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Movement of credit card monies through the Automated Clearing House (ACH) is somewhat of a mystery to many. Many people want to know “Who gets the float for that one lost day in the ether world of the ACH?" When establishing a Bank settlement process with Visa and MasterCard, and the ACH process with the Federal Reserve in St. Louis, Lets trace the movement of a credit card batch through the Visa/MasterCard settlement process, and then through the ACH. The ACH is the name used for the Electronic Binds transfer system offered by the Federal Reserve. The following will be precise with respect to the Bank as a principal member of the associations. Different banks may have implemented different policies with regard to merchant funding windows and cut-off times. However, most banks use very similar policies to those described.
This is the merchant processing day in which sales are processed at the point-of-sale by the merchant with a batch closing (either manual or auto close) at the end of the day. For the sake of this article, we will assume Day 1 is a Monday during a week with no banking holidays.
- The Bank has established 5 AM Eastern Time as its closing time for acceptance of batches. Each bank establishes its own cut-off time. We want to allow the night auditors of our hotels to have the most time possible to settle the previous day’s activity before we "close the day.” 5 AM Eastern is about as far as we can go and still hit the necessary settlement windows.
- The merchant closes his batch prior to 5 AM. At 5 AM Eastern on Tuesday our front-end processors "close the capture window" for Day 1 (Monday) and begin to process these batches for our merchants. The job of these front-end processors is to submit the batches for all of our merchants to our "back-end or settlement processing system" so we can hit the "settlement window with Visa and MasterCard" as early as possible on Tuesday. On Tuesday morning, lots of things are happening.
- Our front-end processors are submitting their files to our back-end system
- Our back-end system is editing and verifying our batches of transactions and separating them to send to Visa, MasterCard, American Express, Discover and Diners.
- Our back-end system is preparing a file of transactions, which we will use to pay our merchants funds via ACH. Just before noon on Tuesday (Day 2), each of these three steps is winding down. Visa and MasterCard, etc. have received the transactions for settlement and The Bank has received an electronic file of merchant funding information. Up to this point, virtually everything is the same for most acquiring banks. Different banks establish different times for "batch closing windows" and for "settlement windows.” Nevertheless, the transactions captured for Day 1 are normally in to Visa and MasterCard mid-day of Day 2, and the merchant ACH file is in the possession of the acquiring bank mid-day of Day2.
Later in the afternoon of Day 2, decisions are made. The first decision is whether to pay the merchants their money or to hold on to it. Since nothing has been submitted to the Federal Reserve yet, no money has flowed. Also, no money has flowed to the acquiring bank. We will come back later to what happens on the afternoon of Day 2 at the acquiring bank.
- Meanwhile the settlement process is proceeding at the Visa and MasterCard settlement processing centers. Visa and MasterCard are editing and processing all of the transactions which have been submitted by the acquiring banks prior to each "settlement window.” After their work is done, Visa and MasterCard submit back to the acquiring banks and issuing banks "settled" financial information for each merchant and for each cardholder. This information is submitted to the back-end system of each bank.
- On the morning of Day 3 (Wednesday) Visa and MasterCard, send The Bank its money for the merchant batches processed on Day 1 (Monday). Payment is made by wire transfer via the Federal Reserve. The money is received in the late morning with one wire coming in from Visa and a second wire coming in from MasterCard. Now we come back to the afternoon of Day 2. On that afternoon, the acquiring bank will edit the incoming file of ACH information and decide which merchants to pay and which merchants to not pay. This decision is usually based upon a combination of the banks policy of paying merchants and its agreements with individual merchants. The bank selects the merchants it is going to pay and then separates out the "on-us" merchants from merchants who have checking/deposit accounts at its own bank. There is no reason to send on-us merchant deposits through the ACH system. They can be posted directly to the merchant’s checking account with the banks internal checking account computer system
- These on-us deposits must be sent to the banks computer system prior to the banks internal cut-off time. Those deposits are then posted to the merchant’s checking account on the night of Day 2 (Tuesday night) and the merchant will see the deposit in his account on Wednesday morning. This "on-us" settlement process shortcuts the ACH system and results in the merchant receiving his money one day earlier than those merchants who bank elsewhere. This is the ONLY money that will flow by the end of Day 2 and it is from the acquiring bank to the on-us merchant. Also on the afternoon of Day 2, the acquiring bank is finalizing its ACH file for those merchants with checking accounts at other banks. The "ACH window" for the Federal Reserve in St. Louis is approximately 7 PM. At the end of Day 2, the ACH file has been submitted to the Federal Reserve.
Just prior to 7 PM on Day 2, The Bank submits its ACH file of merchant deposits to the Federal Reserve Automated Clearing House (ACH) system. At 8:30 AM the following morning (Day 3), the Federal Reserve deducts the total of these merchant deposits from The Bank’s funds deposited at the Federal Reserve. This is the second flow of funds, the flow of funds from the acquiring bank to the Federal Reserve.
