E lectronic F unds T ransfer 101

1. Electronic Funds Transfer 101 EFT Office of the State Controller August 2008

2. Two Types of EFT • EFT is a generic term – Describing two different methods of transferring funds electronically • Both performed through Federal Reserve Bank System(Except for “in-bank” or “on-us” transactions) • Common mistake to call an ACH payment a wire transfer • Each are handled by different departments at a bank

3. Wire Transfer • Movement of funds is real time – effected immediately • FRB open for fed wires up to 6:00 p.m. • Book Transfers are memo posted up until midnight • ZBA (Zero Balance Account) sweeps are book transfers • Fed Wire Affects banks’ Reserve Accounts maintained at the FRB • Sending bank’s account at the FRB gets debited • Receiving bank’s account at the FRB gets credited • Foreign exchange and Euro dollars through “Clearing House for Inter-bank Payments System” (CHIPS) – 54 New York Banks Between two banks Within same bank Foreign bank

4. Wire Transfer Utilization • When appropriate to use • Time sensitive - Funds need to be moved same day initiated • Large dollar amounts • Examples • Debt Service Payments (preserve State’s credit rating) • Funding ACH payments (e.g. payroll direct deposit) • Funding investments (e.g., at custodian bank) • Adjusting balances (between depository banks) • Remitting ESC payments (to US Treasury) • DOR accepts wire transfers from corporate taxpayers on an exception basis only

5. Initiating Wire Transfers • Banks provide corporate customers ability to initiate their own wires via online banking access • Templates are used • Repetitive Transfers – Pre-established ABA# and acct.# • Non-Repetitive - Open wire – to anywhere • State Treasurer initiates all wire transfers for agencies • Via Wachovia Connection and BOA Direct • As requested by agencies via Core Banking $ystem • Results in debit to agency’s disbursing / STIF acct. DST WC Disb. Acct. at DST Online Wire System DST’s Bank Payee’s Bank Agency Logs in

6. ACH ACH Network – A batch-process, store and forward for future settlement • Two types of ACH (Automated Clearing House) • Electronic Drafts • Initiated by sender or receiver • If by sender – Sender authorizes a third party to initiate transaction • If by receiver – Receiver initiates transaction • Also referred to as Direct Payments • Direct Deposits • Always initiated by sender • Sender’s account is debited and receiver’s account is credited • Receiver’s Acct • Bank account • Debit card account

7. ACH Utilization • When appropriate to use • Large number of payments in a single file (batch) • At leastone day is available between initiation and settlement • Any size dollar amounts • Examples • Outbound Payroll direct deposit to bank account (ACH credits) • Outbound Payroll direct deposit to debit card account (ACH credits) • Outbound Vendor payments (ACH credits) • Inbound Taxpayer payments (ACH credits or debits) • ACH Transactions can have Addendum Records • Remittance data attached • Can be interfaced with A/R system • DOR requires taxpayers to use TXP format

8. NACHA EastPay ACH Players Governing Org. Trade Group 3 2 OriginatingDepositoryFinancial Institution(ODFI) ACH Operator(FRB) ReceivingDepositoryFinancial Institution(RDFI) 4 1 Receiver(Company / Employee) Originator(Company / Employer) Authorization / Enrollment

9. Primary Differences • ACH • Item Cost < 1 penny • Next day funds • One day delay in settlement • Used for large batch files (e.g., payroll) Wire Transfers • Item Cost - $6.75 • Same day funds • Transfer almost instantaneous • Use for critical payment (e.g. debt service) State ChecksAverage Cost - Range $.74

10. Electronic Checks • Loosely used term – Refers to two different methods • Online Paper Check • Developed by “Financial Services Technology Consortium (FSTC) – Not-for-profit group of CA banks • Initiated using a PIN and digital signature • Receiver prints out paper check for deposit • ACH Conversions (most common method referred to) • Transactions converted to ACH debits (e.g., ARC, POP, WEB, TEL) • Services can be provided by third party processors • Account verification determined upfront. Guarantees available. • Examples of services provided through third-party CyberSource (POP) • Telecheck: • CheckFree: • AmeriNet: • Paymentech: Applies to consumer checks only, not business checks.

