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Federal Reserve Financial ServicesChange, Challenge & Opportunity

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Matt Davies, AAPTechMecca 2011

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Business Continuity

• FedLine Advantage

– VPN Replacement

– Additional VPN

• FedLine Command

• FedLine Direct

• ACH: Alternate Access Point (―Buddy Bank‖)

• Fedwire: Service Bureau

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Check21 Adoption Rates

• Implementation of check image exchange for check collections is almost completed across the industry.

• Check image exchange for returns is rapidly approaching full implementation.

• More than 22,900 routing transit numbers are available to receive check images and over 8,700 are available to receive returns.

Source: www.checkimagecental.org

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Check21 Clearing – Tremendous Change

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Check Penetration Trends

FedForward FedReturn Forward FedReceipt Return FedReceipt

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Check21 Clearing – Tremendous Opportunity

• Reduces/eliminates transportation

• Lowers clearing fees

• Reduces check float/accelerates settlement

• Streamlines the check collection and return processing

• Reduces paper handling type adjustments (LNEs, NOIs, MCLs)

• Facilitates rapid discovery of fraud

• Extends deposit cutoff times

• Provides Remote Deposit Capture capabilities

• Expands customer territory

• Enables Deposit at Home/iPhone apps

• Improves efficiency and ensures stability of the U.S. check payment system

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Challenge of Paper Receipt of Returns

• Unless otherwise notified, all FRB cash letters will be sent via overnight express delivery. As a result, FRB forward and return cash letters will be delivered on a next business day schedule.

• The overnight express delivery service requires a signature for receipt acknowledgement purposes.

• Debits for forward presentments and return deliveries will be deferred one-day.

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Opportunity: FedReceipt Plus for Returns –ICL File• The service provides the bank of first deposit (BOFD) with an

X9.37 file of return items that have been deposited with the Federal Reserve Banks in an image return letter and all paper return items received that are imageable. (Note that non-imageable items will continue to be delivered as paper.)

• You can receive your return files via any available Check 21 channel: FedLine Web®, Tumbleweed Secure Transport or Connect:Direct.

• While the morning delivery time is not guaranteed, generally files are targeted for delivery sometime before noon local time with a final file, if needed, by 2 p.m. local time.

• Fees for FedReceipt Plus for Returns: File fee of $2.00, per item fee of $.005, with a FedReturn discount of $(0.008).

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Opportunity: FedReceipt Plus for Returns –PDF Option• All return items that are imageable will be sent to you as part of a

PDF file.

• PDF file will be delivered via FedLine Web or Secure Transport (at no additional charge) and remain available to download, view and print for multiple days.

• The small number of nonimageable items will continue to be delivered to you as paper returns.

• You will need:

– FedLine Web Credentials - Check21 FedReceipt Level Access

– Standard printer with double–sided (duplex) print capabilities (can be auto or manual duplex)

– MICR ink cartridge to be able to print legal/legitimate substitute checks

– Standard 8½ x 11 inch paper (suggested 24 lb. or thicker

laser paper)

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Cost Saving Opportunity: Mail Direct

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Cost Saving Opportunity: Treasury & PMOs

• Treasury Checks and Postal Money Orders that are sorted into separate FedForward Cash Letter files and presented directly to FRB St. Louis are processed without charge to the customer. For more information, refer to: http://www.frbservices.org/files/servicesetup/check/pdf/check21_special_sort_options_guide.pdf

• For paper items, please use the following address for direct mail:

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C21 Fraud Prevention

• Positive Pay/Positive Pay with Payee Verification

• Encourage customers to make large dollar payments electronically.

• Avoid using laser checks.

• Use a controlled stock of high security checks, with safety features such as a true watermark, thermochromatic (heat sensitive) ink and reactivity to various chemicals.

• Lower sight review thresholds, and re-train inspectors to look for physical security features

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Enhancements to FedEDI Plus – Returns Ratio Report

• Designed to assist ODFIs in meeting the NACHA rules requirement regarding return item activity, often referred to as the ―1 percent rule‖.

• The Return Ratio Report generates key return item information:– Value and item counts by SEC code for the specified Originator’ Company IDs

– Percent of forward value items returned

– Summarizes returns vs. forward items over choice of a 60 day window

• Cost structure is $0.50 per daily report or $10 per monthly report.

• Complimentary FedEDI Plus Service Activation Teleseminar athttps://events.frbservices.org/ep_web/DSP_eventlist.cfm

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FedEDI Plus – Return Ratio Report Setup

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FedEDI Plus – Return Ratio Report Sample

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Challenge: ACH Risk Management

• FedACH Risk Origination Monitoring Service

• RDFI File Alert

– Batch/Item Scanning (1Q2011)

• FedEDI Plus ACH Routing Number Activity Report

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RDFI Alert• 1Q2011: RDFI File Alert Service will expand to include ability to

set monitoring thresholds at batch and item levels. (Renamed RDFI Alert.)

