Electronic Payment Systems
Outline
The Net Effect on Payment/E-Payment
Impact on Developed Countries
Starting point for Developing Nations
New Opportunities
Conventional Payment
Mechanisms in United States
Approx 80% of payments in Cash
Non-Cash
Payment
Instrument
Check
Trans. Trans.
Volume Value
Average
Value
71%
10%
$1,179
C/D Card
25%
0.1%
$59
C/D Transfer
by ACH
Wire Transfer
2.5%
2%
$2,000
0.1%
86%
$4.3m
1999 Source BIS
International Trade involves Wire Transfers,
Letters of Credit etc.
Retail Payments Net Evolution
Cash evolving (very slowly) to Internet based
systems such as Paypal
Credit-Card based systems
Ideal for Internet already a global payment method
tradition of card-not-present
Combined with Secure Socket Layer, it is used for
almost all retail E-commerce high fraud rate
Retail Check being eroded by Electronic Bill
Payment, electronic home banking
Trade Payments Net Evolution
Check Payments migrating to Electronic Transfers
in the U.S. via the Automated Clearing House
(ACH) networks
FSTC E-check and BIPS Projects
ACH Transfers growing in importance
European Initiatives: STEP1 (<50K)
Global Initiatives : WATCH, CLS
Internet access to these is coming
Total trading Systems
Bolero, Tradecard
Other Aspects of Electronic
Trading
Electronic Trust building becoming more
common
Legislative Changes in E-Commerce in Europe,
US and Asia enable this
PKI Infrastructure being (slowly) built
Verisign
Identrus
Wisekey
In combination with E-paymentswill enable
complete transactions on-line
Conventional Payments in
Developing Countries
Generally less developed banking industry
Credit Cards not widely available
More reliance on paper
Foreign Exchange transactions more
problematic
Being left out of new payment initiatives
Currently
1 +
9
32
10
New Opportunities
On the Internet
no-one knows you
are a dog
Internet banking
infrastructure is
cheap and easy to
build.. Opportunity to
leap-frog
Open standards level
the paying field
Must work with new
standards
Merchant Cards 101
Office of the State Controller
Types of Cards
Cards
Smart Cards
Credit Cards
Bank Cards
Settle via Associations
Debit Cards
Travel & Entertainment
(Proprietary Cards)
Settle directly
PIN
Online / Real-time
EBT Cards
Signature
Offline / Batch
Credit Cards (Pay later)
Bank Cards e.g., Visa and MasterCard
T&E Cards (Proprietary Cards) e.g. Discover, Diners Club, AmX
Debit Cards (Pay now Against checking acct)
Smart Cards (Prepay) Stored Value Embedded Chip
EBT Card (Electronic Benefits Transfer) (Gov.-Issued debit card)
Food Stamps (Funded directly by USDA)
Cash Benefits (Not utilized in NC)
Merchant Card Players
3&6
Acquiring
Processor
Interchange Network
Visa USA
9
MasterCard Intl
Card Associations
8
Card Issuing Bank
11&12
10
4&5
Merchant
(Agency)
Citizen
(Taxpayer /
Cardholder)
13
States
Depository
Bank
Locals
Depository
Banks
Proprietary Card Cos.
American Express
Discover, etc.
Merchant Card Processor not involved with
Proprietary Card settlements.
Only involved with Authorizations
Authorization and Transmission Day 1
Funds Settlement Day 2 or later
Types of Capture
Card Capture
Card-Present
Cards Accepted
Credit Cards
Debit with PIN
Capture Method
Point of Sale (POS)
Card is swiped or keyed
Lower risk
Lower fees
Card Not-Present
Cards Accepted
Credit Cards
Debit with Visa / MC Logo *
Capture Methods
Mail Or Tel Order (MOTO)
Internet Order
Higher risk
Higher fees
* PIN-less debit cards without logo may be allowed
in future for governments - for Card Not-Present.
. Generally require a signature.
