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How Are ACH Payments Used?

Direct Deposit

Direct Deposit is used to disburse funds to consumer accounts. Direct Deposit of Payroll is the most widely used of the ACH deposit services. The feature is also used to distribute other recurring or one-time deposits. The U. S. Government uses Direct Deposit to disburse nearly 87% of Social Security benefit payments. Some other commonly used applications include:

     - Dividends
     - Pension Benefits ~ Interest
     - Commission Disbursements ~ Trust Disbursements
     - Expense Reimbursements ~ IRS Tax Refunds
     - Child Support Disbursements

Direct Payment

Direct Payment provides the ability to collect funds from consumer accounts. Companies with billing operations participate through the automation of bill payment entries. This application is used for recurring bills that are either regular fixed amounts, or varying amount bills, such as utility payments. Some examples of Direct Payment applications include.

     - Insurance Premiums ~ Utility Bills
     - Mortgage Payments
     - Subscription/Membership Dues ~ Loan Payments
     - Monthly Pledges ~ Rents/Leases
     - Tuition Payments

Cash Concentration

Cash Concentration through the ACH is a widely used and profitable cash management function. Often used by companies operating branches or sales outlets, and local governments to accumulate funds rapidly into a central corporate account. Cash Concentration through the ACH may replace the use of depository transfer checks or expensive wire transfers. Overall, this system improves a company's total cash management capability.

Corporate Payments

Corporate Payment applications through the ACH network provide the ability to collect and disburse funds between companies. They are used by businesses paying one another for goods or services. These applications continue to grow and are currently being used by the U.S. Treasury Department in the Vendor Express program to pay government suppliers.

Corporate Payments replace checks with an electronic process of debiting and crediting for invoices between the financial institutions of participating companies. ACH Corporate Payments allow payments to be accompanied by additional payment information, such as the details of the invoices being paid. This is done by adding an ACH addenda record to the payment format. Some commonly used applications for Corporate Payments include those listed below:

     - Vendor Express Payments > Invoice Payments
     - Federal and State Tax > Trade Payments
     - Royalty Payments > Debt Repayment

Financial Electronic Data Interchange (FEDI)

FEDI is an enhancement to Corporate Payments, which utilizes the ACH addenda record. It provides for the exchange of machine-readable documents and information between businesses. For example, a payment may be sent to a vendor with details of the invoice being paid in an electronic format for automated posting to a receivable accounting program. FEDI is also used with zero-dollar transactions to exchange information such as requests for quotations, order placements and shipment advice's.

Customer Initiated Entries

Telephone bill payment services are a common application of the ACH network's Customer Initiated Entry option. This application provides the ability for a consumer to initiate non-scheduled payments to a company or consumer account. Payment information may be submitted manually, by the consumer, to the ODFI or through a mechanical device (i.e., telephone, ATM or computer).

Re-presented Check Entries

A re-presented check entry is an ACH debit application used by Originators to collect funds for paper checks that have been processed through the check collection system and returned due to insufficient or uncollected funds. Originators of re-presented check entries must provide notice to the check writer, prior to the receipt of the check, informing the check writer that any insufficient or uncollected funds returned checks might be collected electronically. An interim rule effective September 18, 1998 through September 14, 2000 provides a rules framework for transmitting these entries using the PPD standard entry class code. Effective September 15, 2000, a new SEC code of RCK was established to be used to re- present insufficient or uncollected paper checks electronically.

Point-of-Purchase Entries

A point-of-purchase entry is an ACH debit application, used by Originators (merchants, billers, etc.) as a method of payment for the in- person purchase of goods or services by consumers. These non-recurring ACH debits entries are initiated by the Originator based on a written authorization and account information drawn from the source document (check or share draft) obtained from the consumer at the point of sale. The source document, which is voided and returned to the consumer at the point of sale, is used to collect the consumer's routing number, account number and check serial number that will be used to generate the debit entry to the consumer's account. An interim rule effective September 17, 1999 through September 14, 2000, provides a rules framework for transmitting these entries using the PPD standard entry class code. Effective September 15, 2000, a new SEC code of POP will be established for the transmission of point-of-purchase entries.

Lockbox Truncation (Accounts Receivable Conversion - ARC)

Consumers mail their bill payments to companies, realizing some advantages of mail and collection float associated with such payments. For companies, the cost of processing and collecting these checks is high. There are methods that remittance processors or billers may use to increase efficiencies within the lockbox or biller's process by reducing collection float and other check float collection costs, through the truncation of paper checks to electronics via the ACH.

Truncation in this instance means that the payer issues a paper check and sends it through the mail to the payee; at the point of receipt (Lockbox), the check is converted to an electronic payment. Presentment is made to the payer�s financial institution electronically and the paper check or image is stored for a legally specified period of time by the remittance processor.

A short-term rule amendment, effective December 17, 1999 through December 14, 2000, enables Originators to use the PPD format to truncate consumer checks received through the US mail for the payment of goods or services and to collect those checks via an ACH debit. This short-term rule amendment provides a legal framework for the protection of the participants while testing the impact of this consumer check truncation application. ODFls must sign an agreement with NACHA in order to originate these entries.

Cross-Border Payments

In the cross-border payment environment, the Gateway Operator acts as the entry point to the national payments system for entries received from another country and the exit point from the national payments system for entries originated in another country. The Gateway Operator assumes responsibility for foreign exchange conversion and settlement, format mapping and translation of data.

Effective September 15, 2000, two new Standard Entry Class Codes, CBR (Corporate Cross-Border) and PBR (Consumer Cross-Border) will be used for the transmission of cross-border entries. These new SEC codes will allow cross-border transactions to be readily identified by financial institutions so that any special handling requirements may be applied and additionally will allow ACH participants to transmit and receive detailed information unique to cross-border payments.

Other Applications

Uses for the ACH network are unlimited. Other applications include machine transfer entries, point of sale transactions, truncation applications and payment message and payment advice applications.

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