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Originating Depository Financial Institution(ODFI): This party is the institutionthat receives payment instructions fromOriginators and forwards the entries to theACH Operator.2ACH Operator: The ACH Operator isthe central clearing facility operated by aprivate organization or a Federal ReserveBank (FRB) on behalf of DFIs, to or fromwhich Participating DFIs transmit or receiveACH entries. Currently, there are two ACHOperators: Electronic Payments Network(EPN) and the Federal Reserve (FedACH).Receiving Depository Financial Institution(RDFI): This party is the DFI that receivesACH entries from the ACH Operator andposts the entries to the accounts of itsdepositors (Receivers).Receiver: A Receiver is a natural person or anorganization that has authorized an Originatorto initiate an ACH entry (credit or debit) to theReceiver’s account with the RDFI. A Receivermay be either a company or a consumer,depending on the type of transaction.In ACH terminology, Originator and Receiverrefer to the participants that initiate andreceive the ACH entries rather than the funds.Unlike a check, which is a “debit” instrument,an ACH entry may be either a credit or a2.It should also be noted that in someinstances, an Originator, ODFI, or RDFImay choose to use the services of a ThirdParty Service Provider for all or part ofthe process of handling ACH entries. AThird-Party Service Provider is an entityother than the Originator, ODFI, or RDFIthat performs any functions on behalfof the Originator, ODFI, or RDFI withrespect to the processing of ACH entries.A function of ACH processing can includethe creation of ACH files on behalf of anOriginator or ODFI, or acting as a SendingPoint or Receiving Point on behalf of anODFI or RDFI, respectively. As the ACHNetwork continues to evolve, Third-PartyService Providers have taken on largerand more complex roles in the processingof ACH transactions.debit entry. By examining what happens tothe Receiver’s account, one can distinguishthe difference between an ACH credit andan ACH debit transaction. If the Receiver’saccount is debited, then the entry is an ACHdebit. If the Receiver’s account is credited,then the entry is an ACH credit. Conversely,the offset to an ACH debit is a credit to theOriginator’s account and the offset to an ACHcredit is a debit to the Originator’s account.A Depository Financial Institution (DFI) may participate in the ACH system as a Receiving Depository FinancialInstitution (RDFI) without acting as an ODFI; however, if a DFI chooses to originate ACH entries, it must also agreeto act as an RDFI).Sensitive But UnclassifiedNot For Public Release or Further Dissemination5

Draft Informational Networking BulletinWhen an Originator initiates a transfer to move funds into a Receiver’s account, it is called aWhenan Originatorinitiatesto movefundsinto a direction.Receiver’s account, it is called a credit. In an ACHcredit.In an ACHdebit,a transferfunds flowin theoppositedebit, funds flow in the opposite direction.ACH CreditODFIRDFIACH OperatorDebitCreditOriginatorReceiverACH DebitODFICreditOriginatorIV)RDFIACH OperatorDebitReceiverSample Credit & Debit Transaction FlowsACH CreditAn ACH entry, which is always initiated by the Originator, may be either a debit or a credit entry. Asmentioned above, when the Receiver’s account is credited and the Originator’s account is debited, the entry istermed an ACH credit.One of the most common types of ACH credit transactions is a payroll direct deposit. Other ACH credittransactions include: Social Security benefit payments, government and private pensions, annuities, dividends,Sensitive But UnclassifiedNot For Public Release or Further Dissemination65

Sample Credit & Debit Transaction FlowsOne of the most common types of ACHcredit transactions is a payroll direct deposit.An ACH entry, which is always initiatedOther ACH credit transactions include: Socialby the Originator, may be either a debit orSecurity benefit payments, governmenta credit entry. As mentioned above, whenand private pensions, annuities, dividends,the Receiver’s account is credited and theinterest payments, customer initiated billOriginator’s account is debited,entry isDraft theInformationalNetworkingBulletinpayments (phone,electric, etc.), tax payments,termed an ACH credit.government vendor payments, and corporateinterest payments, customer initiated bill payments (phone, electric, etc.), tax payments, government vendorto corporate payments.payments, and corporate-to corporate payments.ACH ictsthe transactionflow of anACHfollowinggraphicillustrationthe transactionflowof credit.an ACH credit.Step 2Initiates FundsTransfer RequestBatches EntriesAnd Transmits ToStep 3ABC Savings & Loan(ODFI)XYZ Printing Company(Originator)ACH OperatorACH AuthorizationSignedSends ACHCredit EntryStep 1CreditsAccount OfJohn Smith(Receiver)Step 4Step 5Atlas Bank(RDFI)In thisscenario,is aemployeenew employeeforPrintingXYZ PrintingCompanywhichpays its by ACHIn thisscenario,John JohnSmithSmithis a newfor XYZCompanywhich paysits employeesemployeesACHcredit.entry is XYZset upPrintingwhen anOriginator,XYZa Printingcredit.An ACHbycreditentryis setAnupACHwhencreditan Originator,Company,initiatestransfer to moveCompany,initiatesaccount,a transferto Smith’smove fundsinto a Receiver’s account, John Smith’s account.fundsinto a Receiver’sJohnaccount.Step 1: John Smith, the Receiver, has authorized his employer, XYZ Printing Company, in writing, to creditBut Unclassified7his bank account for his payroll via an ACHSensitivetransaction.Among the basic information John Smith must includeNot For Public Release or Further Disseminationin his authorization is the name of his Financial Institution (FI), his FI’s ABA number (Routing Number), hisaccount number at the FI and the type of account (e.g. checking or savings).

