FedACH InitiativesGetting on the right path with ACH Risk and IAT

Lance Wagner, AAPFederal Reserve BankSeptember 10, 2009

Nebraska Treasury Management Conference

Agenda

•Quick glance at payments

•FedACH strategies for risk management

•What’s this “IAT” thing all about?

Are you kidding me...

ACH Payments

•Let’s not forget – the ACH network is a safe, reliable, high-quality payments system.

•Changes in the payments system – more transactions moving to ACH▫How these transactions are handled -

transactions initiated via media such as the Internet and telephone

▫Payments moving to the back office▫Cross boarder payments

FedACH RiskSuite of Services

FedACH Risk® Management Services

• FedACH Risk® Returns Reporting Service▫ Provides the ODFI with a necessary tool for detecting

and addressing poor origination practices or possible originator fraud.

• FedACH Risk® Origination Monitoring Service▫ Allows an ODFI to limit ACH origination exposure

(credit and debit) for a routing number or Company ID.

• FedACH® RDFI File Alert▫ Gives an RDFI the opportunity to monitor incoming

FedACH® files for “out of the ordinary” ACH file values and sizes that could impact ACH settlement or indicate possible fraud attempts.

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Common Features & Benefits• Services are accessible through your existing electronic

FedLine® Customer Access Service.

• Turnkey, user friendly solutions.

• E-mail alerts notify your institution when your monitoring thresholds are exceeded.

• Helps strengthen and support your institution’s overall risk strategy.

• Can replace potentially error-prone and time-consuming manual monitoring practices.

• Reporting features help address audit and compliance concerns.

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FedACH Risk® Management Services

Let’s look at each risk platform

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Risk Returns Reporting

Effective January 1, 2008, NACHA changed the requirement on reporting unauthorized returns▫Now 1% (down from 2.5%)▫For any originating ID with 1% or more of

unauthorized returns during a 60 day window, you must report this activity to NACHA

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FedACH Risk Returns Reporting Service

Enables ODFIs to produce reports of returns by originator for a single day or up to a 10-day processing date range ▫ Within the previous 60 business days

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Service Benefits

•Establish thresholds at which an originator’s return volume will appear on a report

•Set reporting threshold as low as one return for unauthorized returns and administrative returns▫R05, R07, R10, R29, R51▫R03 and R04

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Accessibility and fees

•FedACH Risk Returns reporting service is available to any ODFI with an electronic connection to the Fed (FedLine Web) and access to the FedACH Information Services application

•Free service▫No monthly maintenance fees▫No monthly service fee

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Risk Returns ReportingView reports of returns by originator for a

selected 10-day processing date range within the previous sixty business days, or for a specific processing date.

FedACH Risk Returns Reporting

FedACH Risk® Management Services

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FedACH Risk® Origination Monitoring Service

FedACH Risk® Origination MonitoringService Features and Benefits

• Mitigate financial institution’s ACH origination risk for forward item batches through independent monitoring by FedACH.

• Control ACH payments originated by FI’s customers regardless of the network entry point or their ACH software.

• Tailor and self-administer the monitoring criteria to reflect their own risk management strategies and originator profiles.

• Cumulative credit/debit value caps provide flexibility and limit exposure to origination across one or more processing days.

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FedACH Risk® Origination MonitoringService Features and Benefits

• End-of-day default instructions provide automated processing when no decision to release or reject pended batches is made.

• Augments existing systems that control origination only at the originator's point of creation.▫ Supplements monitoring for strategic customer

relationships▫ Provides confidential monitoring when caps have

not been communicated

• Enables consistent, comprehensive, and centralized monitoring for both internal and external origination.

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FedACH Risk® Origination MonitoringService Features and Benefits

▫Establish contacts who will receive email notification when a batch is pended due to breach of criteria or an undefined Company ID

▫Assign specific access to individuals at their institution to release or reject pended batches

▫Establish Release or Reject action as end-of-day default for any pended batches not responded to by end-of-day

▫Self-administer criteria selection and changes

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FedACH Risk® Origination Monitoring Methods for Managing Originators

• Routing Number Only▫Manage all batches by the ODFI’s routing

number• Company ID Inclusive

▫Manage batches by the Company IDs defined by the ODFI and pend all batches from an undefined Company ID

• Company ID Select▫Manage batches by the Company IDs

defined by the ODFI and process all batches from other Company IDs

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Enter cap information.

Select a cap time frame.

Select an end of day default.

