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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10424 ~|
January 9, 1991
ALL-ELECTRONIC ACH PROPOSAL
Comment Requested by March 27
To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:
Following is the text of a statement issued by the Board of Governors of the Federal Reserve System:
The Federal Reserve Board has issued for public comment a proposal to require depository institutions that originate
or receive commercial automated clearing house (ACH) transactions through the Federal Reserve Banks to establish elec
tronic access to the Reserve Banks for ACH services.
Comments are due by March 27, 1991.
Specifically, the Board proposed that:
• beginning January 1, 1993, a per transaction surcharge on commercial ACH transactions be assessed on depository
institutions using nonelectronic ACH deposit or delivery alternatives: and
• beginning July 1, 1993, commercial ACH services be provided only to those institutions that have electronic access
to the Reserve Banks for ACH services.
In addition to these measures, the Board anticipates that ACH service fees pertaining to physical input or output media,
including magnetic tapes, diskettes, or paper, will be increased significantly, beginning in 1992, to further encourage tran
sition to electronic access alternatives.
The Federal Reserve will be able to significantly improve its ACH service by increasing the speed of delivery of
ACH payments and reducing the risks associated with ACH transactions if the origination and receipt of all ACH trans
actions were electronic. These improvements cannot be achieved, however, if a portion of ACH endpoints continues to
send and receive ACH transactions via nonelectronic media.
The Federal Reserve has encouraged users of its ACH service to access the service electronically and has offered
a number of electronic access alternatives designed to meet the needs of depository institutions. Many depository insti
tutions find these alternatives attractive and have readily converted to electronic access for ACH services.
However, the Board believes that an additional impetus will be necessary to complete the transition to a fully electronic
ACH service so that all commercial ACH participants could benefit from the resulting service improvements
Enclosed is a copy of the Board’s proposal; additional, single copies may be obtained at this Bank (33 Liberty
Street) in the Issues Division on the first floor, or by contacting our Circulars Division (Tel. No. 212-720-5215 or
5216). Comments thereon should be submitted by March 27, 1991, and may be sent to the Board, as indicated in
the notice, or to Carol W. Barrett, Vice President, Electronic Payments Function of this Bank.
E. G e r a l d C o r r i g a n ,
President.
Text of All-Electronic ACH Proposal
FEDERAL RESERVE SYSTEM
[Docket R-0718]
Federal Reserve Bank Services
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Request for comment.
SUMMARY:
The Federal Reserve would be able to significantly
improve its automated clearing house (ACH) service by increasing
the speed of the delivery of ACH payments and reducing the risks
associated with ACH transactions if the origination and receipt
of all ACH transactions were electronic.
These improvements
cannot be achieved, however, if a portion of ACH endpoints
continues to send and receive ACH transactions via nonelectronic
media.
In the past, the Federal Reserve has encouraged users of
its ACH service to access the service electronically and has
offered a number of electronic access alternatives designed to
meet the needs of depository institutions.
Many depository
institutions find these alternatives attractive and have readily
converted to electronic access for ACH services.
The Board
believes that an additional impetus will be necessary to complete
the transition to a fully electronic ACH service so that all
commercial ACH participants could benefit from the resulting
service improvements.
Therefore, the Board is requesting comment
on a proposal to require depository institutions that originate
or receive commercial ACH transactions through the Federal
Reserve Banks to establish electronic access to the Reserve Banks
for ACH services.
[Enc. Cir. No. 10424]
Specifically, the Board proposes that:
2
1.
beginning January 1, 1993, a per transaction surcharge on
commercial ACH transactions be assessed on depository
institutions using nonelectronic ACH deposit or delivery
alternatives; and
2.
beginning July 1, 1993, commercial ACH services be provided
only to those institutions that have electronic access to
the Reserve Banks for ACH services.
In addition to these measures, the Board anticipates that ACH
service fees pertaining to physical input or output media,
including magnetic tapes, diskettes, or paper, will be increased
significantly, beginning in 1992, to further encourage transition
to electronic access alternatives.
