Electronic Payment Receivables and the ACH Network New Chops for the Old Kid

Electronic Payment Receivables and the ACH Network New Chops for the Old Kid Speaker: Rob Unger, Amy Morris Date: June 15, 2016 Time: 2:00-3:00 Session Number: 25088

Electronic Payment Receivables and the ACH Network New Chops for the Old Kid Robert Unger, Senior Director NACHA (runger@nacha.org, 703-561-3913 Amy Morris, Senior Director NACHA (amorris@nacha.org, 703-561-3936

Is there anything about payments that gets you steamed? What are your top issues?

4 Agenda ACH 101 Increasing Volume of ACH/Electronic Payments Managing ACH Risk Remittance Information Same Day ACH

ACH 101

6 What is EFT What is ACH? EFT (Electronic Funds Transfer) is a general term designating a system or process for electronically transferring funds from one bank account to another. EFT can refer to ATMs, payment cards, wires, SWIFT, ACH, and any other electronic means for transferring funds.

7 What is EFT What is ACH? ACH (Automated Clearing House Network) refers to a specific electronic payment network. The ACH Network is used for consumer and business domestic and international payments. Payments settle within 1-2 days for classic ACH ; payments settle in the same day for Same Day ACH. The Network is governed by NACHA-The Electronic Payments Association.

NACHA-The Electronic Payments Association and the NACHA Operating Rules 8 https://www.nacha.org/rules www.nacha.org

In the ACH, What is a Credit Payment and What is a Debit Payment? In a CREDIT ACH payment, the customer or buyer pushes funds from the buyer s bank account to a seller s bank account. (Analogy paying with cash, where the seller then has funds in hand.) 9 Buyer Buyer Bank Seller Bank

In the ACH, What is a Credit Payment and What is a Debit Payment? In a Debit ACH payment, the seller pulls funds from the customer or buyer s bank account for transfer to the seller s bank account. (Analogy paying with a check, where the seller then needs to collect funds.) 10 Buyer Bank Seller Bank Seller

11 Credit and Debit Payments Have Wide Applicability Most any payment can be made using credit or debit ACH. ACH can be used to make payments (domestic and international): Direct Deposit of payroll for employees, taxes, bills, invoicebased payments, transferring/concentrating funds, ecommerce/web purchases. ACH payments can be collected in all channels: Mail/lockbox, telephone/ivr, Internet, walk-in, mobile, bankto-bank, point-of-sale In 2015, 23 billion payments worth more than $40 trillion were processed through the ACH Network

12 Credit vs Debit ACH Payment ACH Credit Settled upon funds being received into your account the money is yours once funds are deposited In very rare circumstances, the funds may be reversed (i.e., reclaimed) to correct a defined error: Examples: duplicate payment file, wrong account, incorrect calculation of amount Reversals must be initiated within 5 days of the settlement date ACH Debit Settled upon funds being received into your account - the money is yours once funds are deposited Payment can be disputed by customer as to whether payment was authorized: Consumer has 60 days post statement to make claim Business must make claim within 2 days of debit Other risks: invalid account, account closed, insufficient funds

ACH and the Order to Cash (O2C) Process 13 1. Customer Places a Contract or Order 2. The Customer is Set-Up in the Customer Master File 3. The Order is Booked ACH Value Proposition for O2C Guaranteed payment (credits) Supports easy to use debit payments and conversion of checks to ACH Lowers remittance costs and errors caused by re-association Low cost, low risk Accelerated cash flow Backed by NACHA Rules 8. The ACH Payment is Applied 7. The Customer Pays the Invoice via ACH 6. The Order is Invoiced and Booked into AR 4. The Order is Shipped or the Services are Provided 5. Shipping is Confirmed and Revenue is Recognized

Increasing Adoption of ACH Payments

15 Discussion What percentage of your payments made are electronic, and what is the approximate mix of payments being made? Percent check, ACH, card, wire What percentage of your payments received are electronic, and what is the approximate mix of payments being made? Percent check, ACH, card, wire Does your company have goals to increase electronic payments being made, or electronic payments being received? What are your goals? How will you achieve the goals? What resources are being invested? What has worked in the past?

16 ACH Economics ACH payments benefit AR because ACH payments: Cost less than check payments One leading B2B payment provider cites that receiving a check costs approximately $1.50, assuming that the recipient is using lockbox services and receiving about 10 lines of remittance. The cost of the equivalent ACH is pennies. Cost less than p-card/credit card payments Receiving credit payments typically cost 2% of the transaction (or more) and other fees may apply (e.g., (transaction fee, level 3 data). The cost for the equivalent ACH is pennies.

