank Treasury management departments sell this service to business and government customers

  
SEC Codes
Some common Standard Entry Class (SEC) Codes:

ARC

Accounts Receivable Entry. A consumer check converted to a one-time ACH debit.

CCD

Corporate Cash Disbursement. Primarily used for business-to-business transactions.

IAT

International ACH Transaction. This is a new SEC Code for cross-border payment traffic. This code replaces the PBR and CBR codes. This new code is implemented since September 18, 2009.

POP

Point-of-Purchase. A check presented in-person to a merchant for purchase is presented as an ACH entry instead of a physical check.

POS

Point-of-Sale. A debit at an electronic terminal initiated by use of a plastic card. An example is using your debit card to purchase gas.

PPD

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

TEL

Telephone Initiated-Entry. Verbal authorization by telephone to issue an ACH entry such as checks by phone. (TEL code allowed for inbound telephone orders only. NACHA disallows the use of this code for outbound telephone solicitations unless a prior business arrangement with the customer has been established.)

WEB

          Web Initiated-Entry. Electronic authorization through the Internet to create an ACH entry.

ACH process

An ACH transaction starts with a Receiver authorizing an Originator to issue ACH debit or credit to an account. A Receiver is the account holder that grants the authorization. An Originator can be a person or a company (such as the gas company, a local cable company, or one's employer). Accounts are identifed by the bank's Routing Number and the account number within that bank.

 

Example 1: Alice buys a teeshirt at Bob's Gift Shop with a check for $15. Alice is the Receiver; her bank account will eventually receive the order to take $15 out from her account. Bob's Gift Shop is the Originator. The check, signed by Alice, authorizes Bob's Gift Shop, Inc to originate the ACH transaction, code POP. The check has Alice's routing number and account number.

 

 

Common issues ACH payments have been around for some time now, but people are just getting used to them, especially with the ARC, POP, and RCK SEC Codes, where the original instrument was a physical check. One problem occurs when the account holder issues a stop payment on a physical check not knowing that the check was presented as an ACH entry. Time frame differences can cause loss towards an 'Receiving Depository Financial Institution' when returned ACH entries are subject to the Regulation E. An example is for the ARC and POP SEC Codes, where an RDFI has only 60 days from the date of settlement to return an unauthorized debit, and the consumer has 60 days upon notification to dispute a transaction in his statement under Regulation E. The consumer can receive notification via a statement 30 days after settlement. With these time frames, it is possible that the 60-day period allowed for ACH return would expire even before the consumer's 60-day protection (under Regulation E) would expire, leaving the RDFI open to loss. Another problem deals with compliance where the merchant presented with a check issues an ACH entry with SEC Codes ARC or POP. However, the merchant then fails to comply with the handling of the physical check and presents the physical check for payment as well. This causes a double-debit against a consumer account.

Clearing House (finance)

Clearing House (Finance)

A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions. These transactions may be executed on a futures exchange or securities exchange, as well as off-exchange in the over-the-counter (OTC) markets. The clearing of the OTC transactions is called OTC clearing.

A clearing house stands between two clearing firms (also known as member firms or clearing participants) and its purpose is to reduce the risk of one (or more) clearing firm failing to honor its trade settlement obligations. A clearing house reduces the settlement risks by netting offsetting transactions between multiple counterparties, by requiring collateral deposits (a.k.a. margin deposits), by providing independent valuation of trades and collateral, by monitoring the credit worthiness of the clearing firms, and in many cases, by providing a guarantee fund that can be used to cover losses that exceed a defaulting clearing firm's collateral on deposit.

Once a trade has been executed by two counterparties either on an exchange, or in the OTC markets, the trade can be handed over to a clearing house which then steps between the two original traders' clearing firms and assumes the legal counterparty risk for the trade. This process of transferring the trade title to the clearing house is called novation. It can take fractions of seconds in highly liquid futures markets; or days, or even weeks in some OTC markets.