The Board believes that this proposal would improve the
efficiency of the ACH mechanism by ensuring timely posting of ACH
payments to customer accounts and by allowing greater flexibility
in ACH processing schedules, thus facilitating the use of the ACH
for a broader range of payment applications.
The proposal would
enhance the integrity of the ACH mechanism by reducing the time
lag inherent in ACH transactions, thereby reducing risk, as well
as by providing greater security and improving contingency and
disaster recovery capabilities.
DATE:
Comments must be submitted on or before March 27, 1991.
ADDRESS:
Comments, which should refer to Docket No. R-0718, may
be mailed to the Board of Governors of the Federal Reserve
System, 20th and C Streets, N.W., Washington, DC 20551,
Attention: Mr. William W. Wiles, Secretary; or may be delivered
3
to Room B-2223 between 8:45 a.m. and 5:00 p.m.
All comments
received at the above address will be included in the public file
and may be inspected in room B-1122 between 9:00 a.m. and 5:00
p.m. Monday through Friday.
FOR FURTHER INFORMATION CONTACT:
Louise L. Roseman, Assistant
Director (202/452-3874), or Gayle Brett, Manager (202/452-2934),
Division of Federal Reserve Bank Operations and Payment Systems;
for the hearing impaired only:
Telecommunications Device for the
Deaf, Dorothea Thompson (202/452-2077).
SUPPLEMENTARY INFORMATION:
BACKGROUND.
The ACH is a value-dated electronic
payments mechanism that supports both debit and credit payments.
In ACH debit transactions, funds flow from the depository
institution receiving the transaction to the institution
originating the transaction.
Typical debit payments include the
collection of insurance premiums, mortgage and loan payments,
consumer bill payments, point-of-sale transactions, and corporate
cash concentration transactions.
In ACH credit transactions,
funds flow from the originating institution to the receiving
institution.
Typical ACH credit payments include direct deposit
of payroll and corporate payments to contractors and vendors.
In
1990, the Reserve Banks estimate that they will have processed
approximately 470 million commercial debit transactions having a
value of $3.06 trillion and 400 million commercial credit
transactions having a value of $920 billion.
4
Unlike Fedwire, in which funds transfers are processed
individually and settled immediately at the time of processing,
ACH is a batch-processing system in which transactions are
generally deposited at the Reserve Banks for processing one or
two days before the settlement day.
ACH transactions are
processed and delivered to receiving institutions during one of
two scheduled processing cycles: the day cycle and the night
cycle.
Currently, approximately 8,300 (or 80 percent) of the
10,500 endpoints receiving commercial ACH services directly from
the Reserve Banks do not have electronic data communications
links with the Reserve Banks for ACH services.
These
nonelectronic endpoints receive ACH transactions using magnetic
tape, diskette, or paper media.
Some nonelectronic endpoints use
messengers to deposit and pick up ACH output.
Other
nonelectronic endpoints, more remotely located, generally receive
ACH output by Federal Reserve check courier or by mail.
Because of the additional time required to deliver ACH
output to nonelectronic endpoints, ACH credit payment information
necessary to update customers' accounts may not be available to
some receiving institutions until after the opening of business
on the settlement day (and these receiving institutions may not
be able to determine with certainty the timing of delivery of
output).
ACH
In addition, nonelectronic delivery restricts the
Federal Reserve's ability to offer schedules for ACH deposit and
distribution that better meet the needs of depository
5
institutions and their customers.
The time between origination
and settlement of a transfer is longer in the current environment
than would be possible if all endpoints were electronic, thus
making the ACH system unattractive for certain payment
applications and increasing the risk in the system.
Moreover,
the level of security and the disaster recovery capability
associated with nonelectronic receipt and delivery of ACH
payments are lower than those associated with electronic
transmission.
PROPOSAL TO IMPLEMENT AN ALL-ELECTRONIC ACH.