• Will help you broaden and tailor monitoring efforts by letting you mix and match combinations of seven different ACH fields – e.g., SEC code, originator company ID, originator company name, debit or credit dollar amount – to build custom batch and item notification thresholds.

• Monitor incoming batches for originator quality or for specific SEC codes.

• Set up item-level dollar amount alerts for receivers and automate next-day e-mail notification of incoming items meeting the criteria.

• New features will be automatically available for use by current RDFI File Alert customers and are priced monitoring options.

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Challenge: Traditional ACH vs. Same Day

• ACH schedules in place for 35 years without material change

• Demand exists for faster clearing & settlement of ACH payments

– Private ACH exchanges operating today that clear ARC, BOC, POP & WEB payments same-day

– Some commercial banks clear on-us ACH payments same-day

– Check 21 enables same-day clearing of some check payments

– Other countries have implemented same-day clearing for low-value payments

• Faster clearing & settlement provides payment system benefits—e.g., reduces risk

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Opportunities with FedACH SameDay

• Allows converted check payments (ARC, BOC, POP, and RCK) as well as TEL and WEB payments.

• SameDay forward items may be sent between 2:15 a.m. and 2:00 p.m. ET, delivered by 4:00 p.m. ET, and settled at 5:00 p.m. ET.

• Return of SameDay forward items may be sent between 2:00 p.m. and 4:30 p.m. ET, delivered by 5:00 p.m. ET, and settled at 5:30 p.m. ET.

• RDFIs will not be required to return SameDay forward items by the above schedule. For return of SameDay forward items, the current return deadline rules apply.

• The proposed service does not require any non-standard use of NACHA file, record, or field formats.

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FedACH Same Day Features

• Service is opt-in for both the ODFI and RDFI, by agreement, and is available to any FedACH customer.

• For each RTN, participants may choose to be an ODFI only, an RDFI only, or both an ODFI and RDFI for forward payments.

• RDFIs can opt-in for any or all ODFIs using the unilateral/ multilateral service.

• ODFI participants can originate payments to all opt-in RDFI participants agreeing to accept such payments.

• SameDay and next-day payments can be comingled in the same batch and included in the same input file. Non-eligible payments will settle next day.

• ACH interoperator same-day settlement for forward payments is not supported.

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International ACH

Non-Time Critical Payments

International ACH payment framework:• NACHA Operating Rules / File Formats

– IAT

– Batched separately

• Underlying Agreements

• Gateway Operators

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International ACH Secure Low-cost Fixed settlement dates Multiple transaction types Helps businesses maintain compliance with formats,

Rules, additional country clearing system requirements / practices

Simplified reconcilement Date, value and receipt can be determined /

predicted Return item reporting

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JP Morgan Chase Uses global branches and Intl. partner FIs to send

credits/debits to/from Asia, Europe and the Western Hemisphere.

Users send a single file of their bulk, mixed foreign currency payment or collection instructions to the bank. Format options can vary and include EDI, ASC ANSI X12, UN/EDIFACT, SAP and XML.

Timing of file delivery agreed upon beforehand; dependent on each country’s clearing cycle. JPMC’s gateway partner/bank branch processes instructions through the local clearing system, which in turn forwards them to the RDFI for crediting/debiting on the predetermined Settlement Date.

Source: www.jpmorganchase.com

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Wells Fargo International ACH services are available to Austria,

Australia, Belgium, Canada, France, Germany, Ireland, Mexico, The Netherlands, New Zealand, Spain, Switzerland and the UK.

3/4/09 Businesswire – ―Wells Fargo has launched International ACH credit services to India, Hong Kong & Singapore.‖ (Added to Australia, Canada, Europe, Mexico, and New Zealand)

Payments settle on the evening of the effective date specified in the file.

Originate payments in U.S. dollars or foreign currency.

Source: www.wellsfargo.com

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FedGlobalSM Services

Accessible to all U.S. FIs Cost-effective Same process used to send domestic

transactions Use standard NACHA formats (IAT) ACH deposit deadlines and accounting practices:

Same as for domestic transactions Accelerated clearing time No fees are taken from the payment amount of

the transaction entry

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Settlement

U.S. Settlement (FRB to ODFI) occurs on the effective entry date defined in the Batch Header Record.

Rules governing settlement (RGO to RDFI) within the receiving countries vary; however, in all participating countries, settlement to the RDFI occurs within two days of the U.S. settlement date.

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Canada

RGO: Scotiabank

Debits and Credits

FF or FV (USD to USD; or USD to CAD)

Items are payable to the Canadian RDFI on the U.S. settlement date or one business day after the U.S. settlement date, depending upon transaction type.

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Mexico

RGO: Banco de México (Central Bank of Mexico)

Credits

Fixed-to-Variable (USD to Pesos)

Funds are available in the Mexican Receiver’s account next day (2:30 p.m. CT)

Directo a MéxicoSM

Account to Receiver (A2R)

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Transatlantic

• Transatlantic – Strategic collaboration among FRB, Equens and DZ BANK for processing cross-border payments.

