Same Day ACH: Getting Ready to Move Payments Faster Louisiana Bankers Association October 20, 2015 Baton Rouge, LA

SWACHA, as a Direct Member of NACHA, is a specially recognized and licensed provider of ACH education, publications and support. DISCLAIMER: This presentation and applicable materials are intended for general education purposes, and nothing in this presentation should be considered to be legal, accounting, or tax advice Contact your own attorney, accountant, or tax professional with any specific questions you might have related to this presentation that are of a legal, accounting, or tax nature All Rights Reserved Copyright 2015 SWACHA The Electronic Payments Resource

Key Messages Same Day ACH enables a ubiquitous same day capability for virtually any ACH transaction, creating options for the businesses, governments and consumers who want to move their money faster. Same Day ACH will build upon existing, next day ACH Network capabilities and establish a new option for same day clearing and settlement via ACH.

What is Same Day ACH? The ACH Operators will offer two new same day processing windows 1 Morning window: Submission deadline of 10:30 AM ET, with settlement occurring at 1:00 PM ET Afternoon window: Submission deadline of 3:00 PM ET, with settlement occurring at 5:00 PM ET ODFIs will be able to submit files of Same Day ACH payments through the two new clearing windows that can reach all RDFIs in the ACH Network All RDFIs will be mandated to receive Same Day ACH payments Gives ODFIs and Originators the certainty of being able to send Same Day ACH payments RDFIs will make funds available from Same Day ACH credits by 5:00 PM local time as of Phase 3 1 All times are Eastern Time unless noted. These times are estimates; exact schedules and timing would be determined by each ACH Operator. The ACH Operator schedules are not determined by the NACHA Operating Rules, and the inclusion of ACH Operator schedules and other functions should not be interpreted as an endorsement by either ACH Operator.

Same Day ACH Moving Payments Faster USE CASES

The Major Use Cases for Same Day ACH Are Projected to Generate 1.4 Billion Transactions 10 C2B Bill Pay ecommerce POS check conversion Merchant debit Collections C2C Person-to-Person Account-to- Account 100% 90% 80% 70% 62% 60% Over 60% of estimated Same Day ACH volume comes from existing ACH SDA Transactions in 2027, by Source of Transaction 4% 10% 1% 15% 7% 1% 50% B2B Multiple uses, such as trading partner payments, duedate and late invoice payments B2C Payroll Insurance, refunds 40% 30% 20% 10% 0% Existing ACH On-line Banking & Bill Pay Cash Check Wire Card Other Total 2015 NACHA The Electronic Payments Association. All rights reserved. No part of this material may be used without the prior written permission of NACHA. This material is not intended to provide any warranties or legal advice and is intended for educational purposes only.

Major Same Day ACH Use Cases Same day payrolls, supporting business needs to pay hourly workers, and providing flexibility for late and emergency payrolls and missed deadlines; and enabling employees to have faster access to their pay in these cases; Business to Business payments, enabling faster settlement of invoice payments between trading partners, and including remittance information with the payments; Expedited bill payments using both ACH credits and debits, enabling consumers to make on time bill payments on due dates, and providing faster crediting for late payments; and, Account to account transfers, providing faster crediting for consumers who move money among various accounts they own.

What is the Amount of the Same Day Entry Fee? Based on the estimated costs and Same Day ACH volume quantified in the research, the resulting Same Day Entry fee will be 5.2 cents per same-day ACH transaction. 0.06 Bank Fee Components Per Transaction $ Total RDFI cost summary 0.039 0.052 One time investment costs of $118 MM Operating costs grow from $6MM in 2016 to $49MM in 2027 annually SDA 2027 volume projection of 1.4B 0.04 0.02 0.013 0.00 Investment Cost Operating Cost Bank Fee

Can the Fee Amount Be Changed in the Future? 16 The rule includes a methodology to measure at defined intervals the effectiveness of the fee in balancing the interests of the origination and receipt of same day transactions After five years of full implementation, the actual volume of same-day ACH transactions would be compared to the projected volume If the actual volume exceeds the projected volume by more than 25 percent, then the amount of the interbank fee would be reduced to a level that results in RDFIs cost recovery over the same 11.5-year recovery period as initially projected. The interbank fee could not be increased based on this review Another review with the same parameters would be conducted after eight years of full implementation After ten years of full implementation, a new economic analysis of costs and volume would be conducted to determine the amount of an interbank fee that would become effective after the end of the original cost recovery period 2015 NACHA The Electronic Payments Association. All rights reserved. No part of this material may be used without the prior written permission of NACHA. This material is not intended to provide any warranties or legal advice and is intended for educational purposes only.

