Full text of News from FedACH : Vol. 1, No. 5, December 2004

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fedachnews@atl.frb.org

VOL. 1, NO. 5, DECEMBER 2004

customer in the
FEDERAL RESERVE
A C H O P E R AT O R
SERVICES

SPOTLIGHT

Good Habits Spur Growth at Silicon Valley Bank

“News from FedACH” is the Federal
Reserve Banks' nationwide quarterly
ACH newsletter reaching over
19,000 ACH participants including
banks, savings banks and credit
unions. This newsletter is intended
for FedACH customers who are
interested in seeing ACH fulfill its
role as the nation’s premier
electronic payment service. Share
the newsletter. Spread FedACH news.

The best way to break a bad habit is never to let it
start. That philosophy is part of what has helped
Silicon Valley Bank triple its ACH business in fewer
than three years.
“The traditional way banks open up an account with
a small business is to hand them some checks,” said
Shirley Arington, Silicon Valley Bank senior product
manager. “This starts them off with bad habits,
writing checks for their payments rather than using

expensive if you don’t write checks.’ We would like
to keep them away from writing checks.”
Arington observed it is preferable to teach customers better banking habits early than face an
uphill climb later.
“It’s amazing. Technology companies—these people
who create the technology that we use not only in
banking but in general—are not nearly as sophisticated in their business banking experiences,”
Arington said. “Getting them into ACH early is the
only way. Once they’re in the check world, they
want to stay there.”
However, once customers are in the ACH world,
Arington finds they are more than content to stay.

electronic payments. But when you start them with
ACH, you won’t have to convert them from paper.”

CONTENTS
Customer in the Spotlight

1

Facts and Figures

2

Note to FedLine DOS users:
January 2005 Software Upgrade

2

News Kiosk

3

Questions and Answers

3

What’s Coming Up

4

Fee Schedule

4

Customer Service

4

The Financial Services logo, “FedACH,”
“FedACH International,” and “FedLine” are
either registered or unregistered trademarks
or service marks of the Federal Reserve Banks.

Such a progressive approach is consistent with other
facets of Silicon Valley Bank’s operation. Based in
Santa Clara, Calif., Silicon Valley focuses on providing diversified financial services to small to midsize companies in the technology, life science, private
equity and premium wine markets. In 21 years, the
institution has grown to $4 billion in assets, with
nearly 1,000 employees and 9,500 global customers.
Each time Silicon Valley adds a customer, the topic
of ACH is front and center. “We’re working on a strategy for new accounts,” Arington said. “It includes,
‘Here’s how you open up, and here’s how you do
business. And to have an account with us is less

“We have a large number of account holders who do
business over the Internet, so ACH fits in well when
they’re not doing credit card payments,” she said.
“Otherwise, most of our customers are doing B2B
transactions, the perfect place for ACH because
everybody wants to be paid by ACH.”

Payroll Pays Off
Payroll constitutes the biggest chunk of Silicon
Valley’s ACH business, which included more
than 115,000 payments valued at approximately
$260 million in October 2004. This growth is substantial, but Silicon Valley Bank did not have to
look far to generate the business.
“We have a substantial internal customer base for
cash management, and we market to that customer
base because we still do not have complete saturation,” Arington said.
(Continued on page 2)

Good Habits Spur Growth at Silicon Valley Bank
(Continued from page 1)

According to Arington, one move that helped trigger Silicon Valley Bank’s
ACH growth was minimizing its risk with a prefunding strategy. Although
one large account holder backed away, the overall response was positive.
“We rolled out prefunding two and a half years ago,” Arington said. “Since
then, our ACH business has grown exponentially because we’ve been
able to make it available to more customers. We were able to do that
because prefunding eliminates a risk.”
Arington estimates 75 percent of outgoing credits are prefunded. “We
introduced prefunding at a time when interest rates were very low,”
she said. “Many customers signed up for prefunding because their
money wasn’t doing anything for them during those two days.”

Life with the Third Party
One critical component of Silicon Valley Bank’s operation is its relationship with its third-party processor. The relationship has been in place for
more than five years. Silicon Valley’s processor was originally chosen
because its system was newer and had functionality that best suited
Silicon Valley’s needs. Since then, the processor has been responsive to
the bank’s changing needs, such as accommodating prefunding.
Arington said one other important consideration when selecting a thirdparty processor is security of information. “I’m a fanatic about that,”
Arington said. “People don’t tend to realize that just sending an e-mail to
someone with your account information is a bad idea. But the bank is
responsible for holding data securely, so our processor has to do the same.
All the information that passes through has to be very secure.”
One of the best ways to ensure a successful relationship with a third-party
processor is to get in the habit of monitoring performance. “We exercise a
lot of due diligence with processors,” Arington said. “It’s a continuing process to evaluate and make sure they are still holding onto everything and
remaining state of the art on technology.” Silicon Valley Bank remains
big on good habits.