The Board
believes that the Federal Reserve could implement significant
improvements to its ACH service if all participating institutions
accessed the service electronically for the origination and
receipt of ACH transactions.
In general, these improvements
cannot be achieved if a portion of ACH endpoints continue to send
and receive ACH transactions via nonelectronic media.
The
Federal Reserve offers ACH participants a number of electronic
access alternatives designed to meet the needs of depository
institutions.
If the benefits of an all-electronic ACH are to be
realized within the next few years, however, the Board believes
that the Federal Reserve will have to encourage more actively the
development of an all-electronic ACH network.
The Monetary Control Act directs the Federal Reserve to
consider, in its pricing principles, the provision of an adequate
level of service nationwide.
This provision relates not only to
the availability of the service to all depository institutions,
6
but also to the level of service that is provided.
The Board
believes that the establishment of an all-electronic ACH is
consistent with the Monetary Control Act and Federal Reserve
policies concerning payment services in that it will enable the
Federal Reserve to make major improvements to its ACH service.
The Reserve Banks have already taken steps to require
electronic access for new commercial ACH participants.
Beginning
January 1, 1991 , new ACH receiving endpoints (including endpoints
that currently receive only ACH government transfers but begin to
receive commercial transfers) will be required to receive ACH
transactions from the Federal Reserve electronically; beginning
July 1, 1991, new originating institutions will be required to
send ACH transactions to the Federal Reserve electronically.
In order to complete the implementation of an
all-electronic ACH network by July 1, 1993, the Board proposes
that beginning January 1, 1993, a per transaction surcharge on
commercial ACH transactions originated and received would be
assessed on depository institutions using nonelectronic ACH
deposit and delivery alternatives.
The Board anticipates that
the per transaction surcharge would likely increase ACH
transaction fees by 50 to 100 percent.
The Board also proposes
that beginning July 1, 1993, commercial ACH services would be
provided only to those institutions that have electronic access
to the Reserve Banks for ACH services.
In addition to these measures, the Board anticipates
that the ACH fees pertaining to the use of nonelectronic input or
7
output media would be increased by 50 to 100 percent, beginning
January 1992, to further encourage all nonelectronic endpoints to
convert to electronic access alternatives as soon as possible.
The Board believes that increasing the ACH
non-automated input and output fees and assessing the per
transaction surcharge would encourage many depository
institutions to convert to electronic access in advance of the
proposed mid-1993 deadline, and would thus result in a more
orderly conversion to an all-electronic environment.
The Board
does not anticipate that these proposed fee increases, if
implemented, will result in an overrecovery of the costs of
providing ACH services.
The proposed program would apply only to institutions
that originate or receive commercial ACH transactions.
The
Federal Reserve and the Department of the Treasury have held
preliminary discussions regarding an all-electronic government
ACH service.
The Federal Reserve will work with Treasury to
develop a program to encourage institutions that receive only
government ACH transactions to convert promptly to electronic
access.
BENEFITS OF AN ALL-ELECTRONIC ACH.
In considering
major service enhancements, the Federal Reserve evaluates the
public benefits that would be derived.
The Board believes that
the establishment of an all-electronic ACH would facilitate the
adoption of significant improvements in the ACH payments
mechanism that would promote the efficiency and integrity of the
8
payments system.
These benefits are consistent with the Federal
Reserve's role in the payments system, as articulated in the
Board's policy statement "The Federal Reserve in the Payments
System."
[55 FR 11648, March 29, 1990]
1.
Timely delivery.
One of the primary benefits of an
all-electronic ACH would be to increase the speed with which ACH
payments are delivered.
This would ensure that all institutions,
regardless of their volume or location, receive ACH output on a
timely and consistent basis.
Timely delivery of ACH payments is
important to both originating and receiving depository
institutions and their customers, because it enables receiving
institutions to post the payments to their customers' accounts
sooner and to provide prompter availability of funds, consistent
with the objectives of the Expedited Funds Availability Act and
ACH rules.1
Currently, some institutions that receive ACH output
by mail do not have sufficient time to process the payments and
update their customers' accounts by settlement day.
