1. Electronic Funds Transfer 101 Office of the State Controller August 2008

2. Two Types of EFT EFT is a generic term – Describing two different methods of transferring funds electronically EFT Wire Transfer ACH Common mistake to call an ACH payment a wire transfer –Each are handled by different departments at a bank Both performed through Federal Reserve Bank System (Except for “in-bank” or “on-us” transactions)

3. Wire Transfer Movement of funds is real time – effected immediately –FRB open for fed wires up to 6:00 p.m. –Book Transfers are memo posted up until midnight –ZBA (Zero Balance Account) sweeps are book transfers Fed Wire Affects banks’ Reserve Accounts maintained at the FRB –Sending bank’s account at the FRB gets debited –Receiving bank’s account at the FRB gets credited Foreign exchange and Euro dollars through “Clearing House for Inter-bank Payments System” (CHIPS) – 54 New York Banks Wire Transfer Fed Wire Book Transfer Foreign Wire Between two banksWithin same bankForeign bank

4. Wire Transfer Utilization When appropriate to use –Time sensitive - Funds need to be moved same day initiated –Large dollar amounts Examples –Debt Service Payments (preserve State’s credit rating) –Funding ACH payments (e.g. payroll direct deposit) –Funding investments (e.g., at custodian bank) –Adjusting balances (between depository banks) –Remitting ESC payments (to US Treasury) DOR accepts wire transfers from corporate taxpayers on an exception basis only

5. Initiating Wire Transfers Banks provide corporate customers ability to initiate their own wires via online banking access Templates are used –Repetitive Transfers – Pre-established ABA# and acct.# –Non-Repetitive - Open wire – to anywhere State Treasurer initiates all wire transfers for agencies –Via Wachovia Connection and BOA Direct –As requested by agencies via Core Banking $ystem –Results in debit to agency’s disbursing / STIF acct. DST’s BankPayee’s BankOnline Wire SystemDisb. Acct. at DST Agency Logs in

6. ACH Two types of ACH (Automated Clearing House) ACH ACH Credits Direct Deposit. Debit Card Account ACH Debits Direct Deposits Always initiated by sender Sender’s account is debited and receiver’s account is credited Receiver’s Acct –Bank account –Debit card account Electronic Drafts Initiated by sender or receiver If by sender – Sender authorizes a third party to initiate transaction If by receiver – Receiver initiates transaction Also referred to as Direct Payments ACH Network – A batch-process, store and forward for future settlement

7. ACH Utilization When appropriate to use –Large number of payments in a single file (batch) –At least one day is available between initiation and settlement –Any size dollar amounts Examples –Outbound Payroll direct deposit to bank account (ACH credits) –Outbound Payroll direct deposit to debit card account (ACH credits) –Outbound Vendor payments (ACH credits) –Inbound Taxpayer payments (ACH credits or debits) ACH Transactions can have Addendum Records –Remittance data attached –Can be interfaced with A/R system –DOR requires taxpayers to use TXP format

8. ACH Players ACH Operator (FRB) Originating Depository Financial Institution (ODFI) Receiving Depository Financial Institution (RDFI) Originator (Company / Employer) Receiver (Company / Employee) Authorization / Enrollment 1 2 3 4 Trade Group Governing Org.

9. Primary Differences Wire Transfers Item Cost - $6.75 Same day funds Transfer almost instantaneous Use for critical payment (e.g. debt service) ACH Item Cost < 1 penny Next day funds One day delay in settlement Used for large batch files (e.g., payroll) State Checks Average Cost - Range $.74

10. Electronic Checks Loosely used term – Refers to two different methods Electronic Checks Online Paper Check ACH Conversions Online Paper Check Developed by “Financial Services Technology Consortium (FSTC) – Not-for- profit group of CA banks Initiated using a PIN and digital signature Receiver prints out paper check for deposit ACH Conversions (most common method referred to) Transactions converted to ACH debits (e.g., ARC, POP, WEB, TEL) Services can be provided by third party processors Account verification determined upfront. Guarantees available. Examples of services provided through third-party CyberSource (POP) –Telecheck: –CheckFree: –AmeriNet: –Paymentech: Applies to consumer checks only, not business checks.

