They could be called painless payments.
Like magic, mortgage payments, automobile installment payments and insurance
charges can disappear from our checking or savings accounts without our
having to sign a check. Even more magically, paychecks can replenish our
accounts like a gift from an unseen donorwe don't even fill out
a deposit slip.
This wizardry occurs courtesy of a nationwide electronic funds transfer
network called the automated clearing house (ACH).
The ACH links financial institutions that make recurring deposits to,
and withdrawals from, their customers' accounts. The network is used by
the federal government, many employers, corporations and individuals who
have authorized their financial institutions to make and/or receive payments
Alternative to Paper
A natural outgrowth of a growing electronic banking environment, the ACH
concept originated in the 1960s as an alternative to handling an increasing
number of paper checks. The first ACH was established in California in
1972, and until 1978 only financial institutions within a geographic region
could exchange payments. Participation was also limited to financial institutions
that were members of their local ACH association.
With the passage of the Monetary Control Act in 1981, access to ACH
services became available to all institutions with the capability to send
and receive payments electronically. And FRCS-80, the Fed's nationwide
electronic communications system, allows financial institutions to communicate
A typical transaction involves five steps:
An employee authorizes his bank to receive salary payments.
The payment information goes to the employer's bank.
That bank enters the data on magnetic tape or communicates
it via computer connection and sends it to the local ACH.
At the ACH, the employer's payroll information, which may
include payment orders to a number of different institutions,
is sorted and routed to the employee's bank.
The employee's bank posts the electronic credit to the employee's
Although there are more than 30 automated clearing house associations
across the country, processing of all payments is handled by three organizations:
Federal Reserve Banks, the New York Automated Clearing House and VISA.
Together these operations serve approximately 15,000 depository institutions
in the United States.
On a local level, the Upper Midwest Automated Clearing House Association
(UMACHA) was formed in 1974 to serve the Ninth District. Today, more than
1,500 financial institutions participate in this electronic cash management
To keep pace with the demands of an electronic network, the Minneapolis
Fed's ACH operation is staffed 24 hours a day, five days a week. In June
of this year, 7.8 million items passed through this bank's ACH totaling
While paying by ACH may be faster and less costly than paying by check,
ACH payments represent only a small fraction of total payments flowing
through the economy. When compared with checks, ACH accounts for only
5 to 6 percent of the total volume of payments. On the other hand, "ACH
volume at the Minneapolis Fed is 18 percent higher this year than at the
same time last year and it will continue to grow dramatically," according
to Caryl Hayward, assistant vice president in the Minneapolis Fed's Electronic
The Fed As Its Own Customer
Originally used only for automatic recurring payments, the ACH system
is proving to have almost unlimited applications. For example, the Minneapolis
Fed may join a number of other Feds in using the ACH network to pay its
Called Vendor Pay at the Cleveland Fed, the system functions essentially
the same way at all Fed banks and is modeled after the U.S. Treasury's
Vendor Express payment system. Here's how it works: The participating
Fed electronically deposits a payment in the vendor's depository institution
account and communicates information the vendor needs to match the payment
with the correct invoice. The system benefits both parties because vendors
receive payment up to three days sooner than by mail, and the Fed doesn't
have to use paper checks.
"Vendors using the system seem to like it," Sam Harshman, manager in
the Cleveland Fed's budget and expense area, said. "We're interested in
how well (Vendor Pay) is working at the other Feds," said Ron Hostad,
assistant vice president in accounting at the Minneapolis Fed.
Several Federal Reserve banks other than Minneapolis also process employee
expense payments through the ACH network. But with well over 90 percent
of Minneapolis Fed employees already receiving their payroll checks via
ACH, Hostad said his department is also looking into converting expense
payments to ACH.
The Minneapolis Fed's ACH is capable of processing both vendor and employee
expense payments, according to Hayward. "Last year (ACH) processed 78
million payments," Hayward said. "The Minneapolis Fed itself makes maybe
a couple of thousand (payments) in a yeara drop in the bucket,"
he added. However, the switch from paper checks to direct deposit would
require considerable changes in the Bank's accounting systems, according
More Efficiencies for the U.S. Treasury
One Minneapolis Fed ACH innovation, scheduled for implementation this
fall, will improve the efficiency of a program (Masterfile) operated by
the Federal Reserve System for the U.S. Treasury. The Minneapolis ACH
will automatically collect payments for savings bonds from companies that
issue them to employees. This bank initiated the idea of using the ACH
and received permission from the Treasury Department to implement the
changes in payment method, according to Hayward.
Since June 1988, the Minneapolis Fed has been one of three banks in
the Federal Reserve System operating Masterfile, wherein this bank maintains
the savings bond files for employees of participating companies in the
Ninth, Seventh and Twelfth districts (roughly from Detroit to Seattle
and all states west of the Rockies).
The Minneapolis Fed records data on savings bond registration, sends
bonds directly to individual owners and debits the company's account.
"The Treasury specifically asked our bank to perform this function,"
Hayward said. "We've been fairly aggressive in working with the Treasury
to increase ACH usage," he added.
An All-Electronic ACH
Looking to the future, the Federal Reserve System is aggressively pursuing
a program to connect its ACH processing centers electronically to virtually
all depository institutions and service bureaus that receive ACH entries.
The National Automated Clearing House Association (NACHA) has asked the
System to complete the conversion program by July 1, 1991.
Currently, more than 15,000 depository institutions and service bureaus
receive ACH payments, but only 12 to 15 percent are electronically connected
to Federal Reserve Banks. These financial institutions, however, handle
more than 80 percent of all ACH volume.
The national campaign, dubbed "All-Electronic ACH," represents the Fed's
commitment to making the automated clearinghouse system a linchpin in
improving the efficiency of the nation's payments system. An all-electronic
ACH not only will improve the reliability and timeliness of delivery of
ACH entries, officials say, but it will lead to improved deposit schedules,
better return and exception-item handling and new service offerings.
The Minneapolis Fed is well-positioned to participate in the program,
according to one bank official. "This bank has more micro connections
for ACH than any other district," said Bernadette Muck, manager in the
electronic payments department. In addition, this district has two very
large ACH users: Norwest Corp., the third largest originator of ACH payments
in the country; and the U.S. Postal Service, which generates its payroll
through the Minneapolis Fed's ACH. Also, First Bank System is a pioneer
in using the ACH network for electronic data interchange (EDI), an innovative
means of communicating information as well as payments.
Using primarily two methods, a computer-to-computer bulk file transmission
system and a PC-based intelligent terminal packagethe Fed plans
to work initially with higher volume recipients. Software for both products
has been developed by the Federal Reserve System.
The file transmission system uses the Fed's Bulk Data Software, while
microcomputer users will employ the Fedline II Intelligent Terminal System.
The latter features software that can originate and receive ACH entries,
make funds and securities transfers and be used for other applications.
In time, the Fedline II Intelligent Terminal System will become the
Fed's first nationally standard intelligent terminal product. It is expected
to replace the FRED system at the Minneapolis Fed and similar systems
developed earlier by other Federal Reserve Banks.
So, while electronic wizardry continues to create an age of "painless
payments" and electronic deposits, the Minneapolis Fed has its sights
set on the futurea time when more transactions will occur at an
even faster and more efficient pace.