AR Trend Increasing Receivables Costs Driven By Pcard/Credit Card Payments 17 Accounts payable card payments growth: Fueled by reward/rebate model (AP as profit center) Funded by AR Pros Lower risk, easy process Cons Costs Purchasing card spending growth in the past two years in the corporate segment (was) (31%). Going forward, the predicted purchasing card growth is about 10.8% per year average over the next five years RPMG Research Corporation

18 Receivables Payment Mix Strategy Companies are successfully reducing AR costs by strategically managing the mix of payments, using customer segmentation to drive payment choice. What is the optimal mix of card, ACH and wire payments? For example: Repetitive Payments High Value Low Value & One Off Small Biz Immediate International ACH (soon) Card Wire

How do I wean customers away from rebate and reward card payments?

20 ACH Rebates and Rewards Next Big Thing in ACH Applies same economic model as pcard (AP gets rebate/reward) Discount rate is less than card (and is often negotiable) Supported by several AP networks/providers Credit payment Can provide enriched remittance data

Maximize Cost Reduction Opportunities By Growing ACH Volume 21 The ACH super users Set goals for ACH adoption Have budgets Communicate during onboarding ACH Other successful strategies include engaging in various low cost outreach, as well as investing in customer behavioral change

22 What Works - Payment Goals Billers goals range from efficiency and lower costs; 27% focused on specific electronic payment growth targets. We don't really have any goals or bubbles. We always want to steer people toward ACH because our retention is better and it is lower cost. We do not really have an explicit number, but we do have a direction. (Insurance) We have goals to drive more recurring payments with low cost, specifically ACH and Debit. (FS) Develop a realistic strategy to increase EFT to replace checks. Recurring ACH is the sweet spot for our business. We would like to bring Recurring ACH up from 20% of payments to 50-60%. (Insurance) Specific Growth Percent Increase all electronic Payments / Increase ACH Incr Pymt options for custs Get paid / more money / Collections Increase Online Increase / Accept Credit Cards No Goal Make faster / reduce DSO Increase ebilling Decrease Credit Card payments Reduce services requiring labor/ Increase Debit Improve Business billing/ Increase Make easier Other 0% 5% 10% 15% 20% 25% 30%

23 What Works - ACH Marketing Budgets 80% of the participants said that do not have any budget dollars to spend to promote ACH Payments. Although lacking a hard dollar budget, they promote ACH by using messages on bill statements, website and company newsletters. Among the 20% that do have hard-dollar budgets, they are Billers who absorb credit card fees and want to encourage customer adoption of One-time and Recurring ACH. Q62. Are there budget resources for increasing recurring and/or one-time payments? Q62 - Overall Small Middle Large Yes 19.7% 16.8% 17.2% 31.7% No 80.3% 83.2% 82.8% 68.3% n = 575 268 203 104 Q62. Are there budget resources for increasing recurring and/or one-time [ACH] Payments?

24 What Works - Promotion at On-Boarding Three-quarters market electronic payments at the time of new customer enrollment. Bill messages, new customer letters, offer through new service, online push. - Municipal Q65- Do you market to one-time electronic payment customers to try and get them on-boarded for electronic payment? Market During Onboarding A new welcome package for new accounts. Utility New customer brochure, website, customer contact representative contact with customer, bill messaging. - Utility 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 91% 10% Up to $10MM 82% 18% $10MM to $500MM 65% 35% Over $500MM Yes No

Low Cost Opportunity The Phone Prioritize/segment (e.g. focus on large volume check and card payers) The whole credit/receivables department picked up the phones for 2 days to help with outreach. We held a contest with sales staff, focusing on promoting ACH to small business customers. Our hold message promotes the benefits of ACH. During collection calls we talk about using ACH to avoid delays and to improve credit ratings and how much more convenient it is compared to checks. Our company has an FTE (and interns) devoted to onboarding buyers, and we use this position as an entry level position in the company with success they move into other area after several months.

