comment letter expedited processing settlement

8/3/2019 Comment Letter Expedited Processing Settlement

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Submitted via email

December 22, 2011

Maribel Bondoc, Manager, ACH Network RulesNACHA—The Electronic Payments Association13450 Sunrise Valley DriveHerndon, VA 20171

Re: Expedited Processing and Settlement

Dear Ms. Bondoc:

The Independent Community Bankers of America (ICBA)1 is pleased to submit comments on proposed amendments to the NACHA Operating Rules (the “Rules”) that would enable ACH entries to be processed and settled on the same day that they areoriginated.

Currently, the Rules provide that the effective date of an ACH entry – the date on whichthe entity that originates the payment (Originator) intends settlement to take place -must be one banking day in the future for a debit, and one or two banking days in the

future for a credit. This amendment would preserve these existing features of ACHprocessing and settlement, while adding a new Expedited Processing and Settlement window as an ACH Network-wide capability. The ODFI (originating depository financialinstitution) would then be able to use this new capability to offer products and servicesto ACH Network users.

This proposed rule amendment would modify the Rules to define same-day entries andmake certain related changes regarding returns, reversals, and reclamations for same-day entries. In addition, under the proposed rule amendment both ACH Operators ( theFederal Reserve and the Clearinghouse), would revise their processing and settlement

1 The Independent Community Bankers of America represents nearly 5,000 community banks of all sizes and chartertypes throughout the United States and is dedicated exclusively to representing the interests of the communitybanking industry and the communities and customers they serve. ICBA aggregates the power of its members toprovide a voice for community banking interests in Washington, resources to enhance community bank educationand marketability, and profitability options to help community banks compete in an ever changing marketplace.

With nearly 5,000 members, representing more than 20,000 locations nationwide and employing nearly 300,000Americans, ICBA members hold $1.2 trillion in assets, $960 billion in deposits, and $750 billion in loans toconsumers, small businesses and the agricultural community. For more information, visit ICBA’s website at

www.icba.org.



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schedules so that same-day entries transmitted to them by 2:00 pm ET would bedistributed to RDFIs (receiving depository financial institutions) by 4:00 pm ET andsettled by 5:00 pm ET. All SEC codes and both debits and credits would be eligible forsame -day processing and settlement. Origination of same-day entries would bevoluntary but receipt and settlement would be mandatory.

ICBA Comments

For almost forty years, the ACH network has proven to be a safe and reliable payment method that has enabled banks of all sizes to debit and credit customer accountselectronically. Adding same same-day capabilities is crucial to ensuring that the ACHremains a viable and efficient network that meets the payment needs of consumers andbusinesses

However, the move to same-day capability is costly to all participants, particularlyRDFIs. These changes should not be at the expense of community banks that primarily

receive ACH transactions.

In summary:

ICBA urges NACHA to ensure that the costs, both implementation and ongoing,generated by this proposed rule amendment should not place a disproportionateor undue cost burden of community banks.

ICBA strongly urges NACHA to clarify the business case for all participants,particularly for RDFIs. Faster processing and settlement should be constructedin a way that benefits all participants.

ICBA strongly urges NACHA to adopt an implementation period of no less than24 months to ensure that implementation costs can be budgeted and that bankshave sufficient time to modify their payments processes.

ICBA strongly urges NACHA to adopt an earlier same -day schedule in which filesare submitted by noon, distributed by 2:00 p.m., and settled at 3:00 p.m.

ICBA opposes same-day settlement for international items and recommendsNACHA exclude international items from same-day settlement.

ICBA opposes a dollar threshold on same-day items. ICBA strongly urges NACHA and the ACH Operators to develop robust risk

management training and systemic tools to educate all participants on the risksand best practices for mitigating these risks.

The move to same-day capability will costly it terms of expense and staff resources forcommunity banks, but ICBA believes it can be beneficial, provided certain changes aremade to the proposed rule amendment. These changes include a better definedbusiness case for RDFIs, a 24-month implementation period, an earlier same dayposting schedule, an exclusion for international items, the elimination of a dollar capthreshold and the development of robust risk management training and systemic toolsto educate all participants. Please reference our detailed comments for additionalinformation.



