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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 donor—we 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 electronically.
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 nationwide.
A typical transaction involves five steps:
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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 service.
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 $15.2 billion.
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 Payments Department.
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 bills.
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 year—a 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 to Hostad.
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 package—the 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 future—a time when more transactions will occur at an even faster and more efficient pace.
