Fed to Establish ACH Limits for Banks and Their Customers

The Federal Reserve will pilot a risk management service later this year that allows banks to put company-level controls on all of the transfers that originate from their accounts.

Financial institutions that originate debits and credits will be able to establish pre-set limits on the amount that any given company or group of companies can transfer in a given time period. These limits also will apply to third parties that originate transactions on behalf of a financial institution, such as correspondent accounts. "That level of granularity and flexibility doesn't exist very broadly in the marketplace today," says Richard Oliver, executive vice president, Federal Reserve Bank of Atlanta, and retail payments product manager for the Federal Reserve System.

Such limits can help banks to comply with "Know Your Customer" regulations by ensuring that new customers have accurately reported their expected financial activities. Instead of waiting until after effecting transfers above the expected limits, banks will be able to ask questions before a debit or credit is put through.

Banks will be able to establish limits online for each customer or group of customers. "When a cap is hit, we will stop those batches of payments as 'pending,'" says Oliver. "We will immediately notify the originating financial institution that the cap has been breached and request them to provide instructions as to whether to process the items or reject them."

Should the request for further instructions fall at an inconvenient time, banks also will be able to set a default action for what should be done in a specific situation. In addition, a bank can set credit and debit limits for itself, so that it might avoid making a transfer error that shifts the amount of a payment higher by a significant order of magnitude. "You can put a cap on your own ODFI [Originating Depository Financial Institution] at a level that you know would be reasonable, but would prevent some kind of egregious problem."

Although similar functions can be performed using existing software, Oliver points out that the Fed's centralized service makes it possible to aggregate payments that are made through third-party correspondents. "If you have your own in-house system, perhaps through a vendor, you're not in a position to monitor third parties," he says.

The software will be made available in the first quarter of 2006.