Everything ACH

I love that quote on so many levels.  What’s funny to me is that for the most part I don’t think we normally pay much attention to the man behind the curtain.  As an example, think about a live concert or movie or performance of some kind.  We just want to enjoy the event.  We don’t have any idea what has to happen on the backside to make it happen.  As far as we know, it just happens.

 

So how does that translate to ACH?  Do you know what has to happen in the background to make sure your transactions are processed on time?  Most people don’t, they just know it happens.

 

There are many parties behind the scenes making it happen though.  Today, we are tugging aside the curtain to take a peek at the ODFI …

 

The ODFI is the gateway into the ACH Network.  The long and short of it is, through their doors pass essentially all ACH transactions…with few exceptions.  And the ODFI is responsible for every last one of them.

 

We have already learned a bit about the ODFI in previous posts, but did you know the ODFI warrants that their Originators obtain and maintain an authorization for every ACH transaction?  Did you know the ODFI warrants that all information contained in every ACH transaction is accurate?  Did you know that the ODFI is responsible for everything their Originators do?

 

With such huge responsibilities, it should come as no surprise that ODFIs maintain the longest list of warranties of all parties to an ACH transaction. So, what are some of their other responsibilities?

 

Among other things, ODFIs warrant that they will:

 

          Bind their Originator to the ACH Rules

          Ensure their Originators follow the ACH Rules

          Process transactions (and returns) in a timely manner

          Notify their Originators of Returns and NOCs

          Retain records for 6 years

          Perform an Annual ACH Audit

          Indemnify all the other parties should something go wrong

 

Those are just the biggies.  The list goes on.

 

No matter what happens, remember, there will always be ODFIs behind the curtain, pulling levers and spinning wheels and taking care of business.  That’s it, the peek is over.  The next time a transaction is processed in a timely manner; remember it’s not magic.  Some ODFI was just doing their job…behind the curtain.

While essentially true, saying that an Originator originates, is like saying a cook cooks or a coach coaches.  If only it were that simple.

 

In the greater scheme of things, an Originator is so much more, does so much more and is responsible for more yet.  We know already where they fall into the ACH model, but now let’s learn who they are and what they do; besides originate.

 

In simple terms, an Originator is a party that gives permission to an ODFI or Third Party Service Provider to initiate ACH transactions into the ACH Network on their behalf.   Sounds easy, let’s keep going.

 

Who is an Originator?  A good example of an Originator is an employer.  We all know how much I enjoy getting paid and because my employer pays me via Direct Deposit, that makes them an Originator.  Other good examples of Originators are my gym, my insurance company, my mortgage holder, my cable company and the list goes on.  What about me?  Can I be an Originator?

 

Yup, I sure can.  Just like my employer originates Credits (payroll) to my account and my gym, etc. originates Debits to pay my bills, I can originate a credit to give money to someone I know.

 

How does a company become an Originator?  This is a little more difficult, not much, but a little.  You cannot just mount your company flag to a pole, stick it in the ground and declare yourself an Originator.  There is a process.  The process includes finding a financial institution (Bank, Credit Union or Savings & Loan Association) or a 3^rd Party Service Provider who is willing to take your transactions…remember, you have to give someone permission to initiate those transactions on your behalf and they are going to want it in writing.

 

It’s called an ODFI–Originator or a TPSP–Originator Agreement.  Among other things, this agreement binds the Originator to the ACH Rules and Regulations and lays out general and party specific responsibilities, such as:

 

Credit Exposure Limits

Deadlines/Time frames – how late are transactions processed

File formats – NACHA format please

Security Requirements – secure that computer, protect that information

What types of transactions will you process

Authorization/Authentication requirements

How Returns and Rejects are handled and more…

 

Before you get to this point though you have to go through an underwriting process of some sort, the FI or TPSP have to determine that you are not just some kind of a fly-by-night operation and that you are legitimate and you have to have someone or someones to whom you can originate transactions.  That means you have to have their permission (authorization) to credit and/or debit their account.  An authorization in some form or fashion is required for every ACH transaction – no exceptions.  That’s another post….the list grows.

 

Once you have all this in place, you are good to go – you are an Originator.  You are now part of the process.  It’s almost like being a member of a lodge without the secret handshake.  And when people ask you what you do; tell them you originate.

I had been thinking of what to write for my next post, where to direct you and had been debating about bringing “The Lifecycle of an ACH Transaction” into the mix.  I remember, from years of answering the same question over and over again, having something akin to a recording in my head.  When someone asked the question, I could press ‘play’ and run through the spiel explaining the lifecycle all the while surfing the Internet, checking and responding to e-mails or simply working on something else – as long as the recording was going, I was good to go.  When the recording stopped, so did my multi-tasking. 