Step 1: John Smith, the Receiver, hasauthorized his employer, XYZ PrintingCompany, in writing, to credit his bankaccount for his payroll via an ACHtransaction. Among the basic informationJohn Smith must include in his authorizationis the name of his Financial Institution (FI),his FI’s ABA number (Routing Number), hisaccount number at the FI and the type ofaccount (e.g. checking or savings).Step 2: XYZ Printing Company compilesthe remaining identifying data to initiate thepayroll entry for John Smith. This informationwould include the specific date for the creditto his account (Effective Entry Date,) as wellas the specific amount of his salary. Uponcompletion of the payroll file of similardata for all of its employees, XYZ Companytransmits a “batched” payroll file (consistingof individual payment entries) electronicallyto its Financial Institution – ABC Savings andLoan - which is the Originator’s FinancialInstitution (ODFI).Below is an example of an ACH file dataprepared by XYZ Printing (and ultimatelyreceived by Atlas Bank) for John Smith’spayroll. The file would contain an EffectiveEntry Date along with similar entries for otheremployees being paid:NAME:Employee ID:CREDIT:FI:RTN:ACCT. #:Smith, John123-45-5789 2,000.00Atlas Bank2143343338312-345 910 (checking)Step 3: ABC Savings & Loan (serving as theODFI) edits the file and ensures that there areno data error problems prior to transmittingthe file to an ACH Operator.4 Once receivedby the ACH Operator, each entry is sortedand batched by ABA numbers and put intoRDFI-specific files. The ACH Operator willdetermine the Settlement Date based on theEffective Entry Date entered by the Originator(XYZ Printing). All Settlement figures at theend of the processing day will be transmittedby the ACH Operators to the RDFIs/ODFIsin a Statement of Activity, or Advice file, andthe figures are also transmitted to the FederalReserve prior to Settlement time.Step 4: Atlas Bank (serving as the RDFI) thenreceives its ACH file(s) electronically from theACH Operator.Step 5: Atlas Bank disaggregates the “batch”entries it receives from the ACH Operator andthen posts the specific payroll amount for JohnSmith to his account (as an ACH credit) on theSettlement Date.On the Settlement Date in the morning, ABCSavings & Loan is debited on its Fed accountand Atlas Bank is credited on its Fed account forthis entry. (ABC Savings and Loan, in its ACHODFI-Originator agreement with XYZ Printing,specifies the timing for settlement between them forthe payroll entries).3.There would also be a Trace Number for the entry containing 15 digits, the first eight of these come from thefinancial institution’s Routing Number.4.In the case of a first time payroll credit for John Smith, a non-dollar transaction, known as a Pre-notification entry,would likely be sent to ensure the actual payroll credit would be transmitted correctly.Sensitive But UnclassifiedNot For Public Release or Further Dissemination8

ACH DebitIn an ACH debit transaction, funds flow inthe opposite direction. Funds are collectedfrom a Receiver’s account and transferredto an Originator’s account, even thoughthe Originator initiates the entry. The ACHprocessing flow remains the same.Consumer ACH debit acceptance is highest inthe area of pre-authorized transfers involvingregular, recurring payments, such as mortgagepayments, installment loans and insurancepremiums. Many corporations also use ACHdebits to consolidate funds deposited inoutlying divisions by operating branches orsubsidiaries.DraftInformationalNetworkingThe graphic in the followingexampleillustrates thetransactionBulletinflow of an ACH Debit.Step 2Initiates FundsTransfer RequestBatches EntriesAnd Transmits ToStep 3Local Bank(ODFI)World Access Cable(Originator)ACH OperatorACH AuthorizationSignedSends ACHDebit EntryStep 1DebitsAccount OfMike Jones(Receiver)Step 4Step 5Mountain Bank(RDFI)In this example, cable television customer Mike Jones signed an agreement with his cable company to have hisIn thisexample,cablefromtelevisioncustomerMike Joneswith hisWorldcable Accessmonthlycablefee debitedhis accountand creditedto thesignedaccountanofagreementhis cable company,companyhave Cablehis monthlycable fee becausedebiteditfromhis accountandtransactioncredited tointothetheaccountCable.World toAccessis the Originatoris initiatingthe ACHACHof his Mikecable Jonescompany,AccessCable.AccessCableis theOriginator because it isnetwork.is theWorldReceiverbecausehe isWorldreceivingthe ACHdebittransaction.initiating the ACH transaction into the ACH network. Mike Jones is the Receiver because he isthe debitACHauthorizationdebit transaction.Stepreceiving1: An ACHwas completed by the Receiver (Mike Jones) to pay his monthly bill. Inthis example, the Originator of the preauthorized debit is World Access Cable. Mike’s preauthorized debit is 29.95 per month.Sensitive But tionStep 2: On the same date each month, World Access Cable (as the Originator) initiates a funds transfer requestby transmitting an ACH debit file to the Originating Financial Institution, ODFI (Local Bank) which includes

