about the north carolina office of the state controller

Electronic Funds Transfer Overview

What are the two basic types of Electronic Funds Transfer (EFT) transactions?

EFT is a generic term for which there are two basic EFT transaction types:

  • Wire transfers
  • Automated Clearing House (ACH) transactions

What are the characteristics of wire transfers?

  • Large dollar amounts
  • Single payments
  • Settlement date same day as initiated
  • For critical time-sensitive payments (e.g., debt service, funding of payroll)
  • More expensive than ACH ($6 - $20)

What are the characteristics of ACH transactions?

  • Any size dollar amounts
  • Generally batch payments (e.g., payroll to large number of payees, or drafts from large number of remitters)
  • Settlement date one or more days after date initiated
  • Less expensive than wire transfers (less than $.01 under the State's MSA)

Who is the facilitator of wire transfers and ACH transactions?

In most cases, the Federal Reserve Bank (FRB) is the facilitator for both.

What are the two basic types of wire transfers?

  • Fed wire - Between two banks (requires FRB to facilitate)
  • Book transfer - Within same bank (does not require FRB)

What State agency facilitates wire transfer payments?

The Department of State Treasurer (DST) performs nearly all wire transfer payments for agencies.

What State agency facilitates wire transfer receipts?

The DST receives all wire transfers received from payors (e.g., Federal government) with:

  • The funds being credited to the State Treasurer's bank account, and
  • The agency certifying the receipts via OSC's Cash Management System (CMCS)

How are ACH receipts for an agency handled?

There are several methods utilized, depending upon the volume:

  • Small volumes - Credited directly to a depository bank account designated by DST.
  • Large volumes - Credited to a separate bank settlement account established for the agency, with a nightly sweep of the funds to the depository bank account designated by DST. The arrangement may be through the OSC's master contract, or separate through arrangements made with DST.
  • In all cases, the funds received are certified by the agency via CMCS.

What EFT programs for outbound payments does an NCAS agency have access to?

OSC provides the ACH services for NCAS agencies:

  • Employees paid through HR Payroll are eligible for ACH direct deposit.
  • Vendor payments made through NCAS are eligible for ACH direct deposit (via NC ITS TSO mainframe database).

What options does a non-NCAS agency have to participate in EFT?

The agency can develop its own program, utilizing the services available through the OSC's Master Services Agreement (MSA), for both outbound and inbound payments. The current service provider is Bank of America, serving as the Originating Depository Financial Institution (ODFI). The agency has the option of transmitting ACH files directly to the ODFI, or utilizing the Common Payments Service (CPS) as a gateway service. If transmitting directly to Bank of America, the agency can use the bank's Cash Pro program to both create and transmit an ACH file.

What are the two types of ACH transactions?

  • ACH credits - Direct deposits (initiated by the sender)
  • ACH debits - Electronic drafts (initiated by either the receiver or sender)

Can EFT transactions have remittance data included?

  • A wire transfer has limited space for "Originator to Beneficiary Information" (OBI)
  • An ACH credit can have an "addendum record" containing 180 characters

Who are the players in an ACH transaction?

  • Originator - Company, government, or individual that submits an ACH batch file containing multiple ACH transactions to an ODFI.
  • Originating Depository Financial Institution (ODFI) - Financial institution that receives ACH batch files from originators and processes the file through the ACH network.
  • ACH Operator - In most cases the Federal Reserve Bank (FRB), which receives ACH batch files from the ODFI and distributes the payments or drafts contained in the file to various RDFIs.
  • Receiver - The company or individual who has an account at an RDFI, whose account is either credited (for a payment) or debited (for a draft).

What are the most common uses of ACH credits?

The payment of payroll and vendor payments.

What various aspects of EFT could an agency use for inbound payments?

A large agency, such as the Department of Revenue (DOR) could use a variety of EFT programs:

  • Inbound ACH credits - A taxpayer can initiate an ACH payment by having its bank transmit an ACH transaction to DOR, resulting in the taxpayer's bank account being debited and DOR's EFT depository account being credited (established under the MSA). Approximately 72,000 taxpayers use this option.
  • Inbound ACH debits via CPS - A taxpayer can initiate an ACH payment via DOR's web site.  This authorizes an ACH debit (draft) against the taxpayer's bank account, resulting in the CPS creating and submitting to the master contract vendor an ACH batch file, further resulting in the taxpayer's account being debited and the DOR's EFT Web depository account being credited (established under the master contract).
  • Inbound Wire transfers - DOR will accept a wire transfer from a taxpayer on an exception basis only, resulting in the taxpayer's account being debited and the DOR's EFT depository account being credited (established under the master contract).

What various aspects of EFT could an agency use for outbound payments?