 

The decision was cemented when I was trying to think about where I had put the graphic I created for this very purpose and lo and behold at that very moment, on the radio, was Elton John singing Circle of Life from The Lion King soundtrack.  It was a sign; as the song talks about the cycle of life, I am supposed to be talking about a Lifecycle, The Lifecycle of an ACH Transaction that is.  By the way, if you have not seen the original movie, The Lion King, I very highly recommend it. 

 

That being said, let’s get started.  You already know who the main players are in every ACH transaction.  The purpose of this post is simply to show the direction of the transaction at different stages and should be easy enough to follow.  I don’t get into details such as timeframes or what’s required to effect a return, we’ll get into that soon enough – in future posts.

 

 

Original Presentment:  This is the first presentment of an ACH Transaction.  These travel from the ODFI to the RDFI.  Credits, like Direct Deposit, rarely, if ever get past this point: afterall who’s going to refuse a credit? 

 

Return:  This happens for any number of reasons, such as NSF (Non-Sufficient Funds) or Account Closed or No Account or Unable to Locate.  Returns travel from the RDFI to the ODFI.

 

Dishonored Return:  There are a limited number of reasons for which you can initiate a Dishonored Return – 5 reasons to be exact.  Dishonored Returns travel from the ODFI to the RDFI.

 

Contested Dishonored Return:  There are a limited number of reasons for which you can initiate a Contested Dishonored Return too – 6 reasons to be exact.  Contested Dishonored Returns travel from the RDFI to the ODFI.

 

R.I.P.:  At this point, once received as a Contested Dishonored Return, the ACH Transaction is effectively dead and cannot be sent through the ACH Network again.  However, that does not mean an RDFI can just return every transaction using one of the Contested Dishonored Return Reason Codes claiming it’s dead.    Every ACH transaction must be allowed to move through its lifecycle naturally and in the specific order mentioned…no skipping around.

 

I know it sounds like a lot, but know that there are very few ACH transactions that actually make it to the end of their life cycle.  The lion’s share of ACH transactions post without any problems, a few are returned and only those few remaining transactions (generally less than 1%) are lucky enough to have an opportunity to see the end.  Whether they hear  Elton John singing to them or not is another issue.

Party, Party, Party.

 

We just talked about the 5 main parties (Originator, ODFI, ACH Operator, RDFI and Receiver), now let’s talk about the 3^rd party.

 

The Third Parties, to be exact.  There are three of them and they each have a very different and distinct function.

 

Third Party Sender

Third Party Receiver

Third Party Service Provider

 

First:  The Third Party Sender (TPS) exists between the ODFI and the ACH Operator .  Their primary function is to simply take transactions from the ODFI and send them on to the ACH Operator.  An example of a TPS is ADP.  This is not a shameless plug.

 

Second:  The Third Party Receiver (TPR) exists between the ACH Operator and the RDFI.  Their primary function is to simply take transactions from the ACH Operator and send them to the RDFI.  The TPR also generally provides additional support as well, such as posting transactions to the RDFI’s accounts, handling returns (which we’ll talk about in another post), etc.  Their responsibilities will vary depending on the needs of the RDFI.  An example of a TPR is The Independent Banker’s Bank or FiServ.  This is not a shameless plug.

 

Third:  The Third Party Service Provider (TPSP) exists between the Originator and the ODFI.  Their primary function is to collect transactions from an (or multiple) Originator(s) and forward to the ACH Operator.  Just like the TPR, the TPSP can provide a number of additional services.  THIS is a shameless plug.   Check out www.achdirect.com for all your ACH (and Credit Card and Debit Card) processing needs.

 

Now that’s a party.  Hope you had fun.  Tell your friends.

Hands up if you remember Abbott & Costello.

 

There certainly are a bunch of us.  I am a huge fan myself.  And nothing illustrates my next point like the classic Who’s On First? skit… here’s a little snippet.

 

Costello: Well then who’s on first?

Abbott: Yes.

Costello: I mean the fellow’s name.

Abbott: Who.

Costello: The guy on first.

Abbott: Who.

Costello: The first baseman.

Abbott: Who.

Costello: The guy playing…

Abbott: Who is on first!

Costello: I’m asking YOU who’s on first.

Abbott: That’s the man’s name.

Costello: That’s who’s name?

Abbott: Yes.

Costello: Well go ahead and tell me.

Abbott: That’s it.

Costello: That’s who?

Abbott: Yes.