Same Day ACH Moving Payments Faster OPERATIONS

How Does the Same Day ACH Schedule Compare to Existing ACH? This chart shows the current ACH schedule along with the Same Day ACH schedule, creating a total of three daily settlements, as well as other important timing milestones of an ACH processing day 3:00 AM 4:00 AM 5:00 AM 6:00 AM 7:00 AM 8:00 AM 9:00 AM 10:00 AM 11:00 AM 12:00 noon 1:00 PM 2:00 PM 3:00 PM Next Day ACH 3:00 AM - ACH Opens 6:30 PM - Fedwire closes 2:15 AM - ODFI Deadline for 6:00 AM - RDFI receipt files of Next-Day ACH Next-Day Transactions 8:30 AM - Settlement 1 4:00 PM 5:00 PM 6:00 PM 7:00 PM 8:00 PM 9:00 PM 10:00 PM 11:00 PM 12:00 midnight 1:00 AM 2:00 AM Same Day ACH All times Eastern Time RDFI File Receipts Times Are Approximate 2 10:30 AM - ODFI Deadline for Same Day Window 11:30 AM - RDFI Receipt Files for Same Day Window 1:00 PM - Settlement for Same-Day Transactions 3:00 PM - ODFI Deadline for Same Day Window 4:00 PM - RDFI Receipt Files for Same Day Window 3 5:00 PM - Settlement for Same-Day Transactions

What Transactions Are Eligible for Same Day ACH? Virtually all ACH transactions, including credits and debits, will be eligible for same day processing. Same day ACH credits would support use cases such as payroll, business to business, bill payment, and person toperson payments. Same day ACH debits would support use cases such as bill payment, account to account transfers, check conversion, business to business, and e commerce payments. Most non monetary transactions prenotifications, notifications of changes, zero dollar remittance information transactions, etc. will also be eligible for same day processing.

What Transactions Are Eligible for Same Day ACH? The only ACH transactions that will be ineligible for same day processing will be international transactions (IATs) and large dollar transactions (over $25,000). The $25,000 transaction limit applies to individual transactions; i.e., a single same day ACH transaction could not be for more than $25,000. There would be no limit on the aggregate value of a batch of same day transactions.

A Phased Approach to Same Day ACH To ease the industry s implementation effort, the new ACH Network functionality would be implemented across three implementation phases Functionality Phase 1 Sept. 23, 2016 Phase 2 Sept. 15, 2017 Phase 3 March 16, 2018 Transaction Eligibility ($25,000 limit; IAT not eligible) Credits only Credits and debits Credits and debits New Same Day ACH Processing Deadlines 10:30 AM ET and 3:00 PM ET 10:30 AM ET and 3:00 PM ET 10:30 AM ET and 3:00 PM ET New Settlement Time(s) 1:00 PM ET and 5:00 PM ET 1:00 PM ET and 5:00 PM ET 1:00 PM ET and 5:00 PM ET ACH Credit Funds Availability End of RDFI s processing day End of RDFI s processing day 5:00 PM RDFI local time

Effective Dates Are Contingent on the Federal Reserve The effective dates of the three implementation phases WAS contingent on receiving written confirmation from the Federal Reserve at the conclusion of its public comment process to support the rule public comment period: May 27, 2015 through July 2, 2015 If written confirmation was received by: September 23, 2015: the Rule would become effective as approved Between September 24, 2015 and November 13, 2015: the three effective dates of the Rule would become effective 6 months later than the dates approved Between November 14, 2015 and May 18, 2016: the three effective dates of the Rule would become effective 12 months later than the dates approved If written confirmation was not received by May 18, 2016, the Rule would not go into effect

