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E lectronic F unds T ransfer 101 EFT Office of the State Controller August 2008 Two Types of EFT EFT is a generic term – Describing two different methods of transferring funds electronically

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e lectronic f unds t ransfer 101

Electronic Funds Transfer 101

EFT

Office of the State Controller

August 2008

two types of eft
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
wire transfer
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

wire transfer utilization
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
initiating wire transfers
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

slide6
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
ach utilization
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
ach players

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

primary differences
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

electronic checks
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.

regulator governance
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
ach terminology
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)
daylight overdraft
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
check 21
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
eft milestones
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
state s e commerce program
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
e commerce inbound programs
E-Commerce Inbound Programs

Utilizes Both Merchant Cards and EFT

more information
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