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RDFI System Changes

To implement same-day ACH settlement will require extensive changes acrossnumerous banking systems. These changes particularly impact RDFIs who will need toconform their systems to process late day receipt, settlement, and account posting.

Aside from ACH and DDA platform changes, banks must make changes to theirexception handling, reporting, and fraud detection systems.

With respect to customer accounting systems, RDFIs will need to update their core-processing systems so that they can account for transactions arriving late in thebanking day and generate timely, accurate available balance information for theircustomers via their ATM, online, and mobile channels. Further, customer reportingsystems will need to be enhanced to ensure that periodic statements, which arerequired under section 205.9(b) of Regulation E, include all same-day items that post toconsumer accounts on or “as of” a statement cutoff date.

These necessary system changes are significant, in terms of both staff resources andcost. In fact, several community banks mentioned that processing multiple timeframescould be a factor in ether or not they outsource their core processing systems. ICBAstrongly urges that NACHA clarify the RDFI business case to support the time and costsassociated with same-day settlement.

Effective Date

Due to the extent of the implementation costs involved, the effective date should be at least 24 months. Community banks have already completed their 2012 technology

development schedules and budgets. The proposed March 2013 effective date can onlybe met by delaying other development projects or by incurring significantly highercosts. Additionally, those banks that wish to migrate from in-house to outsource coreprocessing will need to modify or exit long-term contracts and will require at least 12months to ensure a smooth conversion.

ICBA recommends at least a 24-month period between final rule approval and theeffective or implementation date of same-day settlement.

Late Day Settlement

While ICBA recognizes the convenience of using existing processing and settlement windows for same- day processing and settlement, we are concerned that the suggestedsettlement time of 5:00 p.m. ET may not be operationally feasible, particularly insettlements involving correspondent banks and present certain risk and consumerissues.



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FI Business Case

ICBA strongly supports the goal of fostering innovation with respect to the ACHNetwork. The ACH Network is extremely cost efficient relative to payment alternativesand subject to robust safety and soundness standards. As such, the ACH systemprovides a strong platform for building enhanced customer payment solutions,

particularly in light of the reduced use of paper checks and the continued growth of e-commerce. However, banks will require a business case to justify the necessary capitaland on-going investments to deliver innovations such as faster processing.

For example, banks and non-banks are making investments to build e-commerce andmobile “wallet” type services with a compelling value proposition to consumers and

merchants. These wallets have the ability to incorporate multiple underlying methodsof payment (ACH, debit, credit, prepaid, proprietary). Innovations that reduce timingand risk will make ACH more attractive for inclusion in such “wallets.”

Improving ACH settlement speed is a potential first step toward fostering ACH

innovation. However, ICBA believes that the current proposal does not address one of most significant barriers to innovation, which is the inability of banks to recover costsof providing ACH services by charging for the services.

ICBA expects that same-day settlement will primarily be used by larger businesses that want quicker settlement for their ACH entries. This quicker settlement is a valueproposition that the top five or ten originating banks can offer to their businesscustomers and will enable these institutions, if they individually choose, to differentiatetheir origination pricing based on same-day or next-day settlement.

There is no corresponding value proposition that the thousands of community bankscan offer to their consumer account holders. Further, the Rules do not enable thesebanks to recover their costs through charges to the originating banks that benefit fromthe proposed rule amendment. Cost recovery on the consumer bank side would,therefore, need to be accomplished either by subsidies from other business lines or byother consumer account service fees. Such a result is antithetical to a sound businesscase. Hence, ICBA believes that the final rule amendment must enable RDFIs to recoverthe costs of their implementation from ODFIs.