Facts and Figures
The figure? 47. The fact? There are that many questions
included in the Federal Reserve’s questionnaire for potential ACH software vendors. To assist those FedACH customers who need to identify a solution for ACH batch
origination in a FedLine Advantage environment, this list
of questions can be used to evaluate potential vendors. The
questionnaire can be found at:
http://www.frbservices.org/Retail/fedach.html.
In 2003, remittances from the United States to Mexico
exceeded $13 billion, nearly double the amount of $6.6 billion in 2000. FedACH InternationalSM Mexico Service is
ready to handle these payments for you and your customers.
More than 200 FedACH customers attended one of four
seminars that introduced the FedLine Advantage access
solution. Registrations for the online, self-guided seminar
exceeded 450. To register for the self-guided seminar,
please visit http://www.frbservices.org.
FedLine Advantage Seminar Participants
30

54

Webinar

78

Atlanta
New York

455

55

San Francisco
Chicago

Note to FedLine DOS users: January 2005 Software Upgrade
®

FedACH customers using FedLine DOS
can expect a software upgrade early in
2005. A software upgrade patch scheduled
for release in January 2005 addresses two
issues: a new return reason code and a
change related to the Electronic Federal
Tax Payment System.
The new return reason code is “R05 - Unauthorized Debit to Consumer
Account Using Corporate SEC Code.” This return reason code becomes
effective March 18, 2005, and supports NACHA’s efforts to improve the
quality of payments made in the ACH network. Transactions qualifying
for use of R05 are limited to CCD, CTX, or CBR debit entries transmitted
to a consumer account and not authorized by the receiver.

2

N e w s

f r o m

F e d A C H

The second component of this upgrade modifies the FedLine federal tax payment batch detail screen. The upgrade is in accordance
with a November 2004 consolidation that resulted in designating a
single financial institution as agent for the Electronic Federal Tax
Payment System.
Your Federal Reserve Customer Contact Center will transmit this
software patch. You will receive correspondence providing detailed
instructions and a distribution date in advance of receiving the
patch. Once the upgrade has been received and automatically
implemented, current FedLine 2.60.90 software will be upgraded
to version 2.70.00. For additional information, please contact your
Federal Reserve Customer Contact Center.

Q&A

ACH Risk and
Back Office Gap
Each year, eFunds processes more than 15 billion transactions, making it the largest
third-party processor in the United States.
Rahul Gupta serves as Senior Vice President
and Division Executive, Risk Management
and Electronic Payment Solutions, for eFunds.
Gupta recently discussed ACH risk as well as
a gap in the ability of ACH to accommodate
retailers’ interest in converting checks in
their back room.

Q: ACH risk has received considerable attention recently. What trends
have you observed?
A: The clear trend we’re seeing is increased fraud. With the growth of ACH,
we see retailers looking for more kinds of payments that they can
accept, whether online or at point of sale. Clearly, there is a growing
number of people wanting to misuse the application. In our thinking,
the whole ACH world breaks down into two dimensions of risk. The
less risky situation occurs when people accept payments from known
entities such as utility companies billing known customers. Even in
that category, there is risk because of identity theft. The far riskier
category is consumer payments to businesses through Web sites and
via the telephone. That risk is increasing dramatically.
Q: What is the biggest vulnerability you see in the ACH arena?
A: There is no standard for authentication. Also, no standards exist in
terms of a centralized database of people who have abused the system. In the retail check world, we built a service called SCANSM
(Shared Check Authorization Network), which was put together by
retailers who saw the risk associated with checks. In a sense, that
service became a standard. Since then, other standards have emerged.
In the ACH world, a comparable standard has not emerged. So when
returns come back, there is not a central reporting agency compiling this information, such as the reason for returns, so the information can be used in a wide variety of formats and places.
Q: How do you help your customers manage ACH risk?
A: Managing risk is a combination of three things. First is helping customers manage ID risk and ID fraud. Is this the right person? Second
is managing the transaction risk itself, such as velocity. The third thing
is ownership. Does this person really own the account? The way we
help our customers really depends on the point at which the ACH
transaction is originated. For example, we offer retailers a check conversion product for ACH origination at the point of sale. There we
leverage our SCAN database, behind which sits a product called Debit
Bureau, to help manage customer information. We also have a product
called ClickCheckSM to help customers manage risk for online origination of payments on e-commerce or e-banking Web sites.
Q: What would you cite as the biggest void with ACH?
A: What retailers want to do is accumulate the checks in their back
office, either in the back of the store or in a regional processing

center, and convert these checks to ACH. Point of sale conversion reached a certain level of penetration and stalled because
of the sheer investment required to convert checks that way.
The problem is there is no SEC code to handle check conversion
in the back office. This conversion would occur after the customer
has departed, so disclosure becomes an issue. NACHA has been
working with banks on the regulatory framework so this back
office conversion can become a true alternative to Check 21.
But the perception within the retail community is that NACHA
and the banks are not moving fast enough. We’re being told it
will be a two-year wait. Two years is a long time. We are very
interested in working with industry groups to accelerate the
development of the regulatory framework.