Step 1: An ACH debit authorization wascompleted by the Receiver (Mike Jones) topay his monthly bill. In this example, theOriginator of the preauthorized debit is WorldAccess Cable. Mike’s preauthorized debit is 29.95 per month.Step 2: On the same date each month, WorldAccess Cable (as the Originator) initiates afunds transfer request by transmitting anACH debit file to the Originating FinancialInstitution, ODFI (Local Bank) which includesthe debit entry to Mike Jones’ account athis Receiving Financial Institution, RDFI(Mountain Bank). Mike Jones will be theReceiver of the monthly 29.95 debit.The following is an example of an ACH fileprepared by World Access Cable for Mike Jones’cable bill. The file contains a billing/debitingdate (Effective Entry Date) and also similarentries for other members being billed/debited:NAME:BILLING REFERENCEACCT:DEBIT:FI:RTN:ACCT. #:Jones, Mike1234 29.95Mountain Bank56789101087-654 321(checking)Step 3: Local Bank (serving as the ODFI) editsthe file and ensures that there are no data errorproblems prior to transmitting the file to anACH operator.5 Once received by the ACHOperator, each file entry submitted is sorted andbatched by ABA numbers and put into RDFIspecific files. The ACH Operator will determinethe Settlement Date based on the Effective Entry5.Date entered by the Originator (World AccessCable.) All Settlement figures at the end of theprocessing day will be transmitted by the ACHOperators to the RDFIs/ODFIs in a Statementof Activity, or Advice files, and the Settlementfigures are also transmitted to the FederalReserve prior to the Settlement time.Step 4: Mountain Bank (RDFI), Mike Jones’bank, receives the file electronically from theACH Operator.Step 5: The RDFI (Mountain Bank)disaggregates the batch entries it receives fromthe ACH Operator and then posts the debit of 29.95 to Mike Jones’ account for his monthlycable bill on the Settlement Date.On the Settlement Date in the morning, MountainBank (the RDFI) is debited on its Fed accountand Local Bank (the ODFI) is credited on its Fedaccount for this entry. (Local Bank, in its ACHODFI-Originator agreement with World AccessCable, specifies the timing for settlement for thedebit entries between them).ACH settlement is the actual transferof the value of funds between financialinstitutions to complete the paymentinstruction of an ACH entry. The FederalReserve provides settlement services forACH entries processed by the FederalReserve and for private sector ACHOperators that process ACH entries. TheFederal Reserve ACH operator calculatesthe net credit and debit positions offinancial institutions and applies thosecredits or debits to the reserve accountsof the financial institutions (or theircorrespondent banks) that are maintainedon the books of the Federal Reserve.In the case of a first time billing debit for Mike Jones, a non-dollar transaction, known as a pre-notification entry,would likely be sent to ensure the actual payroll credit would be transmitted correctly.Sensitive But UnclassifiedNot For Public Release or Further Dissemination10

Applications (Points of Entry) usedby Customers to Originate ACHtransactionsIt is helpful for investigative officials to alsounderstand the various ways ACH is accessedfor use in electronic transactions. We will,therefore, take a close look at some sampleswhich explain the primary ACH points ofentry for ACH debits and credits: i.e., the Pointof Purchase Entry, Internet Initiated Entry,Telephone Initiated Entry, and PrearrangedPayment and Deposit Entry. Each one ofthese “points of entry” is addressed in detailbelow, along with related sample transactionprocessing flows, to provide investigativeofficials with a better understanding of allstages of the ACH process.Point of Purchase Entry (POP)Originators use POP as a method of paymentfor the in-person purchase of goods or servicesby consumers. These are single entry ACHdebits that are based on written authorizationand account information obtained from acustomer’s check at the point of purchase. Thecheck (referred to as a source document) is usedto collect the Receiver’s routing number, accountnumber and check serial number that will beused to generate the debit entry to the Receiver’saccount. After scanning, the source documentis voided by the merchant and returned to theReceiver and the Receiver signs a receipt. Theprocess is discussed in detail below.In this example, the Customer (Receiver)gives a check to a Merchant (Originator) forpurchase of merchandise. The Merchantthen converts the check into an electronicACH payment for processing. The Merchantis the Originator because the Merchant isinitiating the transaction, while the Customeris the Receiver because the Customer will bereceiving the ACH debit.Sensitive But UnclassifiedNot For Public Release or Further Dissemination11