As the clearing house concentrates the risk of settlement failures into itself and is able to isolate the effects of a failure of a market participant, it also needs to be properly managed and well-capitalized in order to ensure its survival in the event of a significant adverse event, such as a large clearing firm defaulting or a market crash.

Many clearing house guarantee funds are capitalized with collateral from its clearing firms. In the event of a settlement failure, the clearing firm may be declared to be in default and clearing house default procedures may be utilized, which may include the orderly liquidation of the defaulting firm's positions and collateral. In the event of a significant clearing firm failure, the clearing house may draw on its guarantee fund in order to settle trades on behalf of the failed clearing firm.

Clearing of Payments

In the United States, NACHA-The Electronic Payments Association, formerly the National Automated Clearing House Association, organizes the mechanism for the financial service institutions that participate in the Automated Clearing House (ACH) network. These organizations use the ACH to transfer funds either as debits or credits between participating institutions. Most, but not all, U.S. banks are members of the NACHA. Typical uses of ACH transactions are for automatic payroll programs, monthly mortgage or membership payments, or among non-profit organizations, as a monthly donor/contribution program.

NACHA (National Automated Clearing House Association)
The Electronic Payments Association, formerly the National Automated Clearing House Association, is an organization that develops electronic solutions to improve the ACH payment system in the United States. NACHA represents more than 12,000 financial institutions through direct memberships and a network of regional payments associations, and 650 organizations through its industry councils. NACHA develops operating rules and business practices for the Automated Clearing House (ACH) Network and for 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 benefit transfer (EBT).

NACHA has eight primary functions:

   1. Rule-making for the ACH Network and other payments systems
   2. Facilitating the development of new payment applications
   3. Identification and implementation of risk management initiatives
   4. Providing and supporting education programs
          http://www.nacha.org/c/Education.cfm
   5. Instituting and monitoring quality controls in the payments system
   6. Improving member communications/relations
   7. Responding to regulatory and government relations issues
   8. Marketing electronic payment services

Money - Payment Systems : USA

Money
It is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment.

Actually Money has originated as commodity money, but nearly all contemporary money systems are based on fiat money.

Fiat money
Fiat money or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by government order (fiat). Usually, the government declares the fiat currency (typically notes and coins from a central bank, such as the Federal Reserve System in the U.S.) to be legal tender, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private.

The money supply of a country consists of currency (banknotes and coins) and demand deposits or 'bank money' (the balance held in checking accounts and savings accounts). These demand deposits usually account for a much larger part of the money supply than currency. Bank money is intangible and exists only in the form of various bank records. Despite being intangible, bank money still performs the basic functions of money, being generally accepted as a form of payment.

Currently, most modern monetary systems are based on fiat money. However, for most of history, almost all money was commodity money, such as gold and silver coins. As economies developed, commodity money was eventually replaced by representative money, such as the gold standard, as traders found the physical transportation of gold and silver burdensome. Fiat currencies gradually took over in the last hundred years, especially since the breakup of the Bretton Woods system in the early 1970s.


Payment System
A payment system is a system for the transfer of money. What makes it a "system" is that it employs cash-substitutes; traditional payment systems are negotiable instruments such as drafts (e.g., checks), credit cards and other charge cards, documentary credit (such as L/C) and electronic funds transfers. Some payment systems include credit mechanisms, but that is essentially a different aspect of payment. Payment systems are used in lieu of tendering cash in domestic and international transactions and consist of a major service provided by banks and other financial institutions. In the US, they are regulated by different state statutes (UCC) and Federal regulations.

Additional forms of payment systems (including physical or electronic infrastructure and associated procedures and protocols) are used to settle financial transactions in Automated teller machine networks, Stored-value card networks, bond markets, currency markets, and futures, derivatives, or options markets, or to transfer funds between financial institutions. Due to the backing of modern fiat currencies with government bonds, payment systems are a core part of modern monetary systems.

Also, Electronic Payment is a subset of an e-commerce transaction to include electronic payment for buying and selling goods or services offered through the Internet.


