Electronic Payments – Coming Attractions

1. Electronic Payments – Coming Attractions Lance Wagner, AAP Federal Reserve Bank of Kansas City lance.m.wagner@kc.frb.org

2. What are we talking about today? • EDI • Cross Boarder ACH • SameDay ACH Payments • Wires

3. Electronic Data Interchange (EDI) • The electronic transfer of business information in a standardized, machine-readable format • Machine-Readable formats include: • Proprietary • Industry Specific • ANSI X12 • UN/EDIFACT • ANSI and ASC X12 • Cross-industry standards, multifunction (purchase orders, shipping notice, invoice, etc.)

4. Who uses EDI? • Are you using EDI today? • Large to medium size companies and their trading partners • Federal Government • State Government

5. Financial EDI • The electronic transfer of payments, payment-related information or other financial documents in a standardized, machine-readable format

6. Benefits of EDI • Better, faster exchange of business information • Reduced administrative costs • Fewer errors • Improved customer service

7. Growth of Financial EDI

8. Future roles for EDI • Healthcare initiatives • Still see nearly 40% of healthcare payments made via paper check today* • Big push right now to “force” adoption of electronic remittances • By 2014, anticipate an increase of CCD+ transactions by two billion* • Still lots of questions • Mandatory versus optional • Standardized format *2011 NACHA Study

9. FedEDI • Continue to review and enhance FedEDI Plus application • Looking to add new report features, including volume report by SEC code • Always looking for feedback • We are committed to this application and want to ensure it is meeting customer needs

10. Cross Boarder ACH

11. DFI Interest in Cross-Border Origination Source: Federal Reserve Banks. Spring 2009. 11

12. Payment Options • Correspondent banking (wires) • Typically relationship based using SWIFT messages for individual payment instruction • Good to know with whom your correspondent has a direct relationship • Settlement occurs parallel to payment instruction • ACH / IAT • Service level (destinations, payment options, etc.) vary by gateway operator • Settlement generally occurs as part of the payment flow 12

13. Other Payment Options • Checks – generally not recommended for cross-border • Credit Cards – some offer payments to international bank accounts COMING SOON: International Payments Recommendation Tool • Developed by SunTrust and NACHA’s United States International Committee (USIC) • Can be used by any FI with its customers 13

14. So What’s Better? • Consumers have a number of possible channels for sending remittance transfers • Money transmitter (Western Union, MoneyGram, etc.) • Internet Payment systems (PayPal) • Wire transfer via Financial Institution • ACH (IAT) • What are the considerations? • Legal and Regulatory Framework • Where do you want to go with the money • Margin for revenue

15. What Else is Important? • Foreign exchange • Base rate + spread • Settlement • International payments generally have multiple settlement • Payment certainty • How long does it take funds to arrive? Funds availability? Beneficiary deductions? • Returns? 15

16. Example of ACH Settlement Timelines Live

17. FedACH Network – Originated Volume & Value Cross Boarder Stats

18. SameDay ACH

19. FedACH SameDay:Service Supports Phased Approach • Phase 1: Allows converted check payments (ARC, BOC, POP, and RCK) as well as TEL and WEB payments. Includes support for mobile debit payments. Supports 37 percent of all payments by volume. Majority of remaining non-supported payments are typically scheduled on a recurring basis and consequently do not require expedited processing. FedACH intra-operator (no EPN) only service. Origination is limited to non-government payments. Service commenced on August 2, 2010.

20. Schedule and Technical Requirements • Forward items may be sent between 2:15 a.m. and 2 p.m. ET, delivered by 4 p.m. ET, and settled at 5 p.m. ET. • Return of forward items may be sent between 2 p.m. and 4:30 p.m. ET, delivered by 5 p.m. ET, and settled at 5:30 p.m. ET. Alternatively, RDFIs can use the existing “immediate” return service at 2 p.m. ET. • RDFIs will not be required to return SameDay forward items by the above schedule. For return of SameDay forward items, the current return deadline rules apply. • Same-day and next-day payments can be included in the ACH input file and can be comingled in the same payment batch. Non-eligible payments will settle next day. • The proposed service does not require any non-standard use of NACHA file, record, or field formats. • Payments must be originated and received through FedACH.