Effective Dates Are Contingent on the Federal Reserve Federal Reserve Approval Date Phase I Date Phase 2 Date Phase 3 Date By September 23, 2015 By November 13, 2015 September 23, 2016 September 15, 2017 March 16, 2018 March 22, 2017 March 14, 2018 September 12, 2018 By May 18, 2016 September 22, 2017 September 14, 2018 March 15, 2019

Identification of Same Day ACH Transactions Same Day ACH transactions would be identified by the ODFI and its Originator by using the current day s date in the Effective Entry Date field of the batch of ACH transactions NACHA Rules already provide that the Effective Entry Date is the date specified by the Originator on which it intends a batch of Entries to be settled. Additionally, Same Day ACH transactions would need to meet an ACH Operator s submission deadline for same day processing Example: transactions originated on Tuesday, October 25, 2016 with an Effective Entry Date of 161025 would need to be submitted to an ACH Operator no later than the 3:00 p.m. ET deadline for same day settlement NOTE: ACH transactions with invalid or stale Effective Entry Dates would be settled by the ACH Operator at the earliest opportunity could be same day

Identification of Same Day ACH Transactions In addition to using the Effective Entry Date, an ODFI may want to verify an Originator s intent for same day settlement NACHA recommends that the ODFI use, at their discretion, standardized content in the Company Descriptive Date field Optional field with 6 positions available. Currently, the Rules provide that the Originator establishes this field as the date it would like to see displayed to the Receiver for descriptive purposes. ODFI could use the convention SDHHMM SD denotes the intent for same day settlement HHMM correspond to the desired settlement timing of either 1:00 PM ET or 5:00 PM ET Valid content would be either SD1300 or SD1700

Identification of Same Day ACH Transactions Identifying Same Day transactions Effective Entry Date field Timely submission in processing window For example: A batch of Entries is submitted on Tuesday, October 25 before 10:30 am ET with an Effective Entry Date of Tuesday, October 25 (with content 161025 in the Effective Entry Date field) Under the Same Day ACH rule, this is valid information in the Effective Entry Date field, and the batch will settle on Tuesday, October 25 at 1:00 pm ET, which is the settlement time that corresponds to the file submission time These are Same Day Entries, and the Same Day Entry fee applies

Identification of Same Day ACH Transactions Processing stale/invalid Effective Entry Dates Stale or invalid Effective Entry Dates settled earliest available settlement opportunity For example: A batch of Entries is submitted on Tuesday, October 25 before 10:30 am ET with an Effective Entry Date of Monday, October 24 (with content 161024 in the Effective Entry Date field) Unfortunately this is a late payroll file that was not submitted timely. The Effective Entry Date is stale (in the past), therefore the batch will be settled at the next available settlement opportunity, which is at 1:00 pm on Tuesday, October 25 This late file is settled 19.5 hours sooner than with next day settlement These are Same Day Entries, and the Same Day Entry fee applies

ACH Date Fields Field name Format Location Purpose File Creation Date YYMMDD File Header record Indicates date file created by ODFI to Operator, Operator to Operator, or Operator to RDFI Company Descriptive Date Optional alphameric Batch Header record Effective Entry Date YYMMDD Batch Header record Settlement Date 3 digit Julian numeric Batch Header record Originator inputs this date that it would like Receiver to see for description, never used to control timing For Same Day ACH Originator may indicate intent to ODFI by populating with either SD1300 or SD1700. Date specified by Originator as date it would like entries to settle For Same Day ACH date must be either current day, stale or invalid Inserted by Receiving Operator as date DFI will be debited/credited by the Federal Reserve. Stale date: a date that is in the past Invalid date: blank, zero, partially blank, partially non numeric, incomplete, day number higher than 31, month number higher than 12