Credit Card Milestones
1920 Proprietary charge cards (Oil companies - courtesy cards)
1950 Travel and Entertainment (T&E) Card Dinners Club Card
1966 Credit cards with revolving credit BankAmericard being the first
1980s Debit cards and ATM cards
1980s NC Wildlife Resources Commission was first State agency to accept credit cards,
with fees paid from non-State funds
1990s Universities began accepting cards, with fees paid from institutional trust funds
(non-State funds)
1995 OSC revised State Cash Management Plan to authorize credit card acceptance by
State agencies if approved by OSC.
1999 SB 222 enacted, giving OSC responsibility for EFT (including cards)
2000 OSC entered in a Master Services Agreement with STMS
2000 State Fair tickets could be purchased online using credit cards
2000 DMV drivers license could be renewed online using credit cards
2005 OSC initiated expansion of Electronic Commerce Program
2006 OSC re-selected STMS as vendor through RFP process
Electronic Funds Transfer 101
Office of the State Controller
Two Types of EFT
EFT is a generic term
Describing two
different methods of
transferring funds
electronically
EFT
Wire Transfer
ACH
Both performed through Federal
Reserve Bank System
(Except for in-bank or on-us transactions)
Common mistake to call an ACH payment a wire transfer
Each are handled by different departments at a bank
Wire Transfer
Wire Transfer
Fed Wire
Between two banks
Book Transfer
Within same bank
Foreign Wire
Foreign bank
Movement of funds is real time effected immediately
FRB open for fed wires up to 6:00 p.m.
Book Transfers are memo posted up until midnight
ZBA (Zero Balance Account) sweeps are book transfers
Fed Wire Affects banks Reserve Accounts maintained at the FRB
Sending banks account at the FRB gets debited
Receiving banks account at the FRB gets credited
Foreign exchange and Euro dollars through Clearing House for Inter-bank
Payments System (CHIPS) 54 New York Banks
Wire Transfer Utilization
When appropriate to use
Time sensitive - Funds need to be moved same day initiated
Large dollar amounts
Examples
Debt Service Payments (preserve States credit rating)
Funding ACH payments (e.g. payroll direct deposit)
Funding investments (e.g., at custodian bank)
Adjusting balances (between depository banks)
Remitting ESC payments (to US Treasury)
DOR accepts wire transfers from corporate taxpayers on an
exception basis only
Initiating Wire Transfers
Banks provide corporate customers ability to initiate their
own wires via online banking access
Templates are used
Repetitive Transfers Pre-established ABA# and acct.#
Non-Repetitive - Open wire to anywhere
State Treasurer initiates all wire transfers for agencies
Via Wachovia Connection and BOA Direct
As requested by agencies via Core Banking $ystem
Results in debit to agencys disbursing / STIF acct.
Agency Logs in
Disb. Acct.
at DST
Online Wire System
DSTs Bank
Payees Bank
ACH
ACH Network A batch-process, store and forward for future settlement
Two types of ACH (Automated Clearing House)
ACH
ACH Credits
Direct Deposits
Always initiated by sender
Senders account is debited
and receivers account is
credited
Inbound & Outbound
ACH Debits
Electronic Drafts
Initiated by sender or receiver
If by sender Sender authorizes a
third party to initiate transaction
If by receiver Receiver initiates
transaction
Also referred to as Direct Payments
ACH Utilization
When appropriate to use
Large number of payments in a single file (batch)
At least one day is available between initiation and settlement
Any size dollar amounts
Examples
Outbound Payroll direct deposit (ACH credits)
Outbound Vendor payments (ACH credits)
Inbound Taxpayer payments (ACH credits or debits)
ACH Transactions can have Addendum Records
Remittance data attached
Can be interfaced with A/R system
DOR requires taxpayers to use TXP format
Governing Org.