Even with
courier delivery, transportation delays may cause untimely
crediting of customers' accounts.
Electronic delivery of ACH
Regulation CC (12 CFR 229.10(b)) requires that depository
institutions make the proceeds of ACH payments available to their
customers on the business day following the banking day the
institution has received both payment in finally collected funds
and the payment instructions. ACH rules require that depository
institutions make the proceeds of ACH credit transactions
available to customers on the settlement day; moreover,
institutions are encouraged to make the proceeds of payroll
transactions available at the opening of business on the
settlement day.
9
payment information to all receiving institutions would assure
ACH participants that the receiving institutions would receive
the ACH payments in sufficient time to ensure prompt posting.
This, in turn, would reduce customers' complaints regarding late
posting and delayed availability of payroll and other credit
transactions and would strengthen the confidence of both the
beneficiary and the originating company in the use of the ACH
mechanism.
2.
More flexible processing schedules.
An
all-electronic ACH would enable the Reserve Banks to make
significant improvements to their processing schedules.
ACH
processing schedules are currently constrained by the timing of
the check courier dispatches, since the check couriers deliver
ACH output to many receiving institutions.
This constraint
limits significantly the Federal Reserve's flexibility to modify
the ACH service to better meet the needs of depository
institutions and their customers.
The elimination of the
constraints of courier and mail delivery in an all-electronic
environment will facilitate the establishment of later deposit
deadlines for originating time-critical ACH payments, such as
hourly wage payrolls, cash concentration, check truncation, and
point-of-sale transactions.
Such changes to the ACH processing
schedule may facilitate the use of the ACH for a broader range of
payment applications.
3.
Reduced risk.
Institutions in an all-electronic
ACH environment would be able to reduce the risks associated with
10
ACH transfers because the time required from the deposit of ACH
transactions at a Reserve Bank until the delivery of those
transactions to receiving institutions would be reduced.
If the
commercial ACH service were all-electronic, originating
institutions would no longer find it necessary to deposit ACH
payroll and other credit payments (which frequently have a large
aggregate value) at the Reserve Banks two days before the
settlement day in order to facilitate the delivery of the
transaction data to the receiving institutions in time to post to
customers' accounts by the opening of business on the settlement
day.
Because an originating institution is obligated to settle
for all credit items submitted to the Federal Reserve for
processing, decreasing the time between the submission of credit
items and settlement reduces its credit risk.
More timely
deposit and delivery of debit return item transactions through
electronic transmission would also reduce credit risk to the
originating depository institution and its customer, because the
originating institution would receive the return item one or two
days sooner than if it had been received by the Reserve Bank in
paper form.
4.
Higher level of security.
An all-electronic ACH
network would result in a higher level of security for all ACH
payments.
Article 4A of the Uniform Commercial Code (Section
4A-202(b)) allocates liability for an unauthorized transfer based
on whether the receiving institution employed a commercially
11
reasonable security procedure.2
The Reserve Banks currently
offer data encryption and other security procedures to electronic
endpoints to ensure the confidentiality of ACH transactions and
the authenticity of the sender.
These procedures provide a
significantly higher level of security than for physical ACH
deposit and delivery alternatives.
5.
Improved contingency processing and disaster
recovery capabilities.
The recent power disruption in New York
City's financial district and last year's earthquake in San
Francisco have highlighted the need for reliable contingency
processing and disaster recovery procedures for payment services.
Electronic access to the ACH service would eliminate the delays
associated with delivering physical input and output media to and
from a remote site in a contingency processing or disaster
recovery situation.
A depository institution also could send
payment file corrections to its Reserve Bank more quickly through
electronic transmission than if physical delivery of the payment
file were necessary, reducing the likelihood of a delay in normal
processing, as well as in a contingency processing situation.
ELECTRONIC ACCESS ALTERNATIVES.
