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News from

VOL. 2, NO. 4, DECEMBER 2005

FedACH

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

MONITORING ACH ORIGINATION RISK

Q&A: SUZANNE HOWE

2

5

Banks Able to Monitor
Payments at Batch Level

NEWS KIOSK
ACH RULES CHANGES
WHAT’S COMING UP

Treasury Payments
Processing

3
3
4

CUSTOMER IN THE SPOTLIGHT

The Bank of Kentucky
Growing by Knowing
Your Customers
now your customers and grow with
them”—a simple and straightforward
approach to customer service. This
philosophy is one key to the success of the
Bank of Kentucky as it has grown to become
the largest community bank in northern
Kentucky. Founded in 1990 and located just
south of Cincinnati in Crestview Hills, KY,
the Bank of Kentucky is the lead bank for
the Bank of Kentucky Financial Corp., a
bank holding company with assets of approximately $950 million. Providing banking
and related financial services to both individuals and business customers, the Bank
of Kentucky is the fastest-growing bank in
northern Kentucky with 27 branches and 41
ATM locations.
One of the newest departments within the
bank is Treasury Services. Just a year ago,
Jerry Meyer was hired to head up Treasury
Services, bringing with him more than 30
years of banking industry experience. Meyer

K

is responsible for developing products and
services to be sold nationally. These include
stored value cards, ACH services, consolidated return services, and expansion of the
bank’s lockbox program.
We recently talked with Meyer, senior vice
president of Treasury Management Sales,
about the bank’s ACH services and products.
We wanted to find out more about how this
community bank has experienced impressive
growth in its ACH business without sacrificing quality or control.

Impressive Growth Defined
Throughout 2004, monthly ACH origination
volume at the Bank of Kentucky hovered
around 60,000 items. An analysis of 2005 ACH
volume through the third quarter revealed
that the bank’s origination volume had grown
by 100 percent over 2004. By late November
2005, that growth rate reached 191 percent.
Increases of this magnitude can be attributed
News from FedACH | 1

primarily to two types of ACH transactions—
direct payments (PPD) and re-presented
check entries (RCK). “PPD volume growth
stems largely from direct payments originated by a local utility company that followed
me to the Bank of Kentucky,” Meyer said.
Relatively new to the bank is its RCK volume.
The bank was already using a consolidated
returned check program to meet the needs
of large check collection companies, and
Meyer recognized the revenue potential
associated with taking on RCK volume.
Meyer believes this business will continue
growing at a steady clip, citing monthly
volumes exceeding 60,000 transactions.

Controlling the Risk
Of course, the decision to begin offering a
particular ACH service is not one that the
Bank of Kentucky takes lightly. During his
years of experience in treasury management,
Meyer learned that “you have to be very

CUSTOMER IN THE SPOTLIGHT
careful with whom you do business.” As a
result, one of his first objectives at the Bank
of Kentucky was to develop a robust risk
assessment process that relies on coordinated efforts with the ACH operations and
credit departments. Simply stated, the bank’s
ACH policy “categorically defines the types
of customers with whom the bank would or
would not do business.” While the types of
ACH services and products offered by the
bank have expanded during the past year,
each decision has been made in light of this
ACH policy.
Although the Bank of Kentucky does not
currently offer origination services for
Internet-initiated (WEB) or telephoneinitiated (TEL) entries, Meyer confirmed
that, “if the right customer with the right
risk parameters came in wanting those services, we would certainly take a look at
working with them to make WEB and TEL
origination available.”
One recent example of effective risk
assessment that the bank performed occurred
when a potential consolidated returns customer asked about bringing its point-ofpurchase (POP) volume to the bank. Because
this was a new customer that was also considered to be a third-party processor, the
bank’s ACH policy dictated that due dili-

gence be exercised before taking on this
business. While POP volume represents a
small percentage of the bank’s ACH business,
this type of effort contributes to the ACH
network’s historically low-risk performance.
Further recognizing the importance of
controlling risk within the ACH network

The Bank of Kentucky’s
ACH policy “categorically defines the types
of customers with whom
the bank would or would
not do business.”

and the role that an ODFI can play, the Bank
of Kentucky recently licensed a risk monitoring system that will enable it to better
monitor its ACH transactions.