21. Participation Requirements • Service is opt-in for both the ODFI and RDFI, by agreement, and is available to any FedACH customer. • For each RTN, participants may choose to be an ODFI-only, an RDFI-only, or both for forward payments. • ODFI-only participants must receive SameDay returns • RDFI-only participants may originate SameDay returns • RDFI may elect to be either a multilateral or unilateral participant. • Multilateral Participants: Allows receipt of payments from all ODFI participants. • Unilateral Participants: Allows receipt of payments from one or more ODFI participants; RDFI specifies ODFI(s) in the unilateral participant agreement. • ODFI participants can originate payments to all RDFI participants agreeing to accept such payments.

22. Looking Ahead: Same-Day Consumer Payment Applications • Supported • Partially Supported • Not supported Consumer-to-Consumer (C2C) • Mobile P2P payments using debit pull, credit push, or “split payment” model • Emergency payments to cover rent or food • Transfer urgently required funds to a close relative or friend in another part of the country • Account-to-account transfers between personal accounts (push and pull) Consumer-to-Business (C2B) • Clear ad hoc (non-scheduled) debit payments (e.g., converted checks, telephone, and Internet payments) same-day to accelerate funds availability by one day • Clear ad hoc (non-scheduled) debit payments (e.g., converted checks, telephone, and Internet payments) same-day to accelerate returns by one day • “Just-in-time” payment of a credit card or other bill, in order to avoid penalty fees • Telephone or Internet purchase, where delivery is required for a specific date, e.g., birthday, theatre tickets for tonight • Mobile point-of-sale payments using debit pull, credit push, or “split payment” model • Transfer of a relatively large amount of funds to ensure that a purchasing opportunity is not lost, e.g., used car purchase or rental deposit

23. Looking Ahead: Same-Day Business Payment Applications • Supported • Partially Supported • Not Supported Business-to-Consumer (B2C) • Salary payments to hourly and temporary employees • Same-day payment for terminated employees • Contingency payroll • Reversal of payroll and other benefit payments • Payment of expenses to staff, where these are claimed after the payroll closing date Business-to-Business (B2B) • Cash concentration (push and pull) • Tax payments • Payments requiring immediate funds before goods are released • Payment for time-critical goods where trade credit is unavailable from the supplier

24. Potential Application Using “Split Payment” Model for P2P Intermediary “Split Payment” Model – Joe Pays Sue $100 Using Mobile Phone Since intermediary originates the payment, banking information does not have to be shared between payor and payee Supported by FedACH’s SameDay Service – Phase 1

25. Wires

26. Wire volume is steady… Fedwire Funds Service - Annual Statistics from www.federalreserve.gov

27. History of Fedwire Format Changes for Extended Remittance Info (ERI) Market Consultation • Wire transfer system operators worked with banks & corporations to evaluate options & design requirements • FRB format survey in Feb 2008 – 84% of banks favor remittance • FRB & TCH announced format changes in May 2008 • AFP Support • AFP voiced continued support for the project via letters & petition • Wire Remittance Implementation • November 19, 2011 • FRB & TCH will update Fedwire & CHIPS to carry 9,000 characters for ERI. • Banks & corporations will need to update their payment applications. AFP Wire Transfer Survey • U.S. corporations want higher STP for wires • 17% of incoming wire transfers require manual research costing $35 per wire 2011 2005 2006 2007 - 2008 2009 • FRB & TCH published B2B Research • Corporations would: • Value expanded wire transfer message format with structured & standardized remittance information • Be willing to pay additional fees to banks • Some B2B checks are high value/ urgent payments & might convert to wire transfer if remittance information were available • AFP Wire Remittance Survey • Corporations continue to demand remittance information with wire transfer payments

28. Benefits of ERI Corporate Reduce costs associated with existing wire volume Opportunity to electronify urgent/high-dollar payments Inclusion of remittance details in wire payments will expedite processing/posting Improved STP rates Originators may receive discount for paying electronically via wire Receivers may request payment by wire more frequently Opportunity to leverage existing AP applications or ERP systems that today create ACH payments with remittance information in EDI, STP 820, ISO20022 or other formats. Banks Increase or preserve existing wire volume/revenue Reduce customer inquiries related to unapplied funds transfers Respond to corporate demand Provide value-added services to corporate customers

29. Questions… Thank You Lance Wagner, AAP Federal Reserve Bank lance.m.wagner@kc.frb.org