Building a Better ACH Model

By Dave Jones
Vice President – ACH Division
Goldleaf Technologies, Inc.

I. INTRODUCTION

Developing a comprehensive suite of products and services for your customers can be a daunting task for financial institutions (FIs) of all types and sizes. The evolution of electronic commerce has raised the degree of difficulty, prompting FIs to supplement their core processing applications with specialized third party solutions in order to meet their increasingly complex servicing needs. Management is charged with the evaluation of a myriad of new products and their integration with existing systems, as well as the retention of proven technology.

Automated Clearing House (ACH) origination is an area of FI operations now being re-evaluated in light of the changing electronic commerce landscape. The introduction of Internet Cash Management combines a new origination option with access to account information, but only includes a fraction of the functionality required for a complete and successful ACH program.

What factors should FIs consider when evaluating the adequacy of their existing ACH program? How do FIs just starting ACH origination evaluate vendors and determine the functionality they need? What functionality is needed for Originating Depository Financial Institutions (ODFIs) and Receiving Depository Financial Institutions (RDFIs)? The answers lie in an analysis of the functionality required to perform specific ACH operations.

II. ACH OPERATIONS - GENERAL

ACH operations can be broken down into four main areas: 1) daily ACH processing, 2) ACH origination, 3) electronic data interchange (EDI) translation and delivery and 4) compliance. Each area of has its own special needs, some of which may require a combination of solutions. In each case, the functionality required will likely be applied to thousands, if not hundreds of thousands, of ACH transactions over the course of an operating year, making ACH one of the most cost effective services FIs can offer.

III. DAILY ACH PROCESSING REQUIREMENTS

Daily ACH processing is the management of originated (outgoing) transactions by ODFIs and cash letter (incoming) transactions received by RDFIs. Both originated and cash letter file processing requires sophisticated automation to efficiently process the ever-increasing volume of ACH transactions. What functionality is required to efficiently process originated and cash letter ACH transactions?

A. Originated (Outgoing) Processing Functionality - ODFIs

• Process any NACHA formatted file.
• Consolidate files and separate “on-us” transactions to lower Fedline file and transaction costs.
• Analyze files to reconcile batch totals, debits, credits, item count, dollar amount, etc. received from Originators and loaded into Fedline.
• Perform origination risk analysis to manage credit and compliance risk.
• Notify ODFIs re: scheduled receipt of Originator files.
• Create settlement offsets for individual FIs in a multi-bank holding company environment.
• Calculate ACH fees with the ability to originate debits to charge Originator’s account and credits to ODFI’s fee income account.
• Include up-to-date NACHA rule changes in the NT operating environment now being introduced by Fedline.
• Warehouse files and transactions.\
• Require Originators to comply with NACHA rules re: creation of transactions.

B. Cash Letter (Incoming) Processing Functionality - RDFIs

• Automate returns and notification of change (NOCs).
• Automate charge-back of returned debits to Originator.
• Automate routing / transit number and account number conversion.
• Capture unauthorized transactions and automate returns.
• Capture Death Notification Entries (DNEs) and automate returns.
• Block unauthorized General Ledger and Loan Account transactions.

C. EDI Translation and Delivery Functionality - RDFIs

• Translate encrypted addenda records received with incoming file.
• Deliver raw EDI data and human-readable statements.
• EDI delivery options – email, fax and regular mail.

D. Daily ACH Processing – Summary

The large volume and diversity of transaction types received in originated and cash letter files necessitates a comprehensive, automated ACH processing system. ACH is an ancillary feature for core processing vendors. They lack the expertise to support ACH operations on an ongoing basis and offer an incomplete solution at best. Internet Cash Management doesn’t provide any ACH processing functionality; it only offers single transaction or small file origination capability. In order to benefit from the processing functionality described above, FIs must turn to specialized third party vendors. Solutions with the requisite functionality are available in host-independent and host-interfacing modules. Host-independent modules are preferred, based on lower comparative cost, ease of installation, and shorter installation timeframe.

IV. ACH ORIGINATION REQUIREMENTS

ACH Origination is the creation and delivery of ACH transactions by the Originator to the ODFI for entry into Fedline. Creation of the NACHA format is required functionality for any ACH origination software, but the following features are necessary to provide a comprehensive origination solution:

A. ACH Origination Functionality - Originators

• Transaction Wizard to assist Originators in the creation of ACH
  transactions.
• Automate data import from Originator host processing systems or
  payroll solutions into origination software.
• Notify Originator re: scheduled delivery of files to ODFI.
• Dual authorization security.
• Re-occurring transactions.
• Split transactions.
• Customized reporting.
• Modem-to-modem file delivery capability

B. ACH Origination – Summary

ACH Origination is much more than the creation of the NACHA format. Originators require software documentation, technical support and a reliable, secure method to transmit files to the ODFI. These are elements often lacking in low cost origination solutions. Core processing vendors often provide limited origination functionality, or none at all. There are also limitations to offering Internet Cash Management as the only means of origination. Originators may require a solution capable of creating large files compared to the single transaction / small file capability of Internet Cash Management. Some Originators may not have Internet access, or may have security concerns regarding online origination. A combination of stand-alone origination software and Internet Cash Management may be required to meet the diverse needs of an ODFI’s commercial customer base. Multiple origination options also enhance the ability to leverage ACH as the most “sticky” service that an ODFI can offer to its commercial customers.

V. COMPLIANCE

Compliance is a critical component of ACH operations, but one that is often overlooked by ODFIs and RDFIs alike. A common error is to load files received from Originators directly into Fedline. Failure to perform file analysis, provide a “commercially reasonable” method to detect fraudulent transactions, and track origination risk as required by NACHA rules compromises the validity of the FI’s annual ACH Self-Audit, as well as the ability to manage credit risk. Compliance with these requirements is the sole responsibility of the FI and subject to increased regulatory scrutiny. FIs not only require ACH solutions capable of processing and originating transactions, but one that helps them stay in compliance with regulatory requirements and limit potential legal exposures in adversarial scenarios with Originators.

VI. CONCLUSION

Automated ACH processing functionality is a “must have” for an ever- increasing volume of originated and cash letter transactions. It enables a more efficient management of ACH operations, credit risk and compliance issues. Processing functionality should also include an EDI module with multiple information delivery options. Origination needs may be satisfied with stand-alone software, Internet Cash Management, or a combination of both. Origination solutions must be capable of originating ACH files of all sizes, as well as providing a reliable, secure file delivery option.

Vendors whose primary focus is ACH are in the best position to provide the requisite functionality, training and technical support for a complete ACH solution. They are also best qualified to respond to changes in the ACH industry and support ACH operations on an ongoing basis. In addition to functionality, vendors should be evaluated based on years in operation, installations (references), financial stability, and the financial resources to continue developing and supporting ACH solutions.

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