More to Come
When asked to project the Bank of Kentucky’s ACH volume, Meyer responded by

Monitoring ACH Origination Risk
Banks Able to Monitor
Payments at Batch Level
The Fed’s recently announced ACH risk
mitigation service—FedACH RiskSM Origination Monitoring Service—is up and
running at select nationwide sites. Eleven
depository financial institutions (DFI)—
including nine banks and two credit unions—
are using features of the service.
This batch-based service tracks, pends,
and notifies participating originating depository financial institutions (ODFI) when
monitored originators send batches that
exceed preset debit and credit caps.

Each ODFI chooses to monitor one or
more of its originators or chooses to monitor
all ACH activity across the DFI. Caps can be
value-based or can be set at zero. For example, an originator may be limited to $1 million in credit payments and $500,000 in debit
payments per day or across multiple days.
Once a cap is breached, e-mail notifications are sent to participants, who then
determine disposition of pended batches.
General availability of the FedACH Risk
Origination Monitoring Service is scheduled
for March 2006.

News from FedACH | 2

saying, “I would be very disappointed if our
volumes don’t, on an annual basis, triple for
the next several years.” Toward this goal and
not wanting to miss out on a proven success,
the bank is licensing software that would
allow it to offer check conversion solutions
to its customers. This software will also be
able to handle back-office check conversion
if approved. The long-range plan is that, once
the software is in place, the bank will have a
single system capable of determining which
processing path a check needs to follow.
For the Bank of Kentucky, knowing its
customers isn’t just an afterthought. As
evidence, the bank’s slogan is “You know us,
we know you.” With a footprint in a handful
of counties, this bank really feels like it is
a part of the communities in which it is
located. From our perspective, those communities should continue to look for good
things from the Bank of Kentucky, a community bank with a footprint that just
keeps getting bigger.

FedACH SALES SPECIALISTS

NEWS KIOSK

Each of these regional account executives is an ACH resource expert
and is dedicated to helping customers find just the right FedACH solution.
We encourage you to contact the sales specialist for your district.

fees will be lowered effective Jan. 3,
·2006.TwoTheFedACH
fee for Web-originated returns and NOCs drops
from $0.50 to $0.30, and the fee for input file processing
decreases from $3.75 to $2.50 per file. No fees for other
FedACH services change. See the back page of this newsletter or visit www.frbservices.org for a complete listing
of 2006 FedACH fees.
Services has a new online communication
·tool:FedACH
the FedACH Electronic Notification System. This
free, subscriber-based e-mail service offers a quick and
convenient way for anyone in your institution to stay
informed about FedACH processing issues and application outages. If you have not yet registered, visit www.
frbatlanta.org/achuser to get started.
Congratulations to all of you who passed the
·Accredited
ACH Professional (AAP) exam in October.
We also applaud those who have put forth the effort to
retain and renew their accreditations. If you would like
to join the growing number of AAPs nationwide, mark
your calendar for the next exam date: Oct. 17, 2006.
In September, the Directo a México roadshow was
·launched.
Roadshows have been conducted in 16 locaSM

tions across the country from California to New York and
many points in between. Designed to promote the
FedACH InternationalSM Mexico Service, each session
included meetings with representatives of local financial institutions and Mexican community groups. News
coverage of Directo a México has been extensive and
positive in both Mexico and the United States. Currently,
58 financial institutions use this service to provide their
customers with a better way to send remittances to
Mexico. If you would like more information, please contact your local FedACH sales specialist or visit http://
www.frbservices.org/Retail/intfedach.html.

Atlanta

Nedelka Bell, AAP

305.471.6472

Boston

Jean Fisher, AAP

617.973.3218

Chicago

Michael Cronkhite

312.322.2145

Cleveland/St. Louis

Susan Bivens, AAP

901.579.2405

Dallas

Matt Davies, AAP

214.922.5259

Kansas City

Joni Hopkins, AAP

620.221.2712

Minneapolis

Marilyn Coleman, AAP

612.204.6964

New York

Thomas Goodman

201.531.3637

Philadelphia

Carol Chartrand, AAP

215.574.3414

Richmond

Della Tate, CTP

410.576.3384

San Francisco

Dorothy Williams, AAP

801.322.7948

ACH RULES CHANGES EFFECTIVE MARCH 17, 2006
The following return reason codes will be modified to address operational
efficiency issues as well as to reduce the potential for misuse of certain
return reason codes:
R16 (Account Frozen)– to clarify use for return of both debit and
credit entries
R27 (Trace Number Error)– to reflect current practice in which Operators
edit to ensure the original entry trace number is included in the addenda
record of an NOC entry
R36 (Return of Improper Credit Entry)– to include XCK entries returned by
an Operator when those entries bear a credit transaction code without the
description of ‘reversal’
R51 (Item is Ineligible . . .)– require RDFI to obtain a WSUPP from
Receiver prior to returning an RCK entry using this code
R70 (Permissible Return Entry Not Accepted)– permit ODFI to dishonor an
entry returned by RDFI using Return Reason Code R06 (Returned per
ODFI’s Request) when ODFI did not request such a return
R13 (RDFI Not Qualified to Participate)– clarify that an Operator uses this
code to return entries containing a routing number or OGO Identification
Number that is not valid for ACH entries
Please visit NACHA’s Web site at www.nacha.org for additional information.