News Kiosk
ACH Risk Surveys
The latest step in the Federal Reserve’s focus on ACH risk
was a survey designed to assess ODFI interest in managing
origination risk through an originator batch-based service
via our FedACH FedLine Web services. More than 80 percent of the FedACH customers polled favored this approach.
Most respondents indicated that the service would either
supplement their existing ACH software or replace an
existing manual process. The survey included large and
small banks from each Federal Reserve district.

FedACH Sales Specialists to Be Named
To better serve FedACH customers, the Federal Reserve
has appointed dedicated FedACH sales specialists. Customers in each district can look to these sales specialists for
specific products and information related to FedACH services. They will be the primary points of contact between
the Federal Reserve and FedACH customers. All account
executives will continue to support FedACH sales and
customer needs.

Updated FedACH Security
Procedure Agreement
During October, all sending points and ODFIs received
letters explaining that a new FedACH Security Procedure
Agreement should be signed and forwarded to the appropriate Customer Operations Support site in either Atlanta
or Minneapolis. It is important to note that an updated,
signed copy of the agreement needs to be on file with the
Federal Reserve prior to an ACH participant’s conversion to FedLine Advantage. This requirement extends to
FedACH customers who may not subscribe to FedLine
Advantage but who process their ACH work through a
processor or a sending point. A copy of the new agreement can be found on page 15 of the FedACH Participation Agreement located at http://www.frbservices.org/
Retail/pdf/ACH-Agreement.pdf.

3

WHAT’S COMING

UP

Happenings
and Events

Conferences sponsored by regional payments associations
¹ EastPay’s Information Interchange 2005
The Changing Face of Payments
February 13-15, 2005
Orlando, FL

www.eastpay.org

WACHA’s 2005 Conference
Electronic Payments Conference 2005
March 14-16, 2005
Middleton, WI

Origination
Items in small files

$0.0030

Items in large files

$0.0025

Receipt Items

$0.0025

Addenda Records

$0.0010

Input File Processing

$3.75 / file

Web-derived Returns / NOCs

$.50

FedPhone-derived Returns / NOCs

$2.00

Facsimile Exception Returns/NOCs

$15.00

Information Extract File Subscription

$10.00 / RTN /Month

Account Servicing

$25.00 / RTN /Month

FedACH Settlement

$20.00 / RTN /Month

www.wacha.org

Southern Financial Exchange’s 15th Annual
Payments Conference and Expo
Partners in an Evolving Payments World
April 18-20, 2005
Biloxi, MS

FedACH Services Fee Schedule

www.sfe.org

NACHA’s Payments 2005
¹ Payments 2005 is scheduled for April 10-13, 2005, in San Antonio,
Texas. Don’t miss this opportunity to hear the latest news in the
payments industry from developers and providers of payments
products, services and technology.

FedACH International*
* For a complete listing of FedACH International fees, please refer to the
fee schedule available at http://www.frbservices.org/FeeSchedules/
FedACH2005.html

Visit http://www.nacha.org/conferences/Payments2005/
default.htm for more information.

FedACH Customer Service Via 24-Hour Telephone Access
For FedACH Customers in
these Districts

Customer Operations
Support Site

For FedACH Customers in
these Districts

Customer Operations
Support Site

Boston (1)
New York (2)
Philadelphia (3)
Cleveland (4)
Richmond (5)
Atlanta (6)
Chicago (7)

Federal Reserve Bank
of Atlanta
1000 Peachtree Street, N.E.
Atlanta, GA 30309-4470
Toll Free: 866.234.5681
Local: 404.498.8902

St. Louis (8)
Minneapolis (9)
Kansas City (10)
Dallas (11)
San Francisco (12)

Federal Reserve Bank
of Minneapolis
90 Hennepin Avenue
P.O. Box 291
Minneapolis, MN 55480-0291
Toll Free: 888.883.2180
Local: 612.204.5555

FEDERAL RESERVE
RETAIL PAYMENTS OFFICE
1000 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30309-4470
RETURN SERVICE REQUESTED

PRESORTED
FIRST CLASS
U.S. POSTAGE
PAID
ATLANTA, GA
PERMIT NO. 292