A large agency, such as the Department of Revenue (DOR) could use a variety of EFT programs:

  • Outbound ACH credits via OSC's NCAS - DOR can create vendor payments via NCAS, denoting the payments as EFT. This would result in an ACH batch file containing ACH credits being created by the NC ITS TSO mainframe database and being transmitted to the master contract vendor, and further resulting in OSC's ACH outgoing settlement account maintained with the State Treasurer being debited and the recipient's bank account being credited.  DOR would fund the ACH payments by CMCS transfer to OSC the business day prior to the file settlement date and OSC directs the State Treasurer to transmit the funds to the master contract vendor by wire transfer (see below).
  • Outbound wire transfers via CB$ - DOR must fund outgoing ACH credit files on settlement date by wire transfer. This is done by DOR initiating an internal electronic warrant via DST's Core Banking System (CB$), resulting in a debit to DOR's disbursing account and a book entry wire transfer by DST to the appropriate outgoing ACH settlement account (either DOR's for CPS, or OSC's for NCAS). On an exception basis, DOR may initiate a wire transfer to a taxpayer's bank account via DST's CB$.

Is the funding of an outbound ACH file different for community colleges and LEAs?

The funding is generally done with a combination of the unit's local bank check and a State warrant.  Since banks consider State warrants "next day funds," it is permissible for the warrants to be deposited one banking day prior to the settlement date.  The State Treasurer's publication entitled, "Banking Services Handbook," should be referenced (pages 44-45).

In the case of an inbound ACH file (debit file), when will the funds be received by the agency, and when must the funds be certified?

The funds will be received into the agency's inbound ACH settlement account on settlement date, as viewed on Bank of America’s Cash Pro Program, and should be certified on CMCS prior to the 2:00 p.m. deadline.

How are ACH Returns handled?

In the case of inbound transactions (collections), when the settlement account is a Zero Balance Account (ZBA), a separate Returns Account is established at the bank, for which the funds are debited against, as specified in special instructions associated with the settlement ZBA account. It is the responsibility of the participant to clear any deficit balances in the Returns Account timely.

In the case of outbound transactions (where the settlement account is not a ZBA account), a separate Returns Account is normally not needed. The returns are credited back to the settlement account from which they were originally disbursed from. The credit balance in the settlement account can then be cleared by a number of ways: 1) The bank can be requested to remit the funds to the participant by "official check" or by a "book transfer;" or 2) the funds can be used to fund a subsequent outgoing ACH Credit file.

Who is the current Master Services Agreement (MSA) for EFT Services with?

Bank of America, acting as the Originating Depository Financial Institution (ODFI).

Who has the responsibility for reconciling settlement bank accounts?

It is the participant's responsibility to reconcile the bank accounts timely. Statements are sent directly to the participant monthly. Bank of America Cash Pro can be used to reconcile on a more frequent basis.

What system does an agency use to view settlement accounts?

Participants using the OSC's MSA are granted access to their settlement accounts via Bank of America Cash Pro program. For State related participants, OSC is the administrator, establishing agency users and assigning functions, and performing password maintenance.

What reports are available through Bank of America’s Cash Pro program?

  • For outbound settlement accounts
    • Information Reporting Previous Day Detail
    • ACH Origination Reconcilement Report (Transactions and prenotes)
    • ACH Returned Item Report (Live returns and NOCs) (six business days)
    • Account Analysis Statement
  • For inbound settlement accounts
    • Information Reporting Previous Day Detail
    • Summary and Detail Report
    • Account Analysis Statement

What are the basic elements an agency must have in order to create an ACH payment, whether a credit or debit transaction, to be included in an ACH file?

  • Payee's name
  • Payee's bank's 9-digit transit-routing number
  • Payee's bank account number
  • Bank account type - checking or savings
  • Effective date of the payment

What are some computer programs various agencies use to create their own ACH files?

  • In-house developed mainframe programs
  • Standard Payroll programs used by many schools systems and community colleges
  • Banner System being developed by the universities
  • PC-based programs available from banks  
  • Web-based programs available from banks. The current master contract allows for utilization of Bank of America’s Cash Pro program.

What are the laws and regulations governing EFT?

  • Regulation E - Issued by the Federal Reserve Bank pursuant to the Electronic Funds Transfer Act (EFTA), pertains to ACH.
  • NACHA Operating Rules - Issued by the National Automated Clearing House Association pertains to ACH.
  • Article 4A of the Uniform Commercial Code (UCC) applies to wire transfers only.
  • Articles 3 and 4 of the UCC and Reg CC apply to checks.

What are the three most common ACH Standard Entry Codes assigned by NACHA to ACH transactions?

  • PPD - Prearranged Payments and Deposits - Used for consumer payments (e.g., payroll)
  • CCD - Cash Concentration or Disbursements - Used for corporate payments (vendors)
  • CCD Plus - CCD transactions that have addendum records attached.