POP Transaction FlowMerchant (Originator)Check written atMerchant“Point of Sale”Customer (Reciever)MICR InformationCaptured at MerchantAuthorizationStep 3Step 2Step 1ODFI (Merchant’s Bank)Receives the ACH filefrom the Merchant andthen transmits ACH debitentry in file to ACHOperatorStep 4RDFI receives the ACH debitin a file from their ACHOperator and posts the debitStep 6Step 5Merchant’s Bank(ODFI)Check and receipt providedto CustomerACH OperatorStep 1: A check is provided by the customerfor a purchase at a “Point of Sale” merchantlocation.Step 2: The MICR (Magnetic Ink CharacterRecognition) is captured from the checkat the merchant location, in order for thecheck to be converted to an ACH debit entry.Information captured is the Routing Numberof the Customer’s financial institution, theCustomer’s account number, and the checkserial number.Step 3: The Customer signs an agreement thatauthorizes the Merchant to convert the checkinto an ACH debit entry.Customer’s Bank(RDFI)Step 4: The original check (stamped “VOID”)and a copy of the receipt are given to thecustomer after the ACH debit has beenentered into the Merchant’s system.Step 5: The Merchant transmits an ACHfile to its ODFI, which then transmits theMerchant’s ACH batch entries along withbatches from other Originators to the ACHOperator for processing.Step 6: The ACH Operator processes the ACHentries and makes files available for RDFIsto receive. The Customer’s Bank (the RDFI)receives the file and posts the debit to theCustomer’s account on the Settlement Date, atwhich time it also settles with its Fed account.Sensitive But UnclassifiedNot For Public Release or Further Dissemination12

Draft Informational Networking BulletinStep 5: The Merchant transmits an ACH file to its ODFI, which then transmits the Merchant’s ACH batchentries along with batches from other Originators to the ACH Operator for processing.Step 6: The ACH Operator processes the ACH entries and makes files available for RDFIs to receive. TheCustomer’s Bank (the RDFI) receives the file and posts the debit to the Customer’s account on the SettlementDate, at which time it also settles with its Fed account.Merchant (Originator) with the requiredInternet Initiated Entry (WEB) / TelephoneInternetInitiatedEntry(WEB) / Telephone Initiated Entry(TEL) to create an ACH debit. In thisInitiatedEntry(TEL)informationscenario, the Merchant is considered theIn thisof entry,authorizationis obtainedIn thistypetypeof entry,authorizationis obtainedfrom the customervia theInternettheor Merchantdirectly overthe telephoneOriginatorbecauseis or a transaction. The process is discussed in detail below.the banking transaction, and the Customer isover the telephone for a transaction. Thethe Receiver because the Customer is receivingIn thisexample,the Customer(Receiver),processis discussedin detailbelow.has purchased goods or services through the Internet or phone andthe ACH account debit. Both Internet Initiatedhas provided the Merchant (Originator) with the required information to create an ACH debit. In this scenario,Entry (WEB) and Telephone Initiated EntryIn this example,the Customer(Receiver),the Merchantis consideredthe Originatorbecause the Merchant is initiating the banking transaction, and the(TEL)transactionssetBothup toInternetbe usedforhas purchasedgoodsbecauseor servicesthrough is receivingCustomeris the Receiverthe Customerthe ACHaccount netphone andhas providedthe transactions are set up to be used for consumer debits only.EntryandorTelephoneInitiatedEntry (TEL)Web / Telephone Transaction FlowCustomer (Receiver)Merchant (Originator)Customer purchases goods or servicesthrough Internet or TelephoneMerchantStep 2Step 1Step 3The Merchant’sBank receives theACH file from theThird Party ServiceProvider and thentransmits the file totheir ACH OperatorThe RDFI receives thefi

The Automated Clearing House (ACH) is a nationwide batch-oriented electronic funds transfer system that provides for the distribution and settlement of electronic credits and debits among financial institutions. The ACH network was initially developed in the early 1970s in response to the tremendous growth of check payments