Overview
The Automated Clearing House (ACH) network was developed to provide an electronic alternative to the paper-based check payment system. ACH offers a number of advantages over paper checks including:
- Lower per-item costs
- More clearly defined settlement times
- Better control over payment timing.
The 5 participants in any ACH transaction include:
- Originator - typically a business or government entity.
- Originating depository financial institution - the originator's bank that accepts the ACH transaction from the originator.
- ACH Operator - the Federal Reserve Bank or private operator that distributes and settles the transactions.
- Receiving depository financial institution - the bank receiving the ACH transactions affecting its depository clients' accounts.
- Receiver - the beneficiary of the ACH transaction.
An ACH origination may be either a credit transaction, in which value is transferred from the originator to the receiver or a debit transaction, in which value is transferred from the receiver to the originator. Settlement of funds normally occurs between 1 - 3 days following submission of the file to the ACH operator. In some cases, ACH rules also provide for ‘same-day’ settlement of ACH transactions.
Understanding ACH Risks
Credit Transactions
An ACH credit transaction moves funds from an originator's account to a receiver's account. A prime example of such a transaction is direct payroll.
Originators generally do not fund the account against which the ACH credit file will settle until just before settlement, thus creating temporal risk of for the originating bank. If the originator fails to fund the account and the settles, an overdraft occurs.
The bank cannot recall an ACH file once it has been released to the ACH operator. In effect, the originating bank guarantees payment of the file. The bank is obligated to fund the file upon settlement, even if the originator does not have sufficient funds. Therefore, the bank has credit exposure to the originator equal to the amount of the file extending from the time the file is released to the ACH operator until the file is settled in good funds.
In addition to the risk of an overdraft, the bank also faces settlement risk if the originator's account has a lien placed against it or is frozen because a bankruptcy is filed in the interval between file release and settlement. Even if there are good funds available, the bank may be unable to debit the account.
Debit Transactions
An ACH debit transaction moves funds from a receiver's account to an originator's account. Debit applications typically involve movement of funds from consumer accounts to a creditor or service provider's account for recurring payments. ACH debits also are used for business-to-business payments and cash concentration services.
The primary credit risk associated with ACH debits is the risk of having return items post to an account after the funds have been withdrawn. Items may be returned for such reasons as a closed or NSF receiving account. Additional risk is created because the debt is initiated by the payee, the payer does not actively make a payment decision each time a debit is initiated; therefore, there can be a higher return risk. Also, this transaction is subject to Regulation E. Under Reg. E, a consumer has up to 60 days in which to dispute the transaction after a statement is issued showing an electronic transaction.
Since return risk is for individual items and not entire ACH debit files, there is less exposure than that experienced with ACH credit transactions. There is one ACH debit product that warrants closer attention - cash concentration debits. A cash concentration file is generated by a company that wishes to move funds from its own accounts at various financial institutions into an account at its concentration bank. In addition to the usual return risk, there is an additional risk if the business files bankruptcy.
Originators are normally permitted full access to their concentrated funds on the settlement date, but it may take up to 2 additional days for a receiving depository financial institution to generate a return item. If the originator has withdrawn all the funds before the concentration debits are returned, the originating bank is exposed. These debits can be for large dollar amounts and the risk of multiple entries or an entire file being returned is greater than with other debit applications.
Finally, debit originations are more susceptible to fraud risk than credit risk. if an originator has criminal intent or is facing liquidity pressure, generating fraudulent debits can provide a quick source of cash.
Transaction Restrictions
Capital City Bank (CCB) will not originate International ACH Transactions (IAT). In addition, CCB will not, generally, provide services for third party ACH origination. On an exception basis, the bank may provide ACH origination services to clients, and their Third Party Service Providers, with prior approval from Credit Administration or the CCB Chief Operating Officer (or CCB Operations Manager when the COO is unavailable). The bank will not provide ACH origination services for Third Party Senders as defined by the NACHA Operating Rules & Guidelines.
Controlling ACH Risk
Clients that actively use the bank’s ACH payment services should be identified and approved for interday and intraday exposure limits. A central list identifying all users of ACH payment services and their related exposure limits is to be maintained with Bank Operations Group. Individual files are to be maintained that may include ACH
Agreements, limit authorizations, correspondence and instructions, and financial statements if the client does not have aggregate borrowings or an ACH limit > $100K. If the client has aggregate borrowings or an ACH limit equal to, or exceeding $100K, a credit file will contain the current financial information and will be found at the Credit Administration Department for the initial approval, and only if above $1.0 million (as noted below) for annual reviews that may be required.
All ACH origination clients must be approved for aggregate daily file limits, per the ACH Approval Hierarchy. To evidence this approval, a memorandum will be archived in the loan operating system. Any appropriate financial information should be included with the memo in order for access to be authorized.
Clients may be set up with access to the ACH payment services offered by the bank even with elevated credit risks being present. Prefunding may be utilized for controlling material risk involving criticized clients. Prefunding only provides protection for clients originating credits files and is not a risk mitigation tool for debit files. In prefunding, the client will be required to have good funds available in their account prior to submitting a credit file transaction. This will allow the bank to debit the client’s offset account for the file amount, or to place a hold on the offset account, up to the file settlement date, to guarantee payment.
Note: See the ACH Approval Hierarchy tab for the approval hierarchy and alternate approvers in the case of absence of any of the preceding approvers.