- If you recall from the previous article, the first flow of funds occurred on the evening of Day 2, when the acquiring bank paid its "on-us" merchants. This closes one portion of the cycle. By 8:30 AM of Day 3, the acquiring bank has funded all of its merchants for the bankcard deposits captured on Day 1.
- The next flow of funds occurs a few hours later on Day 3, when the card associations fund The Bank by wire transfer for the Day 1 transactions. This closes the cycle for the acquiring bank funds. All funds are paid out by 8:30 AM of Day 3 and all funds are received at about noon of Day 3.
- The net-days effect for the acquiring bank is that a "daylight deficit" is created in the bank’s Federal Reserve deposit account. If the bank’s Federal Reserve account had started the day with a zero balance, the acquiring bank would have created a "daylight overdraft" at the Fed. Such an overdraft would create a minute-by-minute accumulation of interest liability to the Fed. This creates the requirement that the acquiring bank establish a balance in its Federal Reserve deposit account sufficient to cover the potential "daylight overdraft”.
- The amount of this funding varies from day to day. For each billion dollars of annual processing volume, the acquiring bank is required to have up to about $10 million of funds on deposit in its Federal Reserve accounted to cover the potential "daylight overdraft.” This amount is needed on Tuesday morning to cover the weekend deposits for three days of processing volume. On the other four business days of the week, an average of about $2,500,000 is required to cover the potential "daylight overdraft" for each billion dollars of annual processing volume.
- We still haven’t answered the simple question "When does the merchant get his money?” Unfortunately, there is not a quick, easy answer because the answer depends upon the actions taken by the bank which holds the merchant’s checking account.
- Once the acquiring bank releases the ACH file to the Federal Reserve, the money is out of the control of the acquiring bank. The ACH is similar in functionality to a highly secured and highly regulated e-mail or bulletin board system. You can send an e-mail or post a message to a bulletin board. However, you have no control over when the recipient will pick up the e-mail or bulletin board message. The same concept holds for the ACH. The Federal Reserve "posts" the ACHed merchant funds to the bulletin board or e-mail of the bank connected to the Routing & Transit Number (ABA Number) in the ACH record.
- Each bank participating in the ACH system is required to pick up and fund its incoming ACH "messages" at least once each business day. However, each bank can pick up those ACH "messages" as often as it desires. (Of course, each of these ACH "messages" is transmitted and received in a highly regulated and secure environment. In this sense, the ACH is NOTHING like a bulletin board or e-mail).
- Once the receiving bank picks up its ACH file, it then decides what to do with the incoming ACH transaction for each of its merchants. It is possible that a receiving bank could pick up its ACH on the evening of Day 2 early enough in the evening to post it to its customer’s account before the cut-off time for Day 2 checking account posting. In this case, it is possible for the merchant’s funds to be posted to the merchant’s checking account on the evening of Day 2. (It is not clear to me or anyone I know exactly how often this really occurs).
- The normal practice is for the receiving bank to receive its incoming ACH’s during the business day of Day 3 and to post them to the merchant’s checking account on the evening of Day 3. In this case, the merchant can call his bank on the morning of Day 4 and confirm that the deposit was posted to his account on the evening of Day 3. This is referred to in the industry as "48 hour funding”.
- Some banks extend a valuable courtesy to their merchants by issuing a "memo posting" to the merchant’s checking account during the business day of Day 3. This allows the merchant to call his bank during Day 3 and confirm that the ACH deposit will be posted that night. This gives the appearance to the merchant of "24 hour funding”. However, it is the same as "48 hour funding" except that the merchant is secure in knowing that he can draw against the funds in the "confirmed" deposit for the evening of Day 3. (It is not easy to know which banks perform this function). This "memo posting" alternative gives the appearance to many in our industry that certain banks "keep the money" an extra day. In fact, some banks do hold the money an extra day by electing to submit the ACH file to the Federal Reserve during Day 3 (or later) instead of Day 2. However, this is a completely different issue.
- Finally, who gets the float? The answer is the issuing bank, which does not have to put up its money until Day 3! No money flows to the acquiring bank until Day 3. No money flows from the issuing bank until Day 3. On the evening of Day 2, THERE IS NO MONEY in the system. The issuing bank (and indirectly the cardholder) gets a one day reprieve because the transaction cannot get through the system fast enough to be processed earlier.
- There is no conspiracy by the banks, the Federal Reserve or the card associations to hold merchant funds an extra day to "get the float.” It is simply a system that must process in a cyclical batch mode. The "check is in the mail" for that one day, and the issuing bank gets the benefit. Incidentally, the cost of an ACH transaction to the acquiring bank is one of the great bargains. It costs the acquiring bank less than one cent per ACH transaction.
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