Payment System in Major Countries:

United States - Fedwire

India - RTGS (Real time gross settlement)

Japan - BOJ-NET (Bank of Japan Financial Network System)

Russia - BESP system (Banking Electronic Speed Payment System)

Singapore - MEPS+ (MAS Electronic Payment System Plus)

Switzerland - SIC (Swiss Interbank Clearing)

United Kingdom - CHAPS (Clearing House Automated Payment System)

Hong Kong - Clearing House Automated Transfer System‎ (CHATS)


1. USA – FedWire.

Formally known as the Federal Reserve Wire Network, Fedwire is a Real Time Gross Settlement (RTGS) Funds Transfer system operated by the Federal Reserve Banks that enables financial institutions to electronically transfer funds between its more than 9,289 participants (as of March 19, 2009). In conjunction with the privately held Clearing House Interbank Payments System (CHIPS), Fedwire is the primary United States network for large-value or time-critical domestic and international payments, and it is designed to be highly resilient and redundant. The average daily value of transfers over the Fedwire Funds Service in 2007 was approximately $2.7 trillion, and the daily average number of payments was about 537,000. 2009 figures show a value of 631 trillion dollars in transfers originated in Fedwire.

Reserve Bank Payment Services
- Automated Clearinghouse Services
- Check Services
- Currency and Coin Services
- Fedwire Funds Services
- Fedwire Securities Services
- Fiscal Agency Services
- National Settlement Service

Automated Clearinghouse Services

The automated clearinghouse (ACH) system is a nationwide network through which depository institutions send each other batches of electronic credit and debit transfers. The direct deposit of payroll, social security benefits, and tax refunds are typical examples of ACH credit transfers. The direct debiting of mortgages and utility bills are typical examples of ACH debit transfers. While the ACH network was originally used to process mostly recurring payments, the network is today being used extensively to process one-time debit transfers, such as converted check payments and payments made over the telephone and Internet.

The Reserve Banks and Electronic Payments Network (EPN) are the two national ACH operators. As an ACH operator, the Reserve Banks receive files of ACH payments from originating depository financial institutions, edit and sort the payments, deliver the payments to receiving depository financial institutions, and settle the payments by crediting and debiting the depository financial institutions' settlement accounts. The Reserve Banks and EPN rely on each other to process interoperator ACH payments--that is, payments in which the originating depository financial institution and the receiving depository financial institution are served by different operators. These interoperator payments are settled by the Reserve Banks.

Check Services

The Federal Reserve Banks provide check collection services to depository institutions. When a depository institution receives deposits of checks drawn on other institutions, it may send the checks for collection to those institutions directly, deliver them to the institutions through a local clearinghouse exchange, or use the check-collection services of a correspondent institution or a Federal Reserve Bank. For checks collected through the Federal Reserve Banks, the accounts of the collecting institutions are credited for the value of the checks deposited for collection and the accounts of the paying banks are debited for the value of checks presented for payment. Most checks are collected and settled within one business day.

The number of checks written nationally has been declining since the mid-1990s as the use of electronic payment instruments has grown. In addition, the Check Clearing for the 21st Century Act (Check 21) removed barriers to the electronic collection of checks and electronic check collection has now become the primary method for collecting checks. Indeed, the vast majority of checks processed by the Reserve Banks today are deposited and presented using the Reserve Banks’ electronic check collection services. These changes have enabled the Reserve Banks to reduce their national check-processing infrastructure so that, by early 2010, they expect to be processing paper checks at one location nationwide, down from 45 in 2003.

Currency and Coin Services

As the nation's central bank, the Federal Reserve issues and processes Federal Reserve notes. The Federal Reserve also distributes coin through depository institutions. The thirty Federal Reserve Bank cash offices provide cash services to approximately 9,200 banks, savings and loans, and credit unions in the United States. The remaining depository institutions obtain currency and coin from correspondent banks rather than directly from the Federal Reserve.

