Guest Post by James A Bradley, MBA, LCAM (FL)
If you ever get the good fortune of working at a bank you will quickly learn that banking has more acronyms than the United States Military. Every once in a while these bank acronyms seep out into the mass public and become a part of our societal fabric, as is the case with ATM, ACH, and APR. There can be misinformation about what people think these banking instruments are, how they work, and what risks are associated. As we’ve become a marketplace that is ever more dependent upon electronic financial transactions, I thought it would be helpful to shed some light on ACH transactions within the realm of homeowners associations.
What is 'ACH'?
ACH stands for Automated Clearing House. The Automated Clearing House is essentially an electronic network where individuals, businesses, financial institutions, government agencies can transmit funds electronically. In an HOA, homeowners can use this process to transmit funds to their associations.
What's included in an ACH?
ACH transactions carry basic transaction details such as the individual name, financial institution routing number, account number, amount and effective date for the transaction. The ACH network allows funds to be electronically debited or credited to a company's or individual's deposit, saving, or even loan account. Additional payment information may be sent in expanded record formats called “addenda records.” This addenda may include payment-related information such as invoice number or shipping advice which is particularly useful for accounting departments at management companies and self-managed associations for deciphering payments that may include late charges or that may be for special assessments. Many times your association management software will sort this data to match up payments, so large batch posting and or auto-reconciliation can take place without manual assignments.
Where does it come from?
ACH was created by a group of California bankers in the 1970’s as a response to escalating check volumes. ACH allows for two parties (a Receiver and an Originator) to electronically transfer funds throughout all 50 States, U.S. territories and Canada. Since the 1960’s and 1970’s, the baby-boom expansion in housing needs and our sprawling development patterns have made ACH highly attractive to homeowners associations and the companies that manage them.
How does it work?
Basically how it works in the HOA industry is: a receiver (homeowner) will authorize an Originator (HOA) and the Originator will send the request to their Originating Depository Financial Institution (ODFI) (the HOA’s Bank). This Originating Institution will consolidate the transactions and transmit them to the Receiving Depository Financial Institution (RDFI) (The homeowner’s Bank) for posting and account settlement.
You can’t have a conversation about ACH and not discuss NACHA. NACHA (National Automated Clearing House Association) is the organization that provides the rules and guidelines for efficient operation of the ACH Network. There are currently 36 regional ACH associations. NACHA forms the governing foundation for these regional associations to execute the Federal Reserve’s Mission to provide the nation with a safe and flexible monetary system and tries to design a framework that mitigates user risks.
There are risks associated with using ACH transactions for homeowner association payments however a good majority of the risk is burdened by the financial intuitions involved in the transaction. These risks can be compartmentalized into three primary categories: Operational, Credit, and Fraud:
- Operational Risk is the risk that a human error or computer mishap may delay or alter an ACH transaction potentially causing delays to payment transmission. This is probably the most commonly occurring issue with ACH and why it’s always valuable in the HOA industry to have a partner that will originate ACH transactions on the association’s behalf.
- Credit risk is the risk that an ACH originator may not have the necessary funds on the settlement date. This risk is primarily taken on by the financial institution is most commonly characterized by a “closed account” or “insufficient funds” return of the ACH.
- Fraud: Lastly, in this day and age of cyber crime: we have to deal with Fraud. This is risk associated with dishonest or criminal attempts made to misappropriate funds. There are thousands of reported instances of “phishing” scams and other wire scams where criminals send emails from what appears to be a trustworthy source like their bank to unsuspecting parties. These correspondences trick the recipient into providing confidential information such as social security, bank account numbers and other private data.
You are already using ACH
The use of ACH has many applications outside of the HOA industry and in fact most people today already use ACH but just may not realize it. Common applications of financial transactions occurring in the network of ACH are: Direct Deposits, EFT’s (Electronic Funds Transfers), Bank Lockboxes and even POS (Point-of-Sale) and PayPal.
Overall the use of ACH is safe, and as long as you understand the risk or can transfer a majority of the risk to a bank partner, you will easily be able to navigate this electronic payment network. Contact your association banking expert to discuss your domestic and international ACH transactions.
- NACHA Timeline, National Automated Clearing House Association, www.nacha.org/c/aboutus_History.cfm/AID/484, Accessed April 18, 2012
- The New York Times, December 18, 2005, When PayPal Becomes the Back
- American Banker, June 17, 2005, Pay Pal’s Next Move In Business Payment (Wolfe)
- BAI Banking Strategies, July/August 2004, Fraud Looms: Crooks sniff opportunity and strike first via identity theft, phishing and ACH fraud. What trouble does Check 21 invite? ( Swift/ Hoffman)
- The Journal of Lending & Credit Risk Management, May 1999, Understanding and managing ACH credit risk ( Weber) Volume81, i9, p66(6)
- “ACH Risk: Here & Now,” Federal Reserve Bank Services. Unknown Author. www.frbservices.org/files/eventseducation/pdf/achrisk_whitepaper.pdf. April 18, 2012.
James Bradley, MBA, LCAM is the Sr. Vice President & Director of Association Banking for State Bank & Trust Company. James has a great deal of experience in the Community Association Management industry, having worked as an association auditor, CFO and owner of a successful management company. James has also been a college professor focusing on behavioral economics and International business. He has a real talent for taking these seemingly disparate skills and figuring out how to make them work together.