FedACH Initiatives
Getting on the right path with ACH Risk and IAT
Lance Wagner, AAP
Federal Reserve Bank
September 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 Risk
Suite of Services
8
®
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.
9
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.
10
®
FedACH Risk Management Services
Let’s look at each risk platform
11
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
12
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
13
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
14
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
15
FedACH Risk Returns Reporting
Risk Returns Reporting
View reports of returns by originator for a selected 10day processing date range within the previous
sixty business days, or for a specific processing
date.
16
®
FedACH Risk Management
Services
FedACH Risk®
Origination Monitoring
Service
17
FedACH Risk® Origination Monitoring
Service 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.
18
FedACH Risk® Origination Monitoring
Service 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.
19
FedACH Risk® Origination
Monitoring
Service 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-ofday default for any pended batches not
responded to by end-of-day
▫ Self-administer criteria selection and
changes
20
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
Risk Origination Monitoring
Sample Set-up
Screen
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.
22
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.
®
FedACH Risk Origination
Monitoring Service
How Does the Service Work?
Batches
ACH File
Originating
Depository
Financial Institution
ACH Operator
FedACH®
FedMail®
Log-in to FedLine®:
Release/Reject?
ACH Operator - Risk
Edits
Generate E-Mail
Notification
Credit Cap($): OK
Debit Cap ($): Breach
Affected
Batches:
Pended
24
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
25
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
®
FedACH Risk Origination Monitoring
Subscriber Roles
Subscriber Roles
Service Criteria
Maintenance
Set /
Edit
Set / Edit
Dual
Control
Set/Edit Criteria, Release Pended Batches
(Dual Control)
X
Set/Edit Criteria, View Only Pended Batches
(Dual Control)
X
Set/Edit Criteria, Release Pended Batches
X
Set/Edit Criteria, View Only Pended Batches
X
Release/Reje
ct Pended
Batches
View
Only
Release
/ Reject
View
Only
X
X
X
X
View Only Criteria, Release Pended Batches
X
View Only Criteria, View Only Pended
Batches
X
Note: It’s important to make sure your institution has a sufficient number of subscribers, based on the roles you select.
X
X
27
®
FedACH Risk Management Services
FedACH Risk® RDFI File
Alert
28
RDFI File Alert Service
Service 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.
29
RDFI File Alert Service
Service 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
30
®
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.
31
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
32
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
®
FedACH Risk RDFI File Alert Service
How Does the Service Work?
ACH Operator - Risk Edits
ACH File
ACH Operator
FedACH®
Credit Threshold ($): OK
Debit Threshold ($): Breach
Item/Addenda: OK
FedMail®
Generate E-Mail
Notification
Receiving Depository
Financial Institution
Log-in to FedLine®:
File Information
Sample File Alert set-up screen
RDFI File Alert
35
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!
IAT
37
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?
Myth
Only DFIs that are receiving PBRs and CBRs
today will be impacted
Fact
All DFIs may receive IAT after the September
implementation date even if they do not receive
CBRs and PBRs today
Fact or Myth?
Myth
Only ACH entries that were originated outside
the U.S. will be coded IAT
Fact
If 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?
Myth
The ACH Operators will automatically screen all
IAT entries for OFAC compliance
Fact
ACH Operators have no obligation to screen IAT
entries for OFAC compliance
Financial Institution
ACH Operator
Gateway Operator
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/fedachTestReques
t.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 Operator
FedACH® Services
Processes outbound credits

Processes outbound debits

Processes inbound credits

Processes inbound debits

Gateway Operator
FedACH International®
Services


[Canada only]

Performs OFAC screening

Places screening indicator in
appropriate field

Reports suspect transactions to
OFAC

Blocks or freezes transactions
Provides IAT tools for RDFIs

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
48
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
49
Going forward w/ IAT
• Financial institutions may schedule testing using
FedACH on-line scheduler:
http://www.frbservices.org/HomePage/app/fed
achTestRequest.jsp
50
Available Resources
• FedACH IAT Resource Center
www.frbservices.org/eventseducation/education/fedach_i
at_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, AAP
FRB KC
800-257-6701, Ext. 12498