Payments 101 Terms and Acronyms

1. Payments 101 Terms and Acronyms October 17, 2007

2. Agenda • Payment Organizations and Associations • Payment Regulations • Payment Tenders, Terms and Acronyms • Miscellaneous Payment Information

3. Payment Organizations & Associations • NACHA • Federal Reserve

4. NACHA NACHA-The Electronic Payments Association (formerly known as the National Automated Clearing House ) • Not-for-profit association • Represents more than 11,000 financial institutions through direct memberships • Network of regional payments associations, and 650 organizations through its industry councils. • Develops operating rules and business practices for: • Automated Clearing House (ACH) Network • Electronic payments in the areas of Internet commerce, electronic bill and invoice presentment and payment (EBPP, EIPP), e-checks, financial electronic data interchange (EDI), international payments, and electronic benefits services (EBS)

5. Federal Reserve • The Federal Reserve System is the central banking system of the United States • Was created in 1913 • Is a private banking system composed of • The Board of Governors (responsible for monetary policy) in of the Federal Reserve System, appointed by the President • The Federal Open Market Committee • 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury • Each with its own nine-member board of directors; • Including numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks • Various advisory councils.

6. Payment Regulations • Regulation E

7. Regulation E • Regulation issued by the Board of Governors of the Federal Reserve System • Authorized under the Electronic Fund Transfer Act governing electronic fund transfers from a consumer’s account • It does not apply to check drafts, credit cards, Federal wire transfers, interbank transfers or non consumer accounts • It applies to ACH, ATM and debit card transactions to or from a consumer account • Is a consumer protection statute that assures consumer rights are protected with regard to electronic transfers by making sure that transfers are: • authorized, clearly disclosed to consumers and that consumers are granted specifically defined rights with regards to error resolution and to challenging transactions they claim they did not authorize • Sets limits on consumer liability for unauthorized transactions.

8. Regulation E Cont’d… Imposes specific obligations for recurring payments • Transfer must be authorized by a “writing” that is signed or similarly authenticated • Writing is on paper or displayed on a computer terminal • Telephone recording alone does not comply with “writing” requirement. • Similarly authenticated, some methodology is needed to confirm identity of person giving authorization. • Example: “Shared secrets” - Credit card number and client account number • Person obtaining the authorization must supply a copy to the consumer by mailing or in case of Internet, by generating a receipt that can be printed • When the fund transfers vary from month to month, Reg. E requires: • Notice be sent of the date and amount of the transfer at least 10 days before the scheduled date of the transfer • Consumer may authorize payments within a certain range and require notice only when the payment falls outside of the range.

9. Payment Tenders, Terms and Acronyms • EDI • Internet payments • IRD • IVR • M-payments • MICR • NOC • Non-contracted • P2P • POP • PPD • RCK • RDFI • ODFI • Unauthorized • ACH • ARC • Authorized • BOC • Check21 • Contracted • CTX • EBPP • Electronic Check Conversion

10. ACH ACH - Automated Clearing House • The ACH network is a highly reliable and efficient nationwide batch-oriented electronic funds transfer system • Governed by the NACHA operating rules • Provides for the interbank clearing of electronic payments for participating depository financial institutions • The Federal Reserve and Electronic Payments Network act as: • ACH Operators, central clearing facilities through which financial institutions transmit or receive ACH entries • The ACH network can be used to send either debits (payments) or credits (refunds) • A credit sends funds to a Receiver’s account • A debit takes funds from a Receiver’s account

11. How ACH Works

12. ACH Continued…

13. ACH Continued…

14. ACH Transaction Terms • ARC – Accounts Receivable Conversion (mail) • BOC – Back Office Conversion • ODFI – Originating Depository Financial Institution • POP – Includes check serial number • PPD – Pre-authorized Payment and Deposit (auto draft) • RCK – Return Check • RDFI – Receiving Depository Financial Institution • TEL – Phone • WEB – Internet

15. ACH Volumes ACH Volumes • Nearly 16 billion automated clearing house (ACH) payments were made in 2006, a 14.5 % increase over 2005. This includes consumer, business, and government transaction types. Annual ACH volume continues to double every 5 years. • In 2006, nearly 8 billion consumer bill payments were collected via the ACH Network which included pre-authorized debits, checks converted to ACH payments, and Internet and telephone. • PPD increased by 6.1% to 3.3 billion payments; • ARC increased by 30% to 2.8 billion payments; • WEB increased by 35% to 1.8 billion payments (85 percent of Internet-initiated ACH payments are to • pay bills via companies’ or billing services’ web sites) • Direct Deposit is still the most widely used type of ACH payment. The number of Direct Deposits in 2006 increased by 5.5 percent to 4.7 billion payments.

