Can't Stop, Won't Stop
So, for the next few blog posts, I am going to lay out some basics around payment mechanisms and the role of the various providers from your local financial institution to the business-owner trying to sell her products to the giant networks in between. After describing each payment system, I’ll highlight Who’s in Control, Vulnerability to Fraud, and Cost as these are the topics most on consumers’ minds. Feel free to comment and leave me additional questions!
ACH, or ‘What’s my Routing Number?’
Let’s start with the routing number. When a US financial institution – whether a bank or a credit union – receives its charter, it is assigned an identification number from the American Bankers Association (ABA). Commonly referred to as an ABA number, a routing number or an R&T number (for ‘routing and transit’), it has 9 digits and only US financial institutions have one. Brooklyn Coop’s is 026084262.
Some financial institutions have many routing numbers. Maybe they merged with other financial institutions over time and kept the legacy ABA numbers. Maybe they pay the fees for additional numbers and then use them for different purposes. This is why you can’t always take for granted which is the routing number for your bank as it may be different depending on the transaction. Brooklyn Coop just has one. It doesn’t matter how many branches we have or in which branch you opened your account – the routing number for Brooklyn Coop stays the same.
BCoop members routinely call to ask ‘what’s my routing number?’. The answer is, ‘you don’t have one’! If you have a savings or checking account with a financial institution, you have an account number. That number is created by your particular bank or credit union, and it is associated with the name and the tax ID number you used to open the account. You have an account number and your institution has a routing number.
ABA numbers are related to payments because, turns out, they are the simplest way for banks to identify each other when it comes to completing their customers’ payment requests. It’s like the US Post Office using 5-digit zip codes to route the mail. By using a bank’s ABA number plus the individual’s account number, funds can be directed from any customer of any bank to any other customer at any other bank. The system that banks use to manage these payments is called the Automated Clearing House (ACH) and the payments are called ACH payments.
Billions of ACH payments are made each month including direct deposit of salaries or benefits and bill payments. When you see ‘ACH’ or ‘EFT’ (‘electronic funds transfer’ is the generic name for ACH) on your BCoop statement, it indicates that the payment was made through the ACH