26 Low Cost Opportunity The Invoice Design the invoice to steer buyers to your website portal and other preferred payment methods Offer ACH debit option Be sure to pre-fill screens Use banner ads Provide instructions on how to pay via ACH (credit) including your RT/account, website portal URL, and how to pay electronically through 3 rd party partners (and how to provide remittance) Getting customers on e-invoices increases electronic payments they get invoices earlier and often pay earlier

27 Investing to Change Customer Payment Behavior Offer incentives (e.g., discount or extended DSO/float time) to pay via ACH Compensate sales staff for selling ACH payment Require new buyers to pay via ACH Decrease or retract - early pay discount with check and card payments Partner with financial institutions, payment vendors and related third parties

Improving Straight Through Processing of Remittance Information

We love ACH payments, but. As our ACH increases, our straight through processing decreases. We provide remit instructions for payers but there are always errors. Remit processing was working, then it wasn t. Software updates are tricky. Payers send us the remittance by email, and we have to rekey it. 29

ACH Payments Facilitate Remittance Information Exchange

ACH Supports Dollars and Data ACH B2B payments provide payment instructions (e.g., the check - who to pay, how much, when), and can include up to 800,000 characters of remittance data (e.g., the stub - invoices being paid, discounts taken) Paper check and stub Converted to electronic ACH payment

ACH Record Format: CTX (corporate trade exchange) for B2B Payments with Remittance 32 The 5 record provides payer and settlement information Record Type Code Service Class Code Company Name Company Discretion ary Data SEC Company Entry Description Company Identification Company Descri p-tive Date Effective Entry Date FRB Settlement Date OFI Status Code Originating DFI Identification M M M O M M M O R M M M Batch Number Content s Length/ Alpha- Numeri c 5 200 Biller Additional Originator Info 1 3 N 16 A Originator ID Number Position 01-01 02-04 05-20 21-40 41-50 51-53 20 A 10 A CTX 3 A 10 A 6 A Specifie d by Orig. YYMMD D 6 3 N Blank Always 1 Biller s RTN 1 A 8 TTTT AAAA Assigned by originato r; zero filled and sequenti al 54-63 64-69 70-75 76-78 79-79 80-87 88-94 7 N

ACH Record Format: CTX (corporate trade exchange) for B2B Payments with Remittance The 6 record contains payee information and amounts 33 Content s Length/ Alpha- Numeric Record Type Code Transaction Code Check Digit Account Number Amount Identificati on# # of Addenda Name Reser ved Receiving DFI Identification Discretionary Data Addenda Indicator M M M M R M O M R N/A O M M 6 22 Customer FI 1 2 N 8 TTTTAAA A Custo mer FI 1 N Customer sc FI Bill Payment Account or ID # 17 A Amount 10 N $ amt. used for FI fees Bill Identificati on Number 15 A Corresponds to the number of addenda attached; zero fill 4 N Customer s Name 16 A 2 2 A Trace Number Blank 1 Assigne d by ODFI Position 01-01 02-03 04-11 12-12 13-29 30-39 40-54 55-58 59-74 75-76 77-78 79-79 80-94 The 7 record contains payment detail (remittance advice) DATA MUST BE IN STANDARD EDI OR XML FORMAT Record Type Code Addenda Type Code Ebill Summary Information Addenda Sequence Number 1 N 15 N Entry Detail Sequence Number M M O M M Contents 7 05 Include first 80 characters of data noted below See Field See Field Defs. Defs. Length 1 2 80 4 7 Position 01-01 02-03 04-83 84-87 88-94

At U.S.-based companies, email is the most preferred method for receiving remittance information overall; large corporations frequently like the EDI and lockbox channels 34 Q. Which three methods of receiving remittance information does your company most prefer? (N=150) Email Mail Fax EDI Lockbox Online portal Electronically Statement (Bank) Telephone In-person SWIFT 17% 14% 18% 23% 45% Q. Which three methods of receiving remittance information does your company most prefer? (N=150) Email 13% 27% 25% 23% 10% 13% 7% 20% 7% 7% 9% 3% 13% 17% 18% 5% 5% 12% 13% 12% 2% 3% 3% 3% Small businesses Midsize companies Large corporations (US$10 million or less (US$10 million to (Over US$500 million in revenue), n=30 US$500 million in in revenue), n=60 1% revenue), n=60 Source: Aite Group survey of 150 receivables managers or experts at U.S.-based companies, January to March 2012 43% 43% 58% 32% 32% 5% 7% 25% Mail Fax EDI Lockbox Online portal Electronically Statement (Bank) Telephone In-person SWIFT White labels represent results that are statistically different from orange labels for each category