An End-of-Day Default of “Release” will cause batches in a pend status to be released at the end of the process day.

An End-of-Day Default of “Reject” will cause batches in a pend status to be rejected at the end of the process day.

Risk Origination MonitoringSample Set-up Screen

Reporting Capabilities with Risk Origination Monitoring Service

• Criteria Summary Report▫ Provides a list of current day and next day management criteria

• Historical Reporting▫ Origination Monitoring Event History

View historical reports of pended batches and the resulting release/reject decision.

• Management Criteria Event History View changes to management criteria, including the user name

of the person making the change.

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FedACH Risk® Origination

Monitoring Service

ACH Operator

FedACH®

Originating Depository

Financial Institution

Affected Batches: Pended

ACH FileACH File

Credit Cap($): OKDebit Cap ($): Breach

BatchesBatches

ACH Operator - Risk Edits

Generate E-Mail Notification

FedMail®

Log-in to FedLine®:Release/Reject?

How Does the Service Work?

Customer feedback on service

•Manual monitoring for risk was one hour, but using service to monitor risk takes 5 – 10 minutes

•One consolidated point for managing origination limits even when we use a third party processor

•Strengthens overall policy on risk by mitigating operational, credit and fraud risk

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Service availability and fees• Service is available to all ODFIs with an

electronic connection to the Fed. • Monitoring ACH origination by Routing

Transit Number only, or monitoring one Company ID, is included in monthly FedLine® access solution fee!

• 2009 Fees▫Tiered pricing structure

One management criteria for free Sets 2-20 criteria - $8.00/month Sets 21-150 criteria - $4.00/month Sets 151 and above - $1.00/month

▫Batch (per monitored batch) - $0.0025/batch

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Subscriber Roles Service Criteria Maintenance

Release/Reject

Pended Batches

Set / Edit

Set / Edit Dual

Control

View Only

Release/ Reject

View Only

Set/Edit Criteria, Release Pended Batches (Dual Control) X X

Set/Edit Criteria, View Only Pended Batches (Dual Control) X X

Set/Edit Criteria, Release Pended Batches X X

Set/Edit Criteria, View Only Pended Batches X X

View Only Criteria, Release Pended Batches X X

View Only Criteria, View Only Pended Batches X X

Note: It’s important to make sure your institution has a sufficient number of subscribers, based on the roles you select.

FedACH Risk® Origination Monitoring

Subscriber Roles

FedACH Risk® Management Services

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FedACH Risk® RDFI File Alert

RDFI File Alert ServiceService Benefits

Monitors incoming ACH files

▫Provides notice of unusual conditions within a RDFI’s incoming FedACH files.

▫Help alert the RDFI to potential fraud attempts and/or significant origination errors.

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RDFI File Alert ServiceService Benefits

•Proactively manage your potential risks as a RDFI

•Assist in alerting your institution to potential fraud attempts and/or significant originated errors

•Strengthen your institution’s overall risk management strategy

•Reporting features help address audit and compliance concerns

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FedACH Risk® RDFI File Alert Service

How Does the Service Help Financial Institutions?

• FedACH® compares debit and/or credit values and/or file size of each outbound file against thresholds defined by the FI. E-mail notification alerts are sent at time of file distribution if the thresholds set have been exceeded.

• Expedites notice to FI when circumstances within ACH may impact their settlement account thereby helping them avoid daylight overdrafts.

• Helps FI protect themselves and their customers from the consequences of originated operational errors or fraud.

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RDFI File Alert – how it works

•Monitors individual FedACH output files – one at a time

•Does not interfere with or delay payments processing

•RDFI selects file thresholds based on debit, credit dollar amounts and/or transaction count▫Item and addenda

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RDFI File Alert – how it works...

•Compares debit and/or credit values and/or file size of each outbound file against the thresholds RDFI has defined

•Designated points of contact receive e-mail alerts at the time of FedACH file distribution on any file exceeding the pre-set thresholds▫Up to five contacts can be designated

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FedACH Risk® RDFI File Alert Service

How Does the Service Work?

ACH Operator

FedACH®

Receiving Depository Financial InstitutionCredit Threshold ($): OK

Debit Threshold ($): BreachItem/Addenda: OK

ACH FileACH File

ACH Operator - Risk Edits

Generate E-Mail Notification

FedMail®

Log-in to FedLine®:File Information

RDFI File AlertSample File Alert set-up screen

Access and Service fees

•Service is available to all RDFIs with an electronic connection to the Fed, AND access to the FedACH Information Services application.

