Now's the time for companies to determine whether they want to originate and/or accept ACH debits, and to determine how doing so might impact their customers, supply chain, employees, and liquidity.

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Preparing for Same-Day Debits

Companies must choose whether they would like to originate same-day debits—which is to say, whether they would like to initiate a debit from another organization's account—and whether they would like to allow trading partners to debit their accounts.

The new capability can be convenient, but some businesses will find that same-day originations are unnecessary or are not useful. Companies are not obligated to allow any other parties to debit their bank accounts, so finance executives should take time to evaluate the pros and cons of participating.

The primary reasons to use same-day ACH debits are to save time and money; to improve convenience for customers, particularly by providing a faster payment option for consumers; and to expedite payments to trusted partners for goods and services. When a company allows a vendor to receive payment by initiating an electronic debit to one of its bank accounts, instead of waiting for it to drop a check in the mail, the ACH debit process can significantly improve efficiency for both parties. Companies may find that same-day ACH debits are useful for making state and local tax payments, loan payments, and routine vendor payments, among other transactions.

That said, corporate finance managers need to consider three key factors when deciding whether to participate in same-day ACH debits.

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1. Timing

In making decisions about when and how to initiate transactions, invest excess cash, and/or fund accounts, corporate treasury and finance professionals may now have to consider the possibility that same-day ACH debits could post to their accounts long after the business day has ended. This makes it more difficult to predict closing account balances. For the paying company, a surprise debit might hamper its ability to conduct transactions, and might put business checking accounts in overdraft, potentially incurring fees either from the bank or from the payee for insufficient funds.

At the same time, organizations contemplating originating same-day ACH debits will need to account for how the cutoff times could impact their cash flows. Same-day debits will have to be originated by early afternoon in the Eastern time zone, which means early deadlines for businesses in the Mountain and Pacific time zones. A West Coast company requiring same-day payment from a vendor, for instance, would need to send the debit-origination file no later than mid-morning local time.

Starting in March 2018, banks will be required to intraday-post same-day ACH credits to accounts by 5 p.m. local time. However, this requirement will not apply to same-day debits. Financial institutions will be able to choose whether to intraday-post ACH debit transactions during the day, so East Coast companies may find that same-day debit settlements post later in the day than do classic ACH transactions or wire transfers, which provide funds immediately but carry a higher transaction cost. Alternatively, an organization might not be aware until tomorrow of debits that post to its account today.

Finance professionals need to speak with their banks as soon as possible to understand the timing issues around same-day ACH debits, and how those timing issues could impact their financial operations.

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2. Controls

Organizations on both ends of a same-day ACH debit need to have tight controls on their liquidity and the process for initiating transactions. Does the paying company limit who can debit its accounts via ACH? Is its process sufficient to account for possible late-day ACH transactions, in addition to checks posting to the account?

Companies that will originate or accept ACH debits should consider working with their vendors and business partners to create controls. A first step is to amend contracts to clarify whether and how the business will originate or accept ACH debits. This will help reduce confusion, and possibly even ill will, among the trading partners.

Treasurers who want to control their company's debit receipts should also speak with their banks to enroll in their ACH block or filter services. An ACH block signals to financial institutions that the account either does not accept ACH debits or does not accept any ACH transactions (it must specify which). A filter, by contrast, allows certain preapproved ACH entries—such as transactions with a particular vendor, lender, or other specified party—while blocking all other ACH debits. Without the appropriate blocks or filters, an ACH transaction can post to a company's accounts at any time.

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3. Cash application

Along with the new settlement windows, another issue in the same-day debit system is that data (e.g., originator, amount, invoice number) may not arrive on the ACH network at the same time as the money. Treasury teams need to develop a process for handling funds that arrive without any remittance information attached. This is especially important because transactions process more than once per day and could potentially cause a backlog. Organizations should not let the convenience of same-day transactions derail their cash application processes.

For the debit originator, maintaining file accuracy is imperative. In particular, companies considering this new means of receiving payment should review their procedures for verifying the date field in their ACH origination files. In the traditional ACH system, if users back-date or incorrectly date a file, the transaction will still process the following business day just like transactions that have the correct date. A treasurer could repeatedly submit a file that was dated back decades, for instance, and the network would still process it the next day. Once same-day capabilities have been rolled out, however, a similar dating mistake might default to be a same-day transaction. To avoid unpleasant surprises for a customer or vendor, companies must take extra care now to correctly date their ACH files, and must continuously update recurring files with the proper entry date for each submission.

On Friday, U.S. commercial payment systems are taking another step toward faster payments, a necessity in today's 24-hour business world. As demand for same-day services climbs, more payment rails and systems are investing in similar capabilities. Through new technologies and functions, companies and consumers will soon benefit from faster and easier payments.

Regardless of whether your business decides to receive or send same-day debits, the best first step is to consult with your financial institutions to learn about their processes and determine how best to effectively manage this change.

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Rick Burke is head of corporate products and services for TD Bank. He is responsible for the bank's treasury management services and non-retail (small business, government, and commercial) liquidity management businesses. Burke is an active member of both TD's U.S. and North American Executive Payments Councils.