News from FedACH | 3

WHAT’S COMING UP

JANUARY 2006

MARCH 2006

NACHA’s Global Electronic Payments Conference
Understanding Market Variables & Opportunities
for Future Success on the International Stage
January 16–17, 2006
Rome, Italy
www.nacha.org

Southern Financial Exchange’s
16th Annual Conference and Expo
Partners in a Secure Payments Future
March 27–29, 2006
Biloxi, MS
www.sfe.org

FEBRUARY 2006

APRIL 2006

Eastpay’s Information Interchange 2006
Hitting a Home Run with Electronic Payments
February 12–14, 2006
Orlando, FL
www.eastpay.org

WACHA’s Electronic Payments Conference 2006
April 10–12, 2006
Green Bay, WI
www.wacha.org

LATEST ENHANCEMENTS TO FedACH SERVICES
Entry Register Now Available to FedLine Advantage Customers
In November, we responded to customer feedback by expanding and improving FedACH
Services to provide an even higher level of service at no additional expense to our customers. FedLine Advantage subscribers who send and receive ACH files can now request an
easy-to-read Entry Register that provides detail at the item and addenda levels. This register
is available online for ACH payment files up to 10 business days old, and the register can
also be printed and saved.
Subscribers Define Reporting Threshold for Unauthorized and Invalid Returns
As of December 18, 2005, all customers using FedACH Information Services will enjoy enhanced returns reporting capabilities. While a
threshold of 50 invalid or unauthorized returns in a day has been in place since the service’s initial availability, customers will now be able to
set this threshold as low as one return in a day. In addition, when reporting on a range of days, the resulting reports will accumulate returns
volume over the requested time frame. Volumes for specific days will continue to be available as well.
If you have any questions, please contact your local FedACH sales specialist.

CUSTOMER SUPPORT INFORMATION
For FedACH Customers
in these Districts
Boston (1)
New York (2)
Philadelphia (3)
Cleveland (4)
Richmond (5)
Atlanta (6)
Chicago (7)

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

For FedACH Customers
in these Districts

Central Operations
Support Site

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

News from FedACH | 4

Question and Answer
Treasury Payments Processing
How do the Federal Reserve Banks factor into
the Treasury’s payments processing? The Federal
Reserve Banks act as fiscal agent for the U.S. Treasury. Several offices provide services to both the
Financial Management Service (FMS) and the
Bureau of Public Debt.

We talked recently with
Suzanne Howe about the
U.S. Treasury’s financial
transaction processing,
focusing on improvements
in the Treasury’s processing.
Howe, who has worked in
the electronic payments
arena at the Federal Reserve
Bank of Cleveland for 16
years, is vice president of
Electronic Payments and
eGovernment Operations.
Working closely with the
Department of the Treasury’s
Financial Management Service, Howe oversees design,
development, and implementation of the federal
government’s check conversion and truncation processing platforms for both overthe-counter and lockbox
collections, corresponding
settlement systems, and
daily operations. She also
manages development and
operations of ACH settlement for Pay.gov, the Treasury’s Internet-based collection system.

What payments services does the Cleveland Fed
provide to the Treasury? We assist the Treasury
with efforts to streamline collections processing,
and we manage the electronic check processing
system (ECP) for lockbox transactions, the paper
check conversion over the counter (PCC OTC) for
processing checks collected at agency locations
worldwide, and the Pay.gov system for collections
across the Web. From an operations perspective, we
provide settlement through FedACH and Check 21
for all transactions created by these systems,
including representment of items returned for
insufficient funds.
Could you give us some examples of these
transactions? An ECP transaction would result
when an individual mails in a passport application
along with a check as payment. The check would be
processed and collected through ECP. A PCC OTC
transaction would be generated if a deployed soldier
cashed a check in the Army Finance Office. Last, a
Pay.gov transaction would be generated by a telemarketer paying for the “Do Not Call” list using
either a credit card or checking account information.
How does the Treasury benefit from Cleveland’s
processing solutions? Each processing solution—
Pay.gov, ECP, and PCC OTC—supports a single
system for a given collection channel. When widely
used these solutions save money, simplify research
and reporting, and streamline the implementation
of mandates, legislative actions, and other government initiatives.
What is the Treasury’s approach to check conversion? The Treasury converts all eligible items to
ACH to take advantage of reduced costs, additional
re-presentments, and streamlined processing.