11. Regulator Governance Regulation E, per Electronic Funds Transfer Act (EFTA) –Issued by Federal Reserve Bank –Covers ACH and debit cards (but not wires or credit cards) –Consumer protection oriented –Some protection afforded the consumer does not apply to corporate or government customers NACHA Operating Rules –National Automatic Clearing House Association –Applies to ACH transactions only –Applicable to both consumer and corporate (including government) Uniform Commercial Code (UCC) – Article 4A –Applies to Wire Transfers Only Uniform Commercial Code (UCC) Articles 3 and 4 and Reg CC –Applies to negotiable instruments (checks) –Reg CC issued by Federal Reserve - Applies to checks – not EFT –Check 21 (Check image conversion) governed by Reg CC, not Reg E

12. ACH Terminology Typical ACH Standard Entry Class Codes –PPD – Prearranged Payments and Deposits (Consumer payments) –CCD - Cash Concentration or Disbursements (Corporate payments) –CCD+ - Corporate payments with 180 character addenda record –TXP – Addendum format for Tax Payments (Used by DOR) Check Conversion Standard Entry Class Codes –POP – Point-of-Purchase / Face-to-face (e.g., Wal-Mart) –ARC – Accounts Receivable Conversion – Non-face-to-face (e.g., Lockbox) –BOC – Back Office Conversion – Face-to-face, but later converted (Mar ‘07) Check Conversions not eligible for use with corporate or government checks and have an amount limit of $25,000 Other Standard Entry Class Codes (Debit entries) –WEB – Internet-initiated entries against a consumer account –TEL – Telephone-initiated entries against a consumer account –RCK – Represented check (representment of a non-sufficient funds check)

13. Daylight Overdraft Federal Reserve charges bank interest per minute for overdrafts in their Fed account Banks do not allow wire transfers to be made from account if “available balance” is not sufficient –Over-the-counter deposits not posted until night –ACH credits are posted in mornings (6:30 and 8:30) –Could pose problems when need to wire funds out Some banks will assign an allowable daylight overdraft limit –Based upon customer’s credit risk –Based upon bank overdraft cap at the FRB –State’s arrangements with banks are handled by DST

14. Check 21 Federal legislation – Result of 9/11 when planes could not fly Became effective October 2004 Banks have option of presenting “substitute checks” instead of original check Also referred to as “Image Replacement Documents” (IRDs) Originals paper checks are to be destroyed Substitute document is legally same as original Check 21 is different than “Check Conversion” (POP/BOC/ARC) –POP, BOC & ARC - Check converted to ACH transaction –Therefore POP, BOC & ARC subject to NACHA Rules – not UCC –POP, BOC & ARC only applicable to “consumer” checks –Check 21 applicable to both “consumer” & “commercial” –Check 21 has no amount limit – Check Conversion limit is $25,000

15. EFT Milestones 1972 – SCOPE (Special Committee on Paperless Entries) 1974 – NACHA (National Automated Clearing House Association) 1977 – Retirement System began using Direct Deposit for retirees 1979 – Central Payroll began using Direct Deposit for employees 1980s – University Payroll Centers began using Direct Deposit - employees 1984 – GMTS (Governmental Moneys Transfer System) implemented by DST for paying local units of government (Replaced by STEPS) 1988 – DOT Payroll began using Direct Deposit for employees 1992 – STEPS (State Treasurer’s Electronic Payments System) implemented for local units (two-way street). (Ended 2003, except Retirement) 1994 – DOR implemented EFT for corporate tax collections 1990s – LEAs and community colleges implemented direct deposit for employees (costs being paid for by DST) 1999 – SB 222 enacted, giving OSC responsibility for EFT 2002 – Common Payment System implemented (DMV-IRP first) 2005 – OSC initiated expansion of Electronic Commerce Program

16. State’s E-Commerce Program State’s Cash Management Legislation (G.S. 147-86.11) requires State Controller to develop policies regarding cash management practices, including E-Commerce. Two Master Services Agreements (MSAs) procured –MSA for Electronic Funds Transfer Services – Wachovia Bank –MSA for Merchant Card Services – SunTrust Merchant Services Agencies and local units of governments eligible participants Each participant must execute an Agency Participation Agreement (APA) Paying for Services – In accordance with MSA fee schedule –Agency pays in most cases –EFT for payroll and NCAS payments – DST pays

17. E-Commerce Inbound Programs Utilizes Both Merchant Cards and EFT

18. E-Commerce Outbound Programs Utilizes EFT Only

19. More Information Office of the State Controller Web Site www.ncosc.net David C. Reavis E-Commerce Manager (919) 871-6483 August 2008Robert Powell State Controller Amber Young Central Compliance Manager (919) 981-5481 Support Services Center (919) 875-HELP (4357)