Eligibility of Non Monetary ACH Transactions for Same Day Processing These non monetary transactions include: Prenotifications Notifications of Change (NOCs) Remittance information (using CCDs and CTXs) Death Notifications (DNEs) Notifications of Change processed on the same day would not be subject to the interbank fee

Return Processing For ACH transactions that need to be returned, faster processing of the return is typically a win win for all parties ODFIs and Originators learn about problems sooner RDFIs get exceptions processed and settled faster Rule will allow for the same day processing of returns, regardless of whether the forward transaction is a sameday transaction or not Returns that are settled on a same day basis are not subject to the Same Day Entry fee, and are not subject to the eligibility limit on forward transactions (i.e., $25,000 per transaction; IAT)

Same Day ACH Moving Payments Faster IMPACTS FOR PARTICIPANTS & IMPLEMENTATION CHECKLISTS

ODFI Impacts Offering Same Day ACH products and services is optional for ODFIs. For those ODFIs that choose to offer Same Day products and services, the following relationships and areas may be impacted: ACH Operator Originators and Third Party Senders Vendors and processors Internal operations Current schedules and offerings will continue without change. Same Day offers schedules in addition to the current offerings.

ODFI Implementation Checklist Offering Same Day ACH products and services is optional for ODFIs. For those ODFIs that choose to offer Same Day products and services, the following should be considered: Educate decision makers in these areas on Same Day ACH (SDA): Senior management/executive Product, sales, compliance across all three implementation phases Operations Develop a strategy on how your FI will use SDA. Strategic considerations should include: Evaluation of risks from an enterprise wide perspective (across all departments) Use cases that may be offered or pursued Classify eligible ACH customers for the service, including if corporate and consumer accountholders will have access to Same Day services Identify downstream ACH origination and file transmission applications and systems that may be impacted by Same Day Entries Assess budget impacts and potential fee schedule impacts

ODFI Implementation Checklist Review current ODFI operational procedures and identify changes needed with regards to the following: Processing cut off times Use of Effective Entry Date by Originators (know how customers/members are currently using this field to determine if an optional identifier should be utilized) Credit risk management processes such as prefunding Fee schedules and pricing Reversal processing Talk to ACH Operator, ACH processors and vendors, and Third Party Service Providers to understand their solutions and implementation timeframes (include bill pay services, transfers and any other non traditional ACH Origination channels): Create action plan for implementation across phases (Phase 1: credits only, Phase 2: add debits, Phase 3: expedited availability) including system testing Update risk assessment

ODFI Implementation Checklist Review documents for potential revisions to: Internal policies and procedures as needed, including a step to test all changes Origination Agreement Processing windows cut off timeframes Hours of operation Identification of Same Day ACH transactions and proper use of Effective Entry Date (particular if pricing is affected by this) Fees Educate Originators and Third Party Senders on the following topics: Operational impacts to Originators and Third Party Senders and their software providers Eligibility requirements for Same Day ACH Opportunities available RPA assistance for ODFI to offer Same Day ACH training to Originators and Third Senders

RDFI Impacts Receipt of Same Day Entries is not optional for RDFIs. For RDFIs the following relationships and areas may be impacted: ACH Operator Vendors and processors Internal operations Current schedules and offerings will continue without change. Same Day offers schedules in addition to the current offerings.

RDFI Implementation Checklist Receipt of Same Day Entries is not optional for RDFIs, but does provide new opportunities with faster returns and exception processing. RDFIs should consider the following: Educate decision makers in these areas on Same Day ACH (SDA): Senior management/executive Product, sales, compliance across all three implementation phases Operations BSA and Fraud Monitoring Review current operational procedures and identify changes needed with regards to the following: Schedule of when posting occurs Receipt times and staff hours for Operations Exceptions processing Amount of time and personnel different receipt processes take Example: 5 minutes to collect file from Operator 10 minutes to download & post to accounts 5 minutes to process exception items, suspicious credit activity What the institution s definition of end of day is Customer Deposit cut off deadline Settlement deadline for end of day