ACH Players
3
2
Originating
Depository
Financial
Institution
(ODFI)
Trade Group
ACH Operator
(FRB)
Receiving
Depository
Financial
Institution
(RDFI)
1
Originator
(Company /
Employer)
Receiver
(Company /
Employee)
Authorization / Enrollment
Primary Differences
Wire Transfers
Item Cost - $6.75
ACH
Item Cost < 1 penny
Same day funds
Next day funds
Transfer almost
One day delay in
instantaneous
Use for critical
payment (e.g. debt
service)
settlement
Used for large batch
files (e.g., payroll)
Checks
Cost - $.75
Electronic Checks
Loosely used term Refers to two different methods
Electronic Checks
Online Paper Check
ACH Conversions
Online Paper Check
Developed by Financial Services Technology Consortium (FSTC) Not-forprofit group of CA banks
Initiated using a PIN and digital signature
Receiver prints out paper check for deposit
ACH Conversions (most common method referred to)
Transactions converted to ACH debits (e.g., ARC, POP, WEB, TEL)
Services can be provided by third party processors
Account verification determined upfront. Guarantees available.
Examples of services provided through third-party CyberSource (POP)
Telecheck:
CheckFree:
AmeriNet:
Paymentech:
Applies to consumer checks
only, not business checks.
Regulator Governance
Regulation E, per Electronic Funds Transfer Act (EFTA)
Issued by Federal Reserve Bank
Covers ACH and debit cards (but not wires or credit cards)
Consumer protection oriented
Some protection afforded the consumer does not apply to corporate or
government customers
NACHA Operating Rules
National Automatic Clearing House Association
Applies to ACH transactions only
Applicable to both consumer and corporate (including government)
Uniform Commercial Code (UCC) Article 4A
Applies to Wire Transfers Only
Uniform Commercial Code (UCC) Articles 3 and 4 and Reg CC
Applies to negotiable instruments (checks)
Reg CC issued by Federal Reserve - Applies to checks not EFT
Check 21 (Check image conversion) governed by Reg CC, not Reg E
ACH Terminology
Typical ACH Standard Entry Class Codes
PPD Prearranged Payments and Deposits (Consumer payments)
CCD - Cash Concentration or Disbursements (Corporate payments)
CCD+ - Corporate payments with 180 character addenda record
TXP Addendum format for Tax Payments (Used by DOR)
Check Conversion Standard Entry Class Codes
POP Point-of-Purchase / Face-to-face (e.g., Wal-Mart)
ARC Accounts Receivable Conversion Non-face-to-face (e.g., Lockbox)
Check Conversions not eligible for use with corporate or government checks
Other Standard Entry Class Codes (Debit entries)
WEB Internet-initiated entries against a consumer account
TEL Telephone-initiated entries against a consumer account
RCK Represented check (representment of a non-sufficient funds check)
Daylight Overdraft
Federal Reserve charges bank interest per minute for
overdrafts in their Fed account
Banks do not allow wire transfers to be made from
account if available balance is not sufficient
Over-the-counter deposits not posted until night
ACH credits are posted in mornings (6:30 and 8:30)
Could pose problems when need to wire funds out
Some banks will assign an allowable daylight
overdraft limit
Based upon customers credit risk
Based upon bank overdraft cap at the FRB
States arrangements with banks are handled by DST
EFT Milestones
1972 SCOPE (Special Committee on Paperless Entries)
1974 NACHA (National Automated Clearing House Association)
1977 Retirement System began using Direct Deposit for retirees
1979 Central Payroll began using Direct Deposit for employees
1980s University Payroll Centers began using Direct Deposit - employees
1984 GMTS (Governmental Moneys Transfer System) implemented by
DST for paying local units of government (Replaced by STEPS)
1988 DOT Payroll began using Direct Deposit for employees
1992 STEPS (State Treasurers Electronic Payments System) implemented
for local units (two-way street). (Ended 2003, except Retirement)
1994 DOR implemented EFT for corporate tax collections
1990s LEAs and community colleges implemented direct deposit for
employees (costs being paid for by DST)
1999 SB 222 enacted, giving OSC responsibility for EFT
2002 Common Payment System implemented (DMV-IRP first)
2005 OSC initiated expansion of Electronic Commerce Program