• U.S. FIs can send payments in U.S. $, Euros and British pounds to 22 countries across Europe.

• Allows banks across Europe to send U.S. $ payments via Equens to the U.S.

• DZ BANK serves as the European gateway operator, and Equens as payment processor.

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Foreign Exchange

Fixed-to-Fixed (FF) – Originated in fixed amount, settles in fixed amount (e.g. $ to $).

Fixed-to-Variable (FV) – Originated in fixed amount, and settles in variable amount after FX performed by RGO.

Variable-to-Fixed (VF) – Originated in a variable-value amount based on a specific FX rate for conversion to a fixed value amount in receiving country.

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Foreign Exchange Liability

Originator/ODFI Agreement should contain specific details regarding the terms and conditions for the allocation of gains/losses and the assumption of risk for foreign exchange conversion.

FX spread applied on both the originated item and the return (in FRB services).

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Payment System Differences

Holiday Schedule

Authorization

Information required for periodic statements in the recipient’s country

Acceptance of:

• Reclamations

• Prenotes

• Reversing Files/Entries

Notice of variable payments (to consumer accounts)

Returns

Others. . .

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Account-to-Receiver (A2R)

• Account-to-Receiver (A2R) Service - FIs can send funds that can be retrieved by a receiver at either a bank location or at a third-party provider in Mexico and 12 other Latin American countries.

• Funds are available to RDFI next business day.

• No fee to pick up funds.

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Region Countries Currency picked up in Destination Country

Foreign Exchange Option

North America Mexico Pesos FV

Central America Costa Rica USD FF

El Salvador USD FF

Guatemala Quetzal FV

Honduras Lempira FV

Nicaragua USD FF

South America Argentina USD FF

Bolivia USD FF

Brazil Real FV

Colombia Peso FV

Ecuador USD FF

Peru USD FF

Uruguay USD FF

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Per Item Surcharges To ODFI

• To enroll, complete Part 6A (FedGlobal ACH Payments) of the FedACH Participation Agreement

http://www.frbservices.org/files/forms/fedach_services/pdf/fedach_part_6a_seca_rv.pdf

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FedGlobal Marketing Options

• Comprehensive white-label brand materials created for enrolled financial institutions that want to market a

variety of FedGlobal services to their customers.

Directo a México® and CanadaConnectionSM materials also available.

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Challenge: Wire Payment Information

• The Association for Financial Professionals (AFP) initially approached the Federal Reserve Banks on this topic after the AFP had done research in 2005 suggesting that 17% of incoming wires to corporations require research to properly reconcile and apply costing an average of $35 and 30 minutes of time.

• The Federal Reserve Banks and The Clearing House joined forces in 2006 and conducted research to establish the extent of corporate demand for structured remittance information in the wire transfer message.

• From this research, it was concluded that corporations would:

-value an expanded message format with structured and standardized

remittance information

-be willing to pay an additional fee for a wire transfer message that included that information

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Fedwire Funds Service Message Format Changes

• The Federal Reserve Banks will be implementing a new message format to support extended character business remittance information, improved cover payments, payment notification and tracking, better alignment to SWIFT, and a few additional minor changes.

• The centerpiece of the Fedwire Application Interface Manual (FAIM) 3.0.2 format changes will be the availability of a new business function code called the customer transfer plus (―CTP‖) with new available data elements and revised edit rules.

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Fedwire Funds Service Message Format Changes (Cont.)

• All customers will be required to be able to receive the new CTP message and to ensure that internal systems can handle other minor changes in this format release that apply to all messages.

• You are advised to work with your vendors and internal software development teams to ensure that any payment applications that interface with the Fedwire Funds Service can process FAIM 3.0.2 messages.

• The Federal Reserve Banks are targeting an implementation date of November 19, 2011 for these changes.

• For more information, please see:

http://www.frbservices.org/campaigns/remittance/files/remittance_faq.pdf

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Opportunities for Fedwire Payment Notification

• A ―strawman‖ model has been developed for using the new fields to notify an originator that the payment has been processed by a downstream party. Opt in rulebook to be created for participating banks.

• Originating banks would offer the service to their customers via their wire origination services.

• Originating banks would notify their customers of payment status.

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New $100 Bill Coming in 2011!

• New Design for the $100 note was scheduled for distribution beginning Feb. 10, 2011. This has been delayed.

• Educational materials available on the BEP website at www.newmoney.gov

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Toll Free Numbers are Consolidating!

• Check 21 Customer Support Center consolidated with the number for Check and Check Adjustments Customer Support. Customers should call (877) FRB-CHKS or (877) 372-2457 for all check-related customer support.

• FedACH Central Operations Support consolidated to a single, toll-free number with a shorter call menu and new call-routing technology to expedite the handling of calls. Customers should call (866) 234-5681 for 24-hour FedACH support.

• FedLine, FedMail, and FedPhone Customer Contact Center is (888) 333-7010.

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My FedDirectory

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