The amount of currency in circulation depends on the public's demand for currency. Domestic demand largely results from the use of currency in transactions and is influenced primarily by prices for goods and services, income levels, and the availability of alternative payment methods. Domestic demand for currency, however, accounts for only part of the total demand. Foreign demand is influenced primarily by the political and economic uncertainties associated with certain foreign currencies. Recent estimates show that between one-half and two-thirds of the value of U.S. currency in circulation is held abroad. Some residents of foreign countries hold dollars as a store of value, while others use it as a medium of exchange.

- Currency
Federal Reserve notes comprise more than 99 percent of all U.S. currency in circulation; the remainder includes United States notes, national bank notes, and silver certificates, all of which remain legal tender. Each year, the Federal Reserve Board determines the number of new Federal Reserve notes that are needed and submits a print order to the Treasury's Bureau of Engraving and Printing (BEP). The order reflects the Federal Reserve System's estimate of the amount of currency that the public will demand in the upcoming year and unfit currency that is destroyed. The Federal Reserve pays the BEP the cost of printing new currency and arranges and pays the cost of transporting the currency from the BEP facilities in Washington, D.C., and Fort Worth, Texas, to Reserve Bank cash offices.

When a depository institution orders currency from a Reserve Bank, the Reserve Bank prepares and releases the shipment to an armored carrier company that is arranged by the depository institution. When a depository institution deposits currency with a Reserve Bank, the Reserve Bank stores the currency in secure vaults until it is verified, note-by-note, on sophisticated processing equipment. During the piece-verification process, deposited currency is counted, suspect counterfeit notes are identified, and unfit notes are destroyed. The fit currency is packaged and returned to the vault, and is used to fill future currency orders.

The Federal Reserve distributes a large amount of currency to overseas markets through Extended Custodial Inventory (ECI) facilities and other depository institutions. The Federal Reserve established ECIs in 1996 to facilitate the introduction of new-design U.S. currency to the international community, to recirculate fit bank notes in overseas markets, and to strengthen the information on foreign use and counterfeiting of U.S. currency.

-Coin
The Federal Reserve's role in coin operations is more limited than its role in currency operations. As the issuing authority for coins, the United States Mint determines annual coin production. The Reserve Banks, however, influence the process by providing the Mint with monthly coin orders and a 12-month rolling coin-order forecast. The Mint transports the coin from its production facilities for circulating coin in Philadelphia and Denver to all of the Reserve Banks and the Reserve Banks' coin terminal locations.

The Reserve Banks distribute new and circulated coin to depository institutions to meet the public's demand. While the Reserve Banks store some coin in their vaults, they also contract with coin terminals to store, process, and distribute coin on behalf of the Federal Reserve. Armored carrier companies generally operate the coin terminals; the coin terminals have improved the efficiency of the coin-distribution system.

Federal Reserve Accounting for Currency and Coin
Federal Reserve notes are liabilities on the Federal Reserve's balance sheet. These liabilities are collateralized by the assets of the Federal Reserve Banks.

Coin held by the Reserve Banks is an asset on the Federal Reserve's balance sheet and the Federal Reserve buys coin from the Mint at face value. When a depository institution orders and deposits coin from its Reserve Bank, the institution's account balance is adjusted accordingly.

Fedwire Funds Services

The Federal Reserve Banks provide the Fedwire Funds Service, a real-time gross settlement system that enables participants to initiate funds transfer that are immediate, final, and irrevocable once processed. Depository institutions and certain other financial institutions that hold an account with a Federal Reserve Bank are eligible to participate in the Fedwire Funds Services. In 2008, approximately 7,300 participants made Fedwire funds transfers. The Fedwire Funds Service is generally used to make large-value, time-critical payments.

The Fedwire Funds Service is a credit transfer service. Participants originate funds transfers by instructing a Federal Reserve Bank to debit funds from its own account and credit funds to the account of another participant. Participants may originate funds transfers online, by initiating a secure electronic message, or off line, via telephone procedures.

