Payments 101 Billie Higgins Kay Limbaugh

Federal Reserve Central Banking system Created in 1913 Private banking system composed of Board of Governors appointed by the President Federal Open Market Committee 12 regional Banks Member banks Advisory councils

Electronic Funds Transfer Act (aka Reg E) Federal Reserve Issued by the Board of Governors of the Federal Reserve System Implemented in 1978 Governs electronic fund transfers from a consumer’s account Protects consumers’ rights and sets limits on consumer liability for unauthorized payments Imposes specific obligations to billers for recurring payments

Federal Reserve Check 21 Passed in Oct 2004 Produces a digital image by scanning both sides of a paper check If a paper document is needed, a photo-reduced copy of the original checks is created (“substitute check” or IRD (Image Replacement Document) Since we only have about 20 minutes to give you this quick overview and have time to open up for questions, I’ll give you the 30,000 foot elevation of Electronic Payments.

IRD – Image Replacement Document

Network = Automated Clearing House (ACH) We are going to concentrate from here on on the electronic payments through the ACH channel. The “railway” so to speak, is the ACH network. Processing and delivery system. The users ….see next slide

ACH ACH - Automated Clearing House The ACH network is a highly reliable and efficient nationwide batch-oriented electronic funds transfer system Governed by the NACHA operating rules Provides for the interbank clearing of electronic payments for participating depository financial institutions The ACH network can be used to send either debits (payments) or credits (refunds) A credit sends funds to a Receiver’s account A debit takes funds from a Receiver’s account

ACH Participants & Definitions Originator: The company or individual that initiates an ACH transaction according to an agreement with a Receiver. Originating Depository Financial Institution (ODFI): The financial institution that transmits ACH files on behalf of the Originator into the ACH Network. ACH Operator: The central clearing facility operated by a private organization or Federal Reserve Bank, on behalf of participating financial institutions, to or from which financial institutions transmit or receive ACH entries. Receiver: A natural person (or organization) that has authorized the Originator to initiate an ACH entry (debit or credit) to the Receiver's account with the RDFI. Receiving Depository Financial Institution (RDFI): The financial institution that receives ACH entries from the ACH Operator and posts the entries to the accounts of the depositors (Receivers). Third-Party Processors: Processors that participate between any relationship within the ACH processing flow (i.e., correspondents, sending-point processors or payroll processors).

Automated Clearing House Network = Automated Clearing House (ACH) NACHA We are going to concentrate from here on on the electronic payments through the ACH channel. The “railway” so to speak, is the ACH network. Processing and delivery system. The users ….see next slide

NACHA – The Electronic Payments Association (formerly known as the National Automated Clearing House Association) Not-for-profit association Represents more than 11,000 financial institutions through direct memberships Develops operating rules and business practices for: Automated Clearing House (ACH) Network (not Check 21) Electronic payments in the areas of Internet commerce, e-bill and invoice presentment, e-checks, EDI an electronic benefits services (EBS) NACHA estimates that more than 8.5 billion consumer bills were paid via the ACH Network in 2007, including pre-authorized debits, Internet and telephone-initiated payments, and checks converted into ACH payments.

Automated Clearing House Network = Automated Clearing House (ACH) NACHA ACH Rules We are going to concentrate from here on on the electronic payments through the ACH channel. The “railway” so to speak, is the ACH network. Processing and delivery system. The users ….see next slide

Each type/method of payment in the ACH “world” has its own rules and guidelines. These are determined by the Standard Entry Code (SEC) used in the payment file.

PPD POS TEL DNE ACK ATX MTE WEB RCK ARC CIE CBR TRX COR BOC ENR MTE PBR DNE POS CCD SHR XCK TRC CTX AAAAAHHHHHHH ! ! ! !

Commonly used SEC codes for the Utility Industry There are many more rules and guidelines that we are going to talk about. These are the high level bullets. (High level definitions!)

ARC – Accounts Receivable Conversion Mailed in payments to a biller’s lockbox Dollar limit $25,000 Must be a consumer check Check is scanned, destroyed Must have notification on bill statement each month (see ACH rules for requirements) Must give customer option to Opt-out Must retain legible copy of front for 2 years Original document must be stored securely and/or destroyed Volume in 2007 for ARC grew by more than 600 million payments to 3.5 billion, an increase of 23 percent. Wording and specifics supplied by NACHA ARC – The biller can accept a check as a source document to initiate an ARC entry only if it has been sent through the us mail or delivered to a dropbox

POP – Point of Purchase Customer writes check and it’s converted at time of purchase Check is returned to the customer Authorization = supplied by merchant and signed by customer at time of payment $25,000 limit No AUX On-Us on MICR line

WEB - Internet Initiated Payments Authorization received via the internet Authorization must be in writing or similarly authenticated. Consumer transactions only Customer must be “reasonably” authenticated Applies to both one-time or recurring payments; but rules are different for each (stop payment, revocation of authorization, etc.) NACHA reports WEB payments grew by an estimated 26 percent to 2.3 billion in 2007

TEL – Telephone Initiated Entries Single entry payments Consumer accounts Must use commercially reasonable procedures to verify consumer’s identity Authorization must be oral and recorded (cannot use key entry for authorization) Must provide in authorization: Date Amount Name Telephone number to be reached during business hours Cannot exceed 2.5% “unauthorized payments”

RCK – Re-Presented Check Entries Returned paper checks can be converted by your financial institution to an ACH item This allows 2 re-presentments instead of 1 with paper check PGE (before ARC) enjoyed a 25+% success rate on the 2nd re-presentment Notification must be clear and conspicuous on your billing statement Must retain copy of the front and back of the check for 7 years

PPD or CCD Used for Automatic Debit Programs (Direct Payment) Recurring payments initiated by biller Must have written authorization Retention of authorization - kept for 2 years after customer requests cancel PPD used for “Consumer” bank accounts CCD used for “Corporate” bank accounts (have an auxiliary on-us in MICR line) NACHA reports pre-authorized payments increased by 3.6 percent to 3.4 billion payments in 2007

Resources Nacha.org Ebilling.org Your New Best Friend

PGE has converted all payment channels to ACH…… Mail-in payments – ARC Community Office – Remote Deposit (BOC) Walk-up Retail Locations – POP Kiosk Payments - vendor IVR Payments –TEL IVR Credit Card payments – vendor Consolidators Auto Pay – PPD and CCD Web payments – WEB EDI 820’s - CTX

Other terms (Your homework!) Aux on us EDI MICR line Non-contracted payments NOC EBPP Lockbox M-payments B2B, B2C Questions?