U.S.-based companies prefer mail, followed by email, for sending remittance information 35 Q. What three methods of sending remittance information does your company most prefer? (N=90) Mail 46% Email Fax EDI Online portal Telephone SWIFT In-person Lockbox Electronically Statement (bank) 2% 1% 4% 4% 8% 11% 37% Source: Aite Group survey of 90 payables managers or experts at U.S.- based companies, January to March 2012 Q. What three methods of sending remittance information does your company most prefer? (N=90) Mail 57% 37% Small businesses (US$10 million or less in revenue), n=30 47% 33% 33% 40% 23% 7% 3% 10% 13% 10% 3% 3% 3% 3% Midsize companies (US$10 million to US$500 million in revenue), n=30 Large corporations (Over US$500 million in revenue), n=30 Email Fax EDI Online portal Telephone SWIFT In-person Lockbox Electronically Statement (bank) White labels represent results that are statistically different from orange labels for each category

While ACH supports data and dollars, only 10% of B2B payments are sent with the payment using standards Method or Channel for Providing Remittance Details Number of Monthly Remittances (billions) 36 1 Sent by mail 2.6 2 Provided through a bank or third-party lockbox resource 2.2 3 Included with the payment in an unstructured or freeform format 1.7 4 Provided at a location such as an online banking site or the remitter's website that is accessed with a code or key 1.6 10% of 15.5 billion remittances 5 Included with the payment in a format supported by a standards group 1.5 5 Sent by email 1.5 6 Provided in Electronic Data Interchange, or EDI, format directly to your company from your trading partner 1.2 7 Provided through a value-added network in Electronic Data Interchange, or EDI, format 1.1 8 Provided by SWIFT (Society for Worldwide Interbank Financial Telecommunications) 0.8 9 Provided by Telephone 0.5 10 Sent by fax 0.4 Source: Aite Group 10 Provided by a trading partner network that is supported by a third-party vendor, such as Ariba or SunGard 0.4

..., 56% must be re-keyed 37 Method or Channel for Providing Remittance Details Number of Monthly Remittances (billions) 1 Sent by mail 2.6 2 Provided through a bank or third-party lockbox resource 2.2 3 Included with the payment in an unstructured or freeform format 1.7 4 Provided at a location such as an online banking site or the remitter's website that is accessed with a code or key 1.6 5 Included with the payment in a format supported by a standards group 1.5 5 Sent by email 1.5 8.7 billion, or 56%, of 15.5 billion 6 Provided in Electronic Data Interchange, or EDI, format directly to your company from your trading partner 1.2 7 Provided through a value-added network in Electronic Data Interchange, or EDI, format 1.1 8 Provided by SWIFT (Society for Worldwide Interbank Financial Telecommunications) 0.8 9 Provided by Telephone 0.5 10 Sent by fax 0.4 10 Provided by a trading partner network that is supported by a third-party vendor, such as Ariba or SunGard 0.4 No part of this material may be used Source: without the Aite prior Group written permission of NACHA. This material is not

There Are Business Practice and Technology Options for Improving ACH Remittance Processing

39 Case Study ACH Debit Payments Enhance Customer Service & Build Loyalty Challenge Small business customers faced: Having cash or check on hand Additional fees for COD services Business flow interruption, including shipment delay risk Results / Benefits More efficient payables for customers Incentives made happier customers Faster settlement than checks Lower costs versus credit card acceptance Approach Offer an ACH payment option (debit or pull payment ) and incentive of 1-2% discount based on payment date for customers Our goal is to offer the best customer service to our customers, and ACH helped us do that. Wayne D. Gray Vice President KHS Bicycles

Managing ACH Risk

41 The Three Critical Corporate Controls The three most critical internal controls for any company can be established by corporate policies should be "operationalized" into your company's financial transaction process and monitored by electronic payment processes. These controls are: 1. Segregation of Duties 2. Delegation of Authority 3. System Access

Five Best Practice Controls for ACH Payments 42 1. Supplier Master File Controls: Use a pre-approved listing of suppliers and banking information. 2. Systems Access: Development of user profiles, which enforce separation of duties. 3. Delegation of Authority: Multiple approval processes should occur before disbursement of funds with dollar limits. 4. Cash Account Reconciliations: Timely reconciliation process using Sarbanes Oxley standards with the timely review of exceptions. 5. Continuous Monitoring: Frequent monitoring of cleared banking transactions to catch unauthorized transactions

ACH Transaction Internal Controls 1. ACH Debit Block: Prohibits all ACH debit withdrawals from the account. 2. ACH Debit Filters: Only ACH debit transactions that match criteria you set base on payee, and dollar amount are permitted. 3. ACH Positive Pay: Allows the accountholder to review ACH debit requests before they are paid. 4. Tokenization: when applied to data security, is the process of substituting a sensitive data element with a non-sensitive equivalent, referred to as a token that has no extrinsic or exploitable meaning or value. Tokenization is a process by which the primary account number (PAN) is replaced with a. surrogate value called a token.