16. Electronic Check Conversion • is a process in which your check is used as a source of information for the check number, your account number, and the number that identifies your financial institution. • The information is used to make a one-time electronic payment from your account- an electronic funds transfer. • The check itself is not the method of payment. • Transaction types include • ARC – Accounts Receivable Conversion • BOC – Back Office Conversion • POP – Point of Purchase http://www.federalreserve.gov/pubs/checkconv/#what

17. Check Conversion Benefits • Privacy – personal information is seen by fewer people when a check is turned into an electronic payment. • Secure and protected – customers have more protection with electronic payments than with paper checks. • ARC transactions are governed by federal laws that apply to electronic banking • (Electronic Funds Transfer Act and Regulation E) • Rules indicate customer has 60 days from the date a bank statement was sent, to notify your bank of a problem. The bank then has up to 45 days to investigate.

18. Check Conversion Benefits Cont’d… • Information – the name of the originating company and a descriptive statement appear on your bank statement rather than an entry that just says “check”. This helps in reconciling and balancing your account and an account statement that includes this information serves as proof of payment. • Environmental - there is an environmental impact to using paper checks. In addition to the natural resources used to manufacture/print paper checks, processing the checks relies heavily on our nation's transportation systems; including trucks and airplanes. It takes a considerable amount of fuel to ship our country's millions of checks each year between companies, financial institutions, and your home.

19. Check21 The Check Clearing for the 21st Century Act (Check 21) was signed into law on October 28, 2003 and became effective on October 28, 2004 • Check 21 is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation • The law facilitates check truncation by creating a new negotiable instrument called a substitute check which permits banks to truncate original checks to banks that want to continue receiving paper checks • A substitute check is the legal equivalent of the original check and includes all the information contained on the original check • The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create substitute checks • Check21 is represented by: • IRD – Image Replacement Document • POP – Point of Purchase http://www.federalreserve.gov/pubs/checkconv/#what

20. Accounts Receivable Conversion (ARC) • ARC (Accounts Receivable Conversion) - Through electronic Accounts Receivable Check (ARC) Conversion, eligible consumer checks received at a lockbox or drop box can be converted into electronic debits and processed through the ACH network. Checks drawn on consumer accounts payable in U.S. dollars are eligible for ARC conversion. Checks are machine read to capture the Magnetic Ink Character Recognition (MICR) information • routing number, account number and check serial number along the bottom of the check The data elements, along with the check amount, are used to create an ACH record. Typically, the biller's bank account is credited the next business day.

21. Back Office Conversion (BOC) • In March, 2007 Under the new BOC rules, retailers and other billers can convert eligible checks to Automated Clearing House (ACH) debits in a controlled environment in the back-office rather than at the point-of-sale or at manned bill payment locations.  Businesses no longer have to obtain a signature authorization for conversion or have scanners installed at each checkout or bill payment location.  A business needs only to disclose to its customers that their check will be converted into electronic transactions by means of a notice at the register and on a document that customers take with them, such as the back of a receipt.  Checks that containauxiliary on-us fields or those over $25,000 are ineligible for BOC.

22. Image Replacement Document (IRD) • Is the legal equivalent of the original check if it has the following requirements: • Accurately represents all information on the front and back of the original check • Contain the legend “This is a legal copy of your check. You can use it the same way you would use the original check.” • Must conform to industry standards applicable to the MICR line • Must conform to the industry standard for the physical characteristics of checks (size, paper, etc.)

23. Point of Purchase (POP) • Is the locationwhere payment takes place and where the purchaser and seller are both present and • Information from the consumer's check is used to create the electronic transaction

24. Corporate Trade Exchange (CTX) • Is a corporate ACH format which allows for up to 9,999 addenda records with approximately 800,000 characters. • The CTX payment format combines payment information and a variable length record (called an addendum record) with related information, such as invoice numbers, allowing multiple payments to creditors or billers in a single transfer of funds.