News from FedACH | 5

What conversion issues may be unique to the
Treasury? Some unique issues are those experienced
at military installations, such as sandstorms affecting payment-related equipment in Afghanistan,
network connectivity issues in Turkey, and the challenge of supporting a worldwide customer base.
Prior to Check 21, the Treasury converted business
checks to ACH under the Treasury’s CFR 210 regulation. This practice resulted in high numbers of
unauthorized returns. Businesses wanted copies of
their checks, and we had to come up with a way to
clear these items as checks.
The issue of back-office check conversion is
getting a lot of attention. How does the Treasury view back-office conversion (BOC)? In short,
the Treasury supports BOC, and Treasury regulations allow BOC in limited circumstances, such as
when the processing environment does not support
point of purchase (POP), sometimes due to limited
electricity or Internet connectivity. With BOC,
implementation of Treasury programs is more
straightforward and cost-effective.
Where is BOC used? BOC is used at military locations where checks are accepted in militarized zones
but cannot be processed at those locations. It is also
used in overseas military commissary locations that
have checkout lanes that may not have power and
Internet connectivity. Checks are scanned and processed in the back office where the necessary
resources are accessible.
What do you see as the future direction of the
Treasury in terms of check conversion? The Treasury will continue to transition regional settlement
processes and operations to a centralized, efficient,
all-electronic environment. Recognizing that it cannot be accomplished in all situations, the preferred
solution is conversion because it represents the
lowest-cost method to settle transactions. The Treasury is closely watching the outcome of NACHA’s
Back Office Conversion Rules Work Group and the
Business Check Work Group in hopes of being able
to expand ACH conversion by extending programs
throughout the federal government.

FedACH SERVICES PERFORMANCE MEASURES

Origination

Year-to-Date through 3rd quarter 2005
Performance

99.89%

2006 FedACH SERVICES FEE SCHEDULE

Quality Measure

Items in small files
(fewer than 2,500 items)

$0.0030

Items in large files
(2,500 or more items)

$0.0025

Transaction files processed and available timely

Receipt Items

$0.0025

Online transaction files processed and delivered
electronically by the scheduled delivery times

Addenda Records

$0.0010

Input File Processing

$2.50 / file

99.89%

ACH service availability (uptime)

Web-derived Returns / NOCs

$.30

Percentage of time FedACH service was available

FedPhone-derived Returns / NOCs

$2.00

Facsimile Exception Returns/NOCs

$15.00

99.99%

Research and trace requests resolved timely

Information Extract File Subscription

$10.00 / RTN / Month

Accounting and billing research requests and trace
requests concerning ACH items or files responded to
within 24 hours

Account Servicing

$25.00 / RTN / Month

FedACH Settlement

$20.00 / RTN / Month

FedACH International Services
1

Item Originated to :

FedACH Volume Statistics

Canada

$0.0390

Mexico

$0.67

Austria, Germany, the Netherlands,
Switzerland, United Kingdom

$2.00

Volume
(000)

Dollar Value
(000,000)

Commercial Forward
Value Items Originated

5,425,878

$9,519,728

Government Forward
Value Items Originated

730,734

$2,355,479

Commercial Return
Items Originated

72,721

$37,577

Same day Recall of Item
at Receiving Gateway

$3.50 (Canada only)

Government Return
Items Originated

5,300

$5,920

Same day Recall of Item
Not at Receiving Gateway

$5.00 (Canada only)

76,787

N /A

Total Commercial and
Government Non-Value
Items Originated
(includes NOCs, DNEs, ENRs,
prenotes and zero-dollar entries)

Total Items Originated

6,311,420

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

$11,918,704

2

Return Received from :

Canada

$0.0390 (surcharge)

Mexico

$0.69 (surcharge)

Austria, the Netherlands, Switzerland

$5.00 (surcharge)

Germany, United Kingdom

$8.00 (surcharge)

Item Trace - Canada Service

$5.00

Item Trace - Mexico Service

$11.50

1

Per-item surcharge is in addition to standard domestic Origination and Input File
Processing fees listed.

2

Per-item surcharge is in addition to the standard domestic Receipt fees listed.

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