11. Regulator Governance • Regulation E, per Electronic Funds Transfer Act (EFTA) • Issued by Federal Reserve Bank • Covers ACH and debit cards (but not wires or credit cards) • Consumer protection oriented • Some protection afforded the consumer does not apply to corporate or government customers • NACHA Operating Rules • National Automatic Clearing House Association • Applies to ACH transactions only • Applicable to both consumer and corporate (including government) • Uniform Commercial Code (UCC) – Article 4A • Applies to Wire Transfers Only • Uniform Commercial Code (UCC) Articles 3 and 4 and Reg CC • Applies to negotiable instruments (checks) • Reg CC issued by Federal Reserve - Applies to checks – not EFT • Check 21 (Check image conversion) governed by Reg CC, not Reg E

12. ACH Terminology • Typical ACH Standard Entry Class Codes • PPD – Prearranged Payments and Deposits (Consumer payments) • CCD - Cash Concentration or Disbursements (Corporate payments) • CCD+ - Corporate payments with 180 character addenda record • TXP – Addendum format for Tax Payments (Used by DOR) • Check Conversion Standard Entry Class Codes • POP – Point-of-Purchase / Face-to-face (e.g., Wal-Mart) • ARC – Accounts Receivable Conversion – Non-face-to-face (e.g., Lockbox) • BOC – Back Office Conversion – Face-to-face, but later converted (Mar ‘07) Check Conversions not eligible for use with corporate or government checks and have an amount limit of $25,000 • Other Standard Entry Class Codes (Debit entries) • WEB – Internet-initiated entries against a consumer account • TEL – Telephone-initiated entries against a consumer account • RCK – Represented check (representment of a non-sufficient funds check)

13. Daylight Overdraft • Federal Reserve charges bank interest per minute for overdrafts in their Fed account • Banks do not allow wire transfers to be made from account if “available balance” is not sufficient • Over-the-counter deposits not posted until night • ACH credits are posted in mornings (6:30 and 8:30) • Could pose problems when need to wire funds out • Some banks will assign an allowable daylight overdraft limit • Based upon customer’s credit risk • Based upon bank overdraft cap at the FRB • State’s arrangements with banks are handled by DST

14. Check 21 • Federal legislation – Result of 9/11 when planes could not fly • Became effective October 2004 • Banks have option of presenting “substitute checks” instead of original check • Also referred to as “Image Replacement Documents” (IRDs) • Originals paper checks are to be destroyed • Substitute document is legally same as original • Check 21 is different than “Check Conversion” (POP/BOC/ARC) • POP, BOC & ARC - Check converted to ACH transaction • Therefore POP, BOC & ARC subject to NACHA Rules – not UCC • POP, BOC & ARC only applicable to “consumer” checks • Check 21 applicable to both “consumer” & “commercial” • Check 21 has no amount limit – Check Conversion limit is $25,000

15. EFT Milestones • 1972 – SCOPE (Special Committee on Paperless Entries) • 1974 – NACHA (National Automated Clearing House Association) • 1977 – Retirement System began using Direct Deposit for retirees • 1979 – Central Payroll began using Direct Deposit for employees • 1980s – University Payroll Centers began using Direct Deposit - employees • 1984 – GMTS (Governmental Moneys Transfer System) implemented by DST for paying local units of government (Replaced by STEPS) • 1988 – DOT Payroll began using Direct Deposit for employees • 1992 – STEPS (State Treasurer’s Electronic Payments System) implemented for local units (two-way street). (Ended 2003, except Retirement) • 1994 – DOR implemented EFT for corporate tax collections • 1990s – LEAs and community colleges implemented direct deposit for employees (costs being paid for by DST) • 1999 – SB 222 enacted, giving OSC responsibility for EFT • 2002 – Common Payment System implemented (DMV-IRP first) • 2005 – OSC initiated expansion of Electronic Commerce Program

16. State’s E-Commerce Program • State’s Cash Management Legislation (G.S. 147-86.11) requires State Controller to develop policies regarding cash management practices, including E-Commerce. • Two Master Services Agreements (MSAs) procured • MSA for Electronic Funds Transfer Services – Wachovia Bank • MSA for Merchant Card Services – SunTrust Merchant Services • Agencies and local units of governments eligible participants • Each participant must execute an Agency Participation Agreement (APA) • Paying for Services – In accordance with MSA fee schedule • Agency pays in most cases • EFT for payroll and NCAS payments – DST pays

17. E-Commerce Inbound Programs Utilizes Both Merchant Cards and EFT

18. E-Commerce Outbound Programs Utilizes EFT Only

19. More Information Office of the State Controller Web Site www.ncosc.net David C. Reavis E-Commerce Manager (919) 871-6483 Amber Young Central Compliance Manager (919) 981-5481 Support Services Center (919) 875-HELP (4357) August 2008 Robert Powell State Controller