25. Electronic Data Interchange (EDI) • Is a set of standards for structuring information that is to be electronically exchanged between and within businesses, organizations, government entities and other groups. • Is considered to be a technical representation of a business conversation between two entities, either internal or external. • Documents generally contain the same information that would normally be found in a paper document used for the same organizational function. • Standards were designed to be independent of communication and software technologies. • Can be transmitted using any methodology agreed to by the sender and recipient.

26. Internal Voice Response Payments (IVR) • Can be either PPD or TEL Entry • Requires written authorization if treated as PPD • One-time or recurring for PPD • If no written authorization on file then can complete only per TEL rules. This requires written receipt or tape recording (actual oral authorization) • TEL = one-time payment • Setting up PPD Payments via IVR is complex, normally IVR should be a TEL entry

27. Notice of Change (NOC) • Information sent by an RDFI to notify the ODFI that previously valid information for a receiver has become outdated or that information contained in a pre-notification is erroneous.

28. Pre-Authorized Payment & Deposit (PPD) • Used to credit or debit a consumer account. Popularly used for payroll direct deposits and preauthorized bill payments.

29. Return Check (RCK) • A physical check that was presented but returned because of insufficient funds may be represented as an ACH entry.

30. Internet Payments (WEB) • One-time or recurring • Should include Terms & Conditions • Privacy statement • Appropriate authorization language • Receipts / confirmations delivered electronically upon completion of payment

31. Electronic Bill Presentment & Payment (EBPP) • On the Internet, electronic bill presentment and payment (EBPP) is the process that enables bills to be created, delivered and paid over the Internet • The service has applications for many industries, from financial service providers to telecommunications and utilities.

32. Lockbox • A service offered by banks to companies where the company receives payments by mail to a post office box and: • The bank picks up the payments • Deposits them into the company's account multiple times • Notifies the company of the deposit • It enables the company to put the money to work as soon as it's received. • The amounts must be large in order for the value obtained to exceed the cost of the service.

33. Mobile Payment (M-payment) • Is a point-of-sale (POS) payment made through a mobile device; cell phone, Smartphone or personal digital assistant (PDA) • A person with a wireless or text enabled device can pay a variety of bills, including a utility bill, at anytime without interacting with anyone. • A customer would enroll for the service and select the biller(s) they want to pay • A customer is usually provided with an account number and personal identification number (PIN) for authorization purposes.

34. Person To Person (P2P) • Is the ability to transfer monies with a mobile phone from person-to-person (P2P)

35. Walk-in Bill Payment • Customers are able to pay in person at locations that accept and process utility payments • The agent may or may not be authorized or unauthorized dependant on the utility and or 3rd party vendor relationship • Customers generally receive a receipt for their payment • A cashier may swipe a bill stub or key in the billing details into a data terminal • A receipt with payment transaction information is provided to the customer • Depending on the utility and their processing capabilities, some authorized pay agents may offer 'real-time' payment posting. • Walk-in bill payment can be by: • Kiosk – customer initiated • Terminal – store or cashier initiated

36. Miscellaneous Payment Information • Authorized or Contracted • Un-authorized or Non-contracted

37. Authorized or Contracted • A utility (or its contractor) have entered into an official contract with a payment vendor • The vendor is authorized to accept payments for the utility • The agent usually is able to accept cash, check and money order tenders • The utility usually advertises or notifies their customers about the (authorized) payment options available to their customers to use

38. Un-authorized or Non-Contracted • A business or retailer that accepts biller/utility payments and the utility (or its contractor) have NOT entered into an official contract • Typically an un-authorized pay agent will only accept cash as tender • There is usually a 2 - 5 (business) day delay from the time a payment is accepted and until it's actually received and posted by the biller • The consumer will pay a convenience fee of $1 - $5 for the ability to generate their payment.

39. Payment Vendors • Visit the Joint Payment Center Conference booths to learn more about the services available to you from our supporting vendors

40. Consumer Payment Evolution For the first time, electronic bill paymentsexceeded bill payments made by paper check among the 82.5 million estimatedU.S households using the Internet* Over time, more of these consumers will migrate to electronic payments • Perception of more control over finances • Convenience of paying multiple bills at once • Eliminates the cost of postage • Perception of more control over finances • Confidence that biller receives payment • Typically more payment types are available *Source: Harris Interactive and the Marketing Workshop: 2007 Consumer Bill Payment Survey; Electronic Transaction Association

41. Jeff HillProcess Design SpecialistSherri Hobbs Senior Business AnalystCustomer Account Services Lauren MeschNew Business Development