FedACH^® Services

Two institutions,
two services,
two success stories

June 2009

Despite the rigid processes that are put in place and efforts from operations staff to ensure accuracy, errors can sometimes occur in payments processing. Two institutions using the Federal Reserve Banks’ FedACH Risk^® Management Services learned just how valuable these risk services proved to be when errors were encountered in their automated clearing house (ACH) processing.

Minimizing duplicate file processing

The FedACH Risk Origination Monitoring Service allows the originating depository financial institution (ODFI) to set debit and/or credit forward origination caps on specific company identification numbers that are included in batch header records or on the ODFI's routing transit number as a whole. If a cap is exceeded, the service pends the particular batch that caused the breach and sends an e-mail notification to designated staff within the ODFI. The ODFI then makes a decision to reject the batch or to release it for processing. By deciding how high or low to set these origination caps, the ODFI can tailor its opportunities to review and decision batches.

Founded in 1870, First National Bank of Santa Fe (Off-site Link) is the oldest bank in the Southwest, with 11 branches in New Mexico and one in Denver. It serves the consumer and corporate markets and offers a full line of online banking services. As senior vice president and senior operations manager, Sandra Snow is responsible for e-banking, ACH, image processing, deposit operations and the customer care center. She brought with her 22 years of banking experience when she joined First National last year.

One of Snow’s first assignments was to implement the FedACH Risk Origination Monitoring Service. “We were beefing up our ACH processing because with online banking we had more to offer, so we needed to make sure on the other side we had sufficient controls in place,” explained Snow. She described the service setup process as “very user friendly; very easy,” and said bank staff benefitted from attending one of the Federal Reserve Banks’ complimentary FedACH Risk Teleseminars on setting risk management criteria.

“While we primarily implemented the monitoring service to help us manage against potential losses on accounts which exceeded their established caps, it actually protected us against a mistake, too,” said Snow. She recounted that one of First National‘s originators inadvertently sent a duplicate file. “It had already been uploaded, but with the FedACH Risk Origination Monitoring Service we were able to just reject it. That saved us a great deal of work and potential risk of loss. If we had not been able to do that, either our staff or the originator would have had to create another file to debit the accounts for the extra payroll file’s credit entries,” Snow explained.

A best practice emerged: First National now sets cap limits low, allowing the bank the opportunity to simply reject some types of mistakes. Snow added, “It’s not so much because the extra file exceeded the cap for that originator, but rather because when we implemented the service we made the decision to set caps in the system lower than the full amount for which an originator was approved. In this duplicate file situation, fortunately, it happened to hit the cap and generate a notification. We learned from that. In fact, because it worked so well for us, we’ve actually gone back and lowered our caps further. It doesn’t cost anything to have the cap lower, and it’s not a problem to have a batch pended by the service. Looking for pended batches is just part of our process that we do every day, and 99 percent of the time it’s just ‘approve and let it go,’” Snow concluded.

Counteracting fat-fingered files

The FedACH Risk RDFI File Alert Service is an informational notification service that lets the receiving depository financial institution (RDFI) set incoming file size thresholds. If a file threshold is exceeded, designated staff within the institution receive e-mail notifications that serve as an early warning system and provide for valuable research time. The RDFI File Alert Service is designed to help protect RDFIs against surprises, which is exactly what it did for First Community Bank.

First Community Bank (Off-site Link), founded in Taos, New Mexico in 1922, is comprised of a 60-branch network located in New Mexico, Colorado and Arizona. Operating under its parent company, First State Bancorporation, First Community focuses on providing individualized customer service that stands behind its motto: Not Your Typical Bankers, Not Your Typical Bank. Its suite of products includes online banking services for both business and consumer markets.

Ramona M. Chadwick, AAP, who serves as manager of electronic banking services, brought 10 years of banking experience with her to First Community in 2008. She holds responsibility for online banking for business customers, for the ACH department and for risk management.

She remembers well when the FedACH Risk RDFI File Alert Service first demonstrated its value to her institution. “Shortly after we signed up for the file alert service in November 2008, we received an incoming debit to a consumer account in the amount of $10,744,259.08,” Chadwick recalled. “Based on what we learned, it was supposed to be a loan payment, but somebody evidently ‘fat fingered’ the amount — big time.”

“With the file alert service, we were alerted immediately, early enough in the day that we could derive a return and get immediate credit,” Chadwick said. “We contacted the ODFI involved and let it know we were returning the transaction. The ODFI didn’t seem to know about the transaction or to be too concerned about it. In fact, we received the very same transaction again the next day — so we returned it yet again.”

“Without the FedACH Risk RDFI File Alert Service, we probably would have had to wait for the consumer to notice the mistake. Depending on what time of day the consumer alerted us, it could have affected when we could return the item, and we might not have been able to get immediate credit. We would have had to pay out almost $11 million in funds from our Fed account, so we wouldn’t have been able to do anything with those funds in terms of overnight investment,” Chadwick explained.

Service setup was “a piece of cake,” according to Chadwick. “I went to our risk management committee to see who should receive the notification e-mails. In addition to myself, there are four others who get the notifications: our ACH coordinator, our risk analyst, the manager of our wire department and a person in the finance department. Because the wire and finance departments work together to send out our settlement wires, they need to know whether we’ll have to buy or sell to settle with ACH. By getting copies of the alert notification e-mails, they can ask questions and we can research them immediately,” she continued.

“It’s a great service. We really get a lot of information to help us monitor potential risks within files coming in to us as an RDFI. We can see large-dollar transactions. We may find out that a customer is doing a lot of activity that we’re not comfortable with, or may find that we need to exit a relationship with a customer,” Chadwick concluded.

We can help you write your own success story

Explore the suite of FedACH Risk Management Services and its benefits and functionality by attending a complimentary teleseminar, reviewing the online product material or contacting your FedACH sales specialist via My FedDirectory^®.

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