Seven Best Practices for Protecting Your ACH Transactional Environment 44 1. Create and maintain a secure computer environment. 2. Review and understand any software limitations. 3. Require multiple layers of password security. 4. Control the number of authorized users. 5. Limit the use of online banking transactions to specific computers. 6. Have well defined controls in place for making any changes to ACH data. 7. Encrypt data and monitor all changes to ACH data.

Same Day ACH for Businesses

Discussion 46 Who has heard of Same Day ACH and what have you heard? What do you view as the potential benefits of Same Day ACH for your: organization? customers? What operational impacts do you think Same Day ACH will have on payments being made or received? Do you have any questions about Same Day ACH?

The New Same Day ACH Opportunity for Businesses 47 Ubiquitous capability for moving ACH payments faster. Transactions initiated within designated timeframes are settled the same day. Using Same Day ACH is optional for Originators. Receiving Same Day ACH is required for Receivers. Existing one-day and two-day ACH processing and settlement capabilities will not be impacted

Same Day ACH Benefits 48 Payers Low cost (compared to other options), ubiquitous option to expedite payments Examples: emergency payments, off-cycle disbursements and corrections or payouts, time critical/due-date payments, account transfers, etc. Potential to hold ledger balance/funds longer before payment Payment Receivers Lower receipt costs compared to other expedited options Accelerated funds availability Opportunity to reduce Days Sales Outstanding (DSO) improvement to cash position for investment/debt reduction decisions Faster receipt of remittance for speedier cash application (if remittance sent with payment) Reduced risk (particularly for debits available 2017) Quicker cycle for account verification and returns (e.g,, insufficient funds, account not found, debit blocks/filters) for payment collection Improved account management for debit payers quicker funds withdraw Positive impact to logistics cycle/disbursements of goods/services, improved product throughput with faster availability of good funds

3:00 AM 4:00 AM 5:00 AM 6:00 AM 7:00 AM 8:00 AM 9:00 AM 10:00 AM 11:00 AM 12:00 noon 1:00 PM 2:00 PM 3:00 PM 4:00 PM 5:00 PM 6:00 PM 7:00 PM 8:00 PM 9:00 PM 10:00 PM 11:00 PM 12:00 midnight 1:00 AM 2:00 AM Next Day and Same Day ACH Settlement Timing (NOTE: Eastern Standard Time and this is not Receiver/payee funds availability) 49 Next Day ACH 2:15 AM - ODFI Deadline for Next-Day ACH Transactions (originated PREVIOUS day) 6:00 AM - RDFI receipt files of Next-Day ACH 8:30 AM - Settlement Same Day ACH Window # 1 10:30 AM - ODFI Deadline for Same Day Window # 1 11:30 AM - RDFI Receipt Files for Same Day Window # 1 1:00 PM - Settlement for Same-Day Transactions for Window # 1 Window #2 2:45 PM - ODFI Deadline for Same Day Window # 2 All times Eastern Time 4:00 PM - RDFI Receipt Files for Same Day Window # 2 RDFI File Receipts Times Are Approximate 5:00 PM - Settlement for Same-Day Transactions for Same Day Window # 2 DETERMINED BY ODFI-Originator Agreement - Times at which Same Day ACH payments are due to the ODFI, and when Originator account is debited. DETERMINED BY RDFI-Receiver Depository Agreement - Time(s) at which Same Day ACH Funds are credited to the Receiver and Receiver's ACH account is adjusted Businesses should contact their ODFI for file submission deadlines, and their RDFI for funds availability and related file delivery schedules.

Phased Approach to Same Day Implementation 50 Phase 1 Sept 2016 Credits only RDFI sets receiver funds availability Phase 2 Sept 2017 Credits and debits RDFI sets receiver funds availability Phase 3 Sept 2018 Credits and debits Receiver funds available at 5pm RDFI local time These are minimum requirements FI can exceed could give availability earlier May adjust balnace throughout day

What Transactions Will Be Eligible for Same Day ACH? 51 Almost all credit and debit ACH payments Example credit and debit payments: payroll, T/E, supplier payments, state taxes, bill pay, urgent claims/refunds, person-to-person, account-toaccount, check conversions, collections, e-commerce/web payments, etc. Non-monetary transactions Examples: prenotifications, notifications of changes, zero-dollar remittance information transactions, etc. International transactions (IATs) and single payment transactions over $25,000 will not be eligible for same-day processing Federal government payments The federal government will not be participating in phase 1 of the Same Day ACH implementation, and will not send or receive Same Day ACH payments at this time.