RDFI Implementation Checklist Talk to ACH Operator, ACH processors and vendors, and Third Party Service Provider to understand their solutions, system testing and implementation timelines: Create action plan for implementation: what to do and when across all three phases, including the requirement in phase 3 to hard post by 5:00pm local time. Review impacts and test downstream applications and systems. Review documents for potential revisions to policies and procedures, which may include, but are not limited to: File receipt Processing of returns, including NSF decisions Exception processing Funds Availability Handling of suspicious credit Entries (large dollar review) Prenotifications (Prenotes) Notifications of Change (NOCs) Test all updated procedures or system changes to verify systems perform as anticipated Update risk assessment and as necessary, obtain Board of Director approval if necessary for any service changes

RDFI Implementation Checklist Educate staff on SDA: Management on operational and customer service issues Call Center/ Front Line to respond to account holder questions BSA / Compliance / Fraud Monitoring on credit Suspicious Activity Review / Reg CC / Funds Availability Educate consumers/account holders, Corporate Receivers and impacted products

Impacts to Other Participants Originators/Third Parties Review use cases for potential opportunities Talk to your FI to determine if Same Day is appropriate and cost effective discuss file requirements, new file submission and exception resolution cut off times Review usage of Effective Entry Date

Same Day ACH Moving Payments Faster RISK MANAGEMENT FOR PARTICIPANTS

Originating Same Day ACH Risk Considerations Overall strategy for offering Same Day ACH Offer to all or select consumer and/or corporate customers? Consideration of customer profile (i.e., business model) when offering Same Day ACH Current credit limits Exposure Authentication methods Amendments /updates to agreements to address: Identification of Same Day ACH files Delivery methods for Same Day ACH files Policies and procedures for Same Day ACH files Process to determine compliance with same day eligibility rules ODFI may need to review files

Originating Same Day ACH Risk Considerations Review policies for pre funding Phase 1 debits not available for Same Day $25,000 per Entry limit, off set may not be eligible for Same Day. Ensure Originators clearly communicate use of same day debit with Receivers Receiver needs to understand when account will be debited Splitting $25,000+ items into two or more Entries ACH Rules Enforcement Panel will have final say when it appears that an ODFI, Originator or Third Party Sender is attempting to evade limit ODFI should monitor for this and educate Originators against doing

Originating Same Day ACH Risk Considerations Returns and NOCs may be more quickly received ODFI should be prepared to provide information to Originator Erroneous Entries may be more quickly remedied Debits (incl. reversals of erroneous credits) will not be available until phase 2 A debit in a Reversing File must not contain an Effective Entry Date that is earlier than the Effective Entry Date of the credit to which it relates Processor readiness for all implementation phases Availability of updated software from vendors for implementation Updated software may affect other pieces of the processing downstream. Software available early enough for testing

Receiving Same Day ACH Risk Considerations Overall strategy for accommodating Same Day ACH Review policies and procedures related to returns and NOCs Returns and NOCs will have more available windows for transmission RDFI not required to send returns faster but, risk is reduced when entries are returned sooner Be aware Erroneous Entries may be remedied more quickly Debits (incl. reversals of erroneous credits) will not be available until phase 2 A debit in a Reversing File must not contain an Effective Entry Date that is earlier than the Effective Entry Date of the credit to which it relates

Receiving Same Day ACH Risk Considerations Funds availability requirements change with Same Day ACH RDFI needs to have resources to ensure funds are available at required time Phase 1 & 2: Funds must be available at end of RDFI s processing day Phase 3: Funds must be available by 5:00 pm local time for RDFI Educate corporate Receivers on applying consumer bill payments to customer s account, as required Ensure remittance information is provided to corporate Receivers in compliance with timing requirements Talk to vendors and processors about timeline for changes to provide sufficient time for testing of downstream processes

Resources NACHA Same Day ACH page: https://www.nacha.org/content/same day ach

Questions?

Contact Information Susan Tiller, AAP Training Specialist susan.tiller@swacha.org (214) 438 4517 (800) 475 0585 www.swacha.org

SWACHA The Electronic Payments Resource The Payments Answerline 800 475 0585 General Information: info@swacha.org Audit & Risk: info@swachaservices.com