The Federal Reserve
currently offers depository institutions several alternatives to
facilitate electronic access to the Reserve Banks for a variety
2The revised ACH operating circular incorporates Article 4A
provisions with respect to those ACH credit transfers that are
subject to Article 4A.
12
of Federal Reserve services, including ACH.
Different access
alternatives are available to meet the needs of depository
institutions, depending on their volume of transactions.
For the ACH service, medium- to high-volume
institutions can use one of two computer-interface alternatives
with dedicated leased-line communications links.
The Reserve
Banks can provide transmission ("bulk data") software that
institutions interface with their host systems; alternatively,
institutions or their vendors can develop software using the
Federal Reserve's Computer Interface Protocol Specifications
(CIPS) to customize their ACH processing systems to meet the
needs of their operating environment.
Low- to medium-volume institutions can use an
intelligent-terminal system that has been certified by the
Federal Reserve.
Depository institutions may use Reserve
Bank-provided Fedline or vendor-supplied intelligent-terminal
software.
The Fedline software fully supports the ACH service,
as well as other Federal Reserve services.
The Federal Reserve
assists depository institutions in identifying sources that offer
reasonably priced equipment that is compatible with the Fedline
software.
The Reserve Banks also recently introduced the
FLASH-Light intelligent-terminal software product for low-volume
institutions.
FLASH-Light, which is a receive-only system,
enables the Reserve Banks to transmit ACH output electronically
in a format that allows the receiving institution to print the
13
ACH payment information.
FLASH-Light also will be enhanced to
provide Fedwire funds transfer advices of credit beginning the
third quarter of 1991.
The Federal Reserve will continue to seek additional
cost-effective electronic access alternatives that are consistent
with the System's network and security standards.
The following
table lists the Federal Reserve's 1991 electronic access
alternatives and associated fees.
1991 ELECTRONIC ACCESS FEES
Connection Fees
Dial - Receive Only (FLASH-Light)
Dial - Full Service (Fedline)
Multi-Drop Leased Line
Dedicated Leased Line
High Speed (>9.6 kbps)
$30/Month
$65/Month
$300/Month
$700/Month
Circuit Cost plus Overhead
Start-Up Fees
Installation/Training
FLASH-Light
Fedline and Computer Interface
Encryption
Certification of Non-Federal Reserve Software
$100
$300
Actual Cost
$0 to $8,000
Vendors currently offer or are developing several
electronic access products that conform to the System's network
protocol and data security standards.
These products may provide
viable alternatives for nonelectronic endpoints using magnetic
tapes for origination and receipt of ACH transactions and for
electronic endpoints using electronic connections that do not
conform to System communication protocol specifications, such as
"datalink" or "dataline" connections.
To enable low-volume FLASH-Light users and institutions
using third-party service providers to originate return item and
i
14
notification of change transactions, all Reserve Banks plan to
offer a database service with telephone voice-response access by
December 31, 1992.
service.)
(Several districts currently offer this
The service would create the return item or
notification of change transaction from the information about the
originated transaction that is stored on a database and
additional information that the depository institution keys into
a touch-tone telephone.
The fee for this service currently
ranges from $1.25 to $2.00 per return item, which is higher than
the fee for an electronically originated return item transaction
but less than the fee the Reserve Banks charge for converting a
paper return item to an electronic transaction.
The Reserve
Banks would continue to accept for processing paper return item
and notification of change transactions only in instances where
technical problems or missing forward transaction information
preclude the use of the database service to generate the return
item or notification of change transaction.
In lieu of establishing an electronic connection
directly with the Federal Reserve, depository institutions may
access the Federal Reserve's ACH services through a correspondent
institution or other service provider that has established an
appropriate electronic connection with the Federal Reserve.
Where a correspondent or other service provider acts as the
sending and/or receiving point for a participating depository
institution, it is deemed the agent for the participating
institution.