The Fedwire Funds Service business day begins at 9:00 p.m. eastern time (ET) on the preceding calendar day and ends at 6:30 p.m. ET, Monday through Friday, excluding designated holidays. For example, the Fedwire Funds Service opens for Monday at 9:00 p.m. on the preceding Sunday. The deadline for initiating transfers for the benefit of a third party (such as a bank's customer) is 6:00 p.m. ET each business day. Under certain circumstances, Fedwire Funds Service operating hours may be extended by the Federal Reserve Banks.

Fedwire Securities Services

The Federal Reserve Banks provide the Fedwire Securities Service, a securities settlement system that enables participants to hold, maintain, and transfer Fedwire-eligible securities. Depository institutions and certain other governmental or financial institutions that hold a funds account and a securities account with a Federal Reserve Bank are eligible to participate in the Fedwire Securities Service. In 2008, approximately 2,300 participants made Fedwire securities transfers. Fedwire-eligible securities include securities issued by the U.S. Treasury, other federal agencies, government-sponsored enterprises, and certain international organizations, such as the World Bank. Securities are held and transferred in book-entry form.

Securities transfers can be made free of payment or against a designated payment. Most securities transfers are, however, made against a designated payment. Transfers against payment involve the simultaneous exchange of payment for the security. All securities transfers are final at the time of transfer. Participants may originate securities transfers online, by initiating a secure electronic message, or off line, via telephone procedures.

The Fedwire Securities Service business day begins at 8:30 a.m. and ends at 3:15 p.m. eastern time (ET), Monday through Friday, excluding designated holidays. During these hours participants can originate online securities transfers. Online participants can initiate reversal transactions until 3:30 p.m. ET and move (reposition) their securities among their securities accounts until 4:30 p.m. ET for payment and until 7:00 p.m. free of payment. Offline participants can initiate securities transfers or other requests from 9:00 a.m. to 1:30 p.m. ET for same-day processing and until 4:00 p.m. ET for future-day processing. Under certain circumstances, Fedwire Securities Service operating hours may be extended by the Federal Reserve Banks.

Fiscal Agency Services

The Federal Reserve Banks provide a range of services to the U.S. government, including financial and securities services, application development, and technology infrastructure support. The Reserve Banks maintain the Treasury's operating account, accept deposits, pay checks drawn on the Treasury, and make electronic payments on behalf of the Treasury and government agencies. The Reserve Banks also process food coupons and U.S. postal money orders and conduct other activities on behalf of certain government agencies.

In addition, the Reserve Banks provide securities services on behalf of the Treasury, other federal agencies, and certain government-sponsored entities. For example, the Reserve Banks support the auction, issuance, and redemption of marketable Treasury securities as well as the processing of U.S. savings bonds. The Reserve Banks also perform monitoring and management activities in support of several Treasury collateral programs.

The Reserve Banks also provide application development and infrastructure support services to the Treasury's efforts to improve government cash and debt-management processes. The Treasury and government agencies reimburse the Reserve Banks for the cost of providing these services.

National Settlement Service

The Federal Reserve Banks provide the National Settlement Service (NSS), which allows participants in private-sector clearing arrangements to exchange and settle transactions on a multilateral basis through designated master accounts held at the Federal Reserve Banks. There are approximately 40 NSS arrangements that have been established by financial market utilities, check clearinghouse associations, and automated clearinghouse networks.

NSS provides an automated mechanism for submitting settlement files to the Federal Reserve Banks and reduces settlement risk to participants by granting settlement finality on settlement day. NSS also enables the clearing arrangements to manage and limit settlement risk by incorporating risk controls that are as robust as those used in the Fedwire Funds Service. Participants generally submit settlement files online, by initiating an electronic message.

The NSS business day begins at 8:30 a.m. and ends at 5:00 p.m. eastern time (ET), Monday through Friday, excluding designated holidays. Files submitted earlier than 8:30 a.m. ET are queued for processing beginning at 8:30 a.m. ET.