International Transfers

The proposed rule amendment includes a requirement that same-day credits be madeavailable to receivers by the time an RDFI has completed processing for the day onwhich the credits were settled. ICBA notes that in addition to the normal reporting andfraud prevention functions that must be synchronized with this expedited schedule,RDFIs will have to expedite their OFAC compliance for IAT entries. In particular, RDFIshave a regulatory obligation to screen all incoming IAT entries against OFAC’s Specially

Designated Nationals and Blocked Persons List. Since funds cannot be made available to



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persons or entities included in the list, this screening will have to occur by the end of anRDFI’s processing schedule for the day on which a same -day entry is settled.

ICBA believes that requiring expedited OFAC screening on top of the other expeditedscreening and reporting changes that must be made to facilitate same-day settlement istoo much or swings the pendulum too far to the disadvantage of community bank

RDFIs. Therefore, we suggest that IATs be ineligible for same-day settlement.

Risk Management and Dollar Cap

While ICBA acknowledges there are increased risks associated with faster processing,settlement, and funds availability and same-day entries, we opposes a dollar cap limit.The limit would most likely be temporary and would be lifted once participants candemonstrate propose risk mitigation techniques. While a dollar cap could provide afallback in case of a large-dollar unauthorized or other illegal transfer, it should not be asubstitute for robust risk mitigation tactics.

Dollar caps could be circumvented by breaking a single over-the-limit payment intoseveral under-the-limit payments and would impede the use of same-day ACH entriesfor legitimate purposes.

For these reasons ICBA opposes the imposition of dollar caps on same- day entries.ICBA strongly urges NACHA and the ACH Operators to develop robust risk management training and systemic tools to educate all participants on the risks and best practices formitigating these risks.

Inadvertent Same Day Settlement

The proposed rule amendment notes anecdotal reports from ACH Operators andfinancial institutions that a substantial number of ACH entries contain invalid or staleEffective Entry Dates. It further notes that the current Rules provide no disincentives forsuch poor origination practices.

To incent better origination practices, the proposed rule ammendment would amendthe Rules to require ACH Operators to insert a Settlement Date consistent with the next available settlement window when the Effective Entry Date for a batch is stale. TheRules would likewise be changed to require that ACH Operators correct blank or invalidEffective Entry Dates by inserting the current processing day’s date as the Effective

Entry Date. As a result of these proposed changes, same day settlement would becomedefault for entries that have defective Effective Entry Dates and that are received by anACH Operator before the proposed 2:00 p.m. same day transmission deadline.

ICBA strongly disagrees with creating default or inadvertent same day settlement. Next day and second day settlement are the current norms for the ACH network. Faster



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settlement between banks will impact the originator and receiver and, thus, should not be imposed upon unsuspecting parties. Same day settlement should only apply whenparties to a payment intend same day settlement. ICBA urges NACHA to maintaindefault settlement as defined in the current Rules, on the banking day following theprocessing day.

Consumer Notice of Faster Debit

If debit items are eligible for same day settlement, ICBA recommends that originatorsbe required to notify consumers when originators intend to clear a consumer’s payment

as a same day entry. This is because consumers are not accustomed to ACH entriessettling same day and such settlement will result in quicker debits to their accounts.The notice would inform consumers that funds may be debited from their account assoon as the same day so that they can manage their account balances accordingly.

This notice would be consistent with the approach taken by the Federal Reserve Board

with respect to check- to- ACH conversion entries addressed in the staff commentary toRegulation E in 2007. Similar to the Regulation E approach, the requirement to providenotice of possible same day debits could sunset after same day ACH settlement becomesroutine.

As a result of these consumer issues ICBA strongly recommends that NACHA discuss theproposed rule amendment with the CFPB (Consumer Financial Protection Bureau) incase the agency has any concerns regarding consumer impact.

Again, ICBA appreciates the opportunity to comment on this important rulemaking.Please do not hesitate to contact me at [email protected] or (202) 821-4449 with

any questions regarding our comments.

Sincerely,

/s/

Cary Whaley, AAPVice President, Payments and Technology Policy

mailto:[email protected]




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