When ACH origination is needed for an internal bank department, the request should be submitted to Capital City Bank Chief Operating Officer for review and decision. If Capital City Bank Chief Operating Officer is unavailable, the Senior Vice President or Vice President, Bank Operations Group, may decision the request.
A memo must be submitted through the credit approval system, addressing the requested limit and an explanation of how many times per month a particular file type will be originated. For example, if an exposure limit is being requested for payroll processing, the number of times payroll is processed per month is important. Any appropriate financial information should be submitted with the request, along with a deposit and loan relationship summary, where applicable. Financial information requirements will be based on the following criteria:
- ACH Prefunded limits up to and including $1,000,000 will not have any financial documentation requirements.
- ACH Prefunded limits over $1,000,000 will require a minimum of 2 years company financials.
- Any amount of ACH Debit exposure will require a minimum 2 years company financials.
- Special exceptions to financial documentation requirement can be made for newly formed entities, with proper mitigation of the risk and proper approval based on the exposure limit.
- Non-prefunded ACH Credit Exposure will require a minimum of 1 year
company financials and minimum 2 years financials for any limit over
$100,000.- Special exceptions to financial documentation requirement can be made for newly formed entities, with proper mitigation of the risk and proper approval based on the exposure limit.
Monitoring ACH Activity
Once a client has been approved, the Bank Operations Group is required to maintain a master list that includes the date originally approved and the limits approved, along with other pertinent information. The limits should be reviewed and reaffirmed annually. The annual review and reaffirmation completed by Credit Administration must include the ACH exposure limit and current financial statements for all ACH limits equal to or greater than $1.0 million that are not pre-funded or that generate debit files of $1.0 million or more. The account officer is responsible for obtaining the financial statements and any other information needed from the client.
Upon completion of the financial review by Credit Administration, the approval will be sent to Treasury Management and Bank Operations Group. These departments will be responsible for completing a quarterly ACH Operational Review for any ACH non-prefunded exposure and prefunded exposures over $250,000. An Annual ACH Operational review will be completed for all clients with ACH exposure. This review will evaluate usage statistics for all origination clients to determine if the limits are appropriate, service is properly used and activity remains consistent with business needs.
Annual reviews by Credit Administration will not be required for ACH limits below $1.0 million, or for prefunded ACH limits of any dollar amount. These clients will be reviewed in the quarterly ACH Operational Review completed by Treasury Management and Bank Operations Group. Evidence of the quarterly review will be sent to Electronic Banking Services department. For clients with prefunded ACH limits of $1.0 million or more, if they are generating debit files, they will still be subject to review (for example: if a client has a prefunded credit limit, but also generates debit files of $1.0 million or more, the client will still be subject on an annual review by Credit Administration).
From time to time a client may have a need to exceed its pre-determined limits on a temporary basis. In such cases, the file is not to be released without the approval of the appropriate approving party as noted in the ACH Approval Hierarchy tab. For temporary limit exceptions for internal departments, Capital City Bank Chief Operating Officer or if unavailable, the SVP or VP of Bank Operations Group, may approve overages. The appropriate Bank Operations Group associate will evidence this override approval by placing a memo (in most cases, an e-mail) approved by the appropriate approving party in the client’s ACH file.
In some instances, a client may seek to have a prefunding requirement waived on a temporary basis. This will be allowed only when there is a compelling reason to do so (for example: cashier’s check being deposited, funds becoming available). Approval of this temporary waiver will be subject to the same approval hierarchy as with temporary increases in limit as noted in the ACH Approval Hierarchy tab.
If the Bank Operations Group becomes concerned about the activity in an account, or there is concern about deteriorating financial condition, we will consider requiring the company to either prefund its account, provide collateral, require a reserve or deposit the ACH file on the night preceding the settlement day when originating credit transactions. If there are similar concerns regarding clients originating debit transactions, the Bank Operations Group may delay availability of funds or place holds on the account.
Note: No action is to be taken against a client that is contrary to either its ACH Agreement or the operating rules and operating guidelines adopted by the National Automated Clearing House Association.
ACH Approval Hierarchy
| Approver | Alternate * | New / Reaffirmation ** | Temporary Increase / Prefunding Waiver *** | Internal |
|---|---|---|---|---|
| Treasury Management Manager or Treasury Management Support Manager | VP of Treasury Management & Institutional Banking or Commercial Division Manager | $100,000 | $100,000 | None |
| VP of Treasury Management & Institutional Banking | Commercial Division Manager | $250,000 | $250,000 | None |
| Credit Administration | CCB President | $1,000,000 | $1,500,000 | None |
| Credit Committee | 2 of 4 voting members | Unlimited | Unlimited | None |
| Senior Vice President, Bank Operations Group | VP, Bank Operations Group | None | $1,000,000 | None |
| CCB Chief Operating Officer | Senior VP or VP, Bank Operations Group | None | None | Unlimited |
* Approval shall be sought by the Approver and in their absence the Alternate shall be sought for approval.
** The approval of new limits and the reaffirmation of existing limits subject to Credit Committee review will be reviewed during their weekly meeting.
*** Temporary increases are subject to the same cumulative limits as if they were a new request. Under certain circumstances, Credit Administration may approve temporary increases on an unlimited basis.
- Credit file transactions for which cash is currently on deposit and will be held for settlement.
- There is an existing bank line of credit held by the client with availability to fund the settlement of the file (for example: sweep or similar).