 

It goes on and on…a classic, repeated over a 1,000 times on the radio and numerous times on TV.

 

It’s clear to those of us ‘in the know’ that Who is in fact on first base, but poor Lou, he was lost from the get-go. 

 

It can be just as confusing trying to figure out who’s-who in an ACH transaction.  I don’t know enough about baseball to make the analogy, but I can at least break it down for you and show you, well, Who’s on first.

 

There are 5 main parties to every ACH transaction; Originator, Originating Depository Financial Institution (ODFI), ACH Operator, Receiving Depository Financial Institution (RDFI) and Receiver.

 

To best illustrate what I’m talking about here, check this out.

 

 

 

 

 

 

 

 

I am going to use Direct Deposit for my example, mostly because I just really enjoy getting paid, but also because I think we are all familiar with it.

 

The Employee/Receiver signs an authorization (agreement), providing their banking information to their Employer.  The Employer/Originator uses this information to create an ACH transaction to pay the Employee/Receiver.

 

The Originator/Employer sends the transaction to their Financial Institution (Bank, Credit Union or Savings & Loan Association) a.k.a. the Originating Depository Financial Institution (ODFI) who in turn sends it to the ACH Operator.

 

There are 2 ACH Operators in the U.S.; The Federal Reserve Bank and Electronic Payments Network (EPN).  The ACH Operator forwards the transaction to the Receiver’s Financial Institution a.k.a. the Receiving Depository Financial Institution (RDFI) who in turn, posts the transaction to the Receiver’s account.

 

In this Credit example, the parties are as follows:

 

Originator = Employer

ODFI = Employer’s Financial Institution

ACH Operator = The Federal Reserve Bank or EPN

RDFI = Employee’s Financial Institution

Receiver = Employee

 

If this were a debit transaction, for instance a consumer paying their mortgage, the parties would be the same, but the money would flow in reverse.

 

Originator = Mortgage Company

ODFI = Mortgage Company’s Financial Institution

ACH Operator = The Federal Reserve Bank or EPN

RDFI = Homeowner’s Financial Institution

Receiver = Homeowner

 

Those are the biggies.  There are a few other optional parties, which we’ll talk about next time in Party, Party, Party. 

 

Only because I know there are some fans out there like me, here is a link to the entire Who’s on First script.

 

http://www.baseball-almanac.com/humor4.shtml

 

And if you want to watch it…

 

http://www.metacafe.com/watch/yt-VcOKk1-SqSg/abbott_costello_whos_on_first_whats_on_second/

I still remember when I first got involved in ACH; it was 1997.  The Green Bay Packers won Super Bowl XXXI, Candle in the Wind by Elton John was on the radio and Men In Black was a box office hit.  My very first day at my new job, my boss handed me a book titled “The ACH Answer Guide” (no longer in publication) and then stated “I’ll be back in 15 minutes to wake you up”.  He chuckled as he walked away.

 

Needless to say, 15 minutes later, he was tapping me on the shoulder and I wiped some drool from the corners of my mouth.  Yup, I had fallen asleep, just as predicted.

 

Now I know that ACH is not very exciting stuff.  It’s not exactly a John Grisham novel if you know what I mean.  It is however a very big part of our lives.  There are many people such as myself who have made a living understanding it, talking about it and teaching it; and yet, there are still so many people who don’t really understand it. 

 

I’m hoping to change that. 

 

So, what is ACH?  Technically, it’s an acronym for Automated Clearing House.  However, the official definition according to NACHA, is “The ACH Network is a batch processing, store and forward system that provides for the distribution and settlement of electronic credits and debits among participating financial institutions.”

 

Now you might be thinking, I know all those words are English, but what does it mean?  Let’s break it down.  The 2 parts that I think need the most explaining are:

 

“…batch processing, store and forward system…” – Unlike Credit and Debit cards which are real time, meaning that you can swipe your card to make a purchase and seconds later, log into your account and see the transaction, ACH is more of an overnight kinda thing.  Companies collect and store transactions over the course of a day/week/month, etc. in a batch.  They then forward those transactions (in batch form) to their financial institution or a company such as ACH Direct for processing.

 

“…among participating financial institutions.” – There are some 14,000 financial institutions (Banks, Credit Unions and Savings & Loan Associations) in the U.S.  As odd as it may seem, not all financial institutions (FIs) participate in the ACH Network.  There are a number of FIs such as smaller banks or S&Ls and shoe-box Credit Unions that simply do not participate for any number of reasons.  And that’s OK.

 

With that in mind, I think the rest makes sense.  Now that you know what it is, next time, we’ll talk about the players and find out Who’s on first?