•No monthly service charge! •No monthly maintenance fee!

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IAT

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Application of IAT format

• IAT implementation – September 18, 2009▫Forward CBR/ PBR transactions discontinued▫New SEC code for international ACH

transactions will be IAT for both consumer and corporate transactions

▫CBR/ PBR returns permitted until December 31, 2009

• Completely new format▫Use of multiple addenda records

Common Misconceptions

Fact or Myth?

MythOnly DFIs that are receiving PBRs and CBRs today will be impacted

FactAll DFIs may receive IAT after the September implementation date even if they do not receive CBRs and PBRs today

Fact or Myth?

MythOnly ACH entries that were originated outside the U.S. will be coded IAT

FactIf an entry is funded by a foreign financial agency it must be coded as IAT even if it is originated within the U.S.

Fact or Myth?

MythThe ACH Operators will automatically screen all IAT entries for OFAC compliance

FactACH Operators have no obligation to screen IAT entries for OFAC compliance

Financial InstitutionACH OperatorGateway Operator

High-Level Differences

High-Level Differences• Financial Institution

▫Originates outbound and receives inbound IATs for customers

• ACH Operator▫Processes all IAT entries from US financial institutions

and US gateway operators▫Manages risk according to NACHA Rules

• Gateway Operator▫Acts as entry point to or exit point from the US▫Makes business decisions regarding cross-border

services such as country reach, currencies and products offered

▫Can be any financial institution or ACH operator

Federal Reserve Banks• ACH OPERATOR• FedACH Services

▫ Processes inbound and outbound debits and credits in domestic payments stream

▫ IAT Testing for all FIs available Schedule testing using FedACH on-line scheduler:

http://www.frbservices.org/HomePage/app/fedachTestRequest.jsp

Sample IAT file templates available Customized test files are available upon request

▫ Does not conduct OFAC screening on inbound IATs coming from other gateway operators (that are ODFIs)

▫ Provides tools to assist RDFIs in identifying IAT transactions

Federal Reserve Banks – Gateway Operator

• FedGlobal® Services▫ Allows outbound IAT credits for all international service countries

Outbound debits are allowed to Canada only▫ Allows inbound IAT credits from international service countries

Inbound debits are not permitted▫ Conducts OFAC screening on FedACH International inbound IAT

items Populate Field 10 in Entry Detail Record “Gateway Operator OFAC

Screening Indicator” with either a “1” to indicate a possible hit or a “0” to indicate there was no hit

Required to send a daily report of possible matches (“1”) of OFAC Does not block, freeze, pend, or reject any IAT items, regardless of

OFAC screening results▫ ODFIs need to enroll in FedGlobal Services to participate

Federal Reserve Banks – A Dual Role

ACH OPERATOR vs. GATEWAY OPERATOR

ACH OperatorFedACH® Services

Gateway OperatorFedACH International®

Services

Processes outbound credits ü ü

Processes outbound debits ü ü[Canada only]

Processes inbound credits ü ü

Processes inbound debits ü

Performs OFAC screening ü

Places screening indicator in appropriate field ü

Reports suspect transactions to OFAC ü

Blocks or freezes transactions

Provides IAT tools for RDFIs ü

Remember…ACH operator – Processes entries and manages risk according to NACHA Rules

Gateway operator – Makes business decisions regarding international services such as countries, currencies and products offered

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IAT Tools for RDFIs

• IAT Output File Sort Optional service to receive IAT items separately

from domestic items Same delivery timeframes as domestic files Eliminates need to interrogate entire output file,

allowing for processing efficiencies

• IAT Report in FedEDI Plus End of day report of IAT items Generated on a fixed schedule or request reports

"on demand" Available at RDFI and corporate customer level

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Going forward w/ IAT

•Financial institutions may schedule testing using FedACH on-line scheduler: http://www.frbservices.org/HomePage/app/fedachTestRequest.jsp

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Available Resources•FedACH IAT Resource Center

www.frbservices.org/eventseducation/education/fedach_iat_resource_center.html

•NACHA▫ IAT Industry Information -

www.nacha.org/IAT_Industry_Information/ ▫ IAT scenarios document -

http://gpf.nacha.org/docs/IAT_Scenarios_-_Domestic_or_International.pdf

▫ 2009 Rules Changes and New Formats for International ACH Transaction (IAT) Entries sections in 2009 ACH Rules Book

Questions

Thanks for your participation!

Lance Wagner, AAPFRB KC800-257-6701, Ext.

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