In order to achieve the full benefits of an
15
all-electronic ACH service, institutions that choose to receive
their ACH payments through a correspondent or other service
provider are encouraged to arrange for delivery of the payments
from the service provider in a manner that ensures timely receipt
by the institution.3
The proposed conversion to an all-electronic ACH should
provide depository institutions or their service providers ample
time to modify their automated systems and adjust their
operations to the new requirement.
Nonelectronic endpoints
should allow sufficient lead-time when requesting electronic
access to provide for ordering equipment, testing, and training
their staffs.
Therefore, nonelectronic endpoints should schedule
their conversion to electronic access by the end of the third
quarter of 1991 in order to avoid the higher nonelectronic input
and output fees, and not later than the end of the third quarter
of 1992 in order to avoid the transaction surcharge.
The Board recognizes that this proposal will require an
initial investment in equipment and staff training and may
3A receiving institution is deemed to have received its ACH
transfers when the transfers are received by that institution's
correspondent bank or other service provider, for the purposes of
when the receiving institution must make the funds available for
withdrawal under Regulation CC. In addition, under Regulation E
(12 CFR 205.10(a)(2)) the receiving institution must credit the
beneficiary's account for a preauthorized credit as of the day
the funds for the transfer are received. Thus, the receiving
institution should ensure that, if it receives its ACH transfers
through a correspondent or other service provider, it receives
the transfers on a timely basis.
16
increase ongoing operating expenses for certain ACH participants.
This additional cost may cause some participants to reevaluate
their participation in the ACH mechanism.
While the Board is
sensitive to this concern, it believes that the benefits of an
all-electronic ACH mechanism to all ACH participants justify the
additional cost that will be incurred.
A fully electronic ACH service complements other major
ACH initiatives that the Federal Reserve is pursuing to improve
the efficiency of the ACH mechanism.
The Reserve Banks plan to
further consolidate their ACH operations and to implement a new
production system for ACH services.
These initiatives should
enable the Federal Reserve to reduce its overall cost of
providing ACH services in the longer term, which will reduce the
cost to ACH participants as well.
The Board is requesting comment on all aspects of this
proposal.
The Board specifically requests comment on the
following:
1.
Would existing nonelectronic endpoints encounter any
significant obstacles that would prevent them from
converting to electronic access by July 1993?
2.
Would increasing ACH nonelectronic input and output fees and
assessing a per transaction surcharge be effective in
facilitating the transition of both high-volume and
low-volume institutions to an all-electronic commercial ACH
service by mid-1993?
Should the per transaction surcharge
be subject to a minimum surcharge level (of, for example,
17
$100 per month) to provide further incentive to low-volume
institutions to establish an electronic connection prior to
the mid-1993 deadline?
3.
Could an all-electronic commercial ACH service be achieved
by mid-1993 by pricing incentives alone, that is, without a
mandatory deadline?
4.
Do the electronic access alternatives provided by the
Reserve Banks and commercial vendors address the needs of
nonelectronic ACH participants?
If, not, what additional
electronic access alternatives that meet Federal Reserve
standards for reliability and security should be considered
for future development?
5.
Are there additional (or alternative) initiatives that could
be taken that would provide for an all-electronic ACH by
mid-1993?
COMPETITIVE IMPACT ANALYSIS.
In March 1990, the Board
formalized its procedures for assessing the competitive impact of
changes that have a substantial effect on the payments system
participants.
The Board believes that this proposal will have no
adverse effect on the ability of other service providers to
compete effectively with the Federal Reserve in providing similar
services.
The New York Automated Clearing House, which provides
commercial ACH services in the Second District, currently
requires that its members send and receive ACH transactions
through electronic connections.
Other service providers
predominantly serve ACH participants through electronic access
18
alternatives.
The Board anticipates that correspondent
institutions and other ACH service providers generally would
support the Federal Reserve's efforts to establish an
all-electronic ACH service.
By order of the Board of Governors of the Federal
Reserve System, December 19, ±990.
(signed)
William W. Wiles
William W. Wiles
Secretary
@FedFRASER