What are some other typical ACH Standard Entry Codes used?

  • POP - Point of Purchase - Check conversions used face-to-face (e.g. Wal-Mart).
  • ARC - Accounts Receivable Conversions - Check conversions in a non-face-to-face situation (e.g., lockbox operation).
  • WEB - Internet initiated transaction against a consumer account
  • TEL - Telephone-initiated transaction against a consumer account
  • RCK - Represented check (e.g., representment of a NSF check)

For an ACH transaction, what information appears on the recipient's bank account statement?

Data in the two fields that are contained in the ACH Batch Header Record will appear on the bank statement: 1) Field #3 - Company Name; and 2) Field #4 - Company Discretionary Data. The "company name" is the name of the originator. The "discretionary data" could be a description of the payment, employee name, vendor number, or a combination of data elements. In the case of payroll, the social security number should not be inserted as discretionary data, unless it only shows the last four digits.

What is a prenote?

  • A prenote (preauthorization) is a zero dollar transaction created and sent through the ACH network to test the validity of a payor's/payee's bank account information that was provided at the time of enrollment or if subsequently changed.
  • The prenote transaction checks the validity of the bank transit-routing number and the payor's/payee's bank account number.
  • Prenotes are optional. However, they are recommended, especially in the case of payroll payments.
  • If a prenote is initiated, there must be a three banking days (effective 9/19/14) lag before a live transaction can be initiated. This gives the receiving bank an opportunity to respond to the originating bank if the prenote contains an invalid element.
  • If the prenote has an invalid transit-routing number or bank account number, the receiving bank will normally respond within the three-day time frame, advising with a "notification of change" (NOC). The NOC will specify the reason for the change needed.
  • While NACHA Rules require receiving banks to test the validity of prenotes received, some banks do not always do so.
  • If the prenote contains a bank account that is incorrect, but yet is a valid bank account number (i.e., belongs to another bank customer), the prenote will not reveal that the information has been set up incorrectly. The name of the account is not verified in a prenote transaction.
  • Participants can view NOCs via Bank of America’s Cash Pro Program, on the ACH Return Item Report.
  • If a change is made based on the receipt of the NOC, it is not necessary to do another prenote to test the change, unless the originating company (participant) desires to do so.
  • A NOC will also be received in response to a live transaction that contains an invalid transit-routing number or bank account number. NOCs for live transactions are of two types: 1) transaction posted, but a change for future transactions is needed; or 2) transaction did not post and is being returned.
  • The fee for a prenote is the same as the fee for a live transaction.
  • Prenotes can be contained in the same ACH batch as other credit or debit transactions. Using the "service class code" of 200 in the ACH batch header record (field 2) will allow debits, credits, and prenotes to be contained in the same batch.

Are routing-transit numbers required to be verified?

When an employee or vendor is enrolled as a payee/payor in an ACH database, it is highly recommended that a verification of the validity of the bank transit-routing number is made. In the case of either TEL entries or WEB entries, NACHA Operating Rules require that commercially reasonable procedures be employed to verify the transit-routing number. Downloadable files are available from the Federal Reserve Bank for this purpose. See OSC's SECP link under "About SECP/External E-Commerce Resources."

Who pays for the bank service fees for EFT Services, for State agency participants?

  • Payroll and NCAS Related Payments - Fees are billed to and paid for by the Department of State Treasurer (DST).
  • Vendor Payments - Fees are billed to and paid for by the respective agency
  • EFT Collections (ACH Debits) - Fees are billed to and paid for by the respective agency

What is an Electronic Check (e-Check)?

The term "electronic check" generally refers to services offered by banks that allow for the conversion of a paper check to an ACH draft (with the original check being destroyed). Federal regulations only allow for the conversion of "consumer" checks. Commercial checks and government checks cannot be converted, as it by-passes positive pay programs used by companies and governments. This type of transaction is subject to the ACH Rules (i.e., NACHA Operation Rules). These transactions have the ACH Standard Entry Code of either POP or ARC. An agency should consult with OSC before acquiring this type of service.

What is Remote Capture?

Remote capture refers to services offered by banks that allow for the capturing of a paper check and generating an image (with original check be destroyed), and presenting the image as a "substitute document" under the Check 21 Law. This type of transaction is subject to the paper check Regulations (i.e., Regulation CC and the Uniform Commercial Code). An agency should consult with OSC before acquiring this type of service.

What is Check Guarantee?

This is a service offered by third-party providers that offer two options: 1) Verification of valid account number; and 2) Guaranteeing of funds. It is often used in conjunction with Remote Capture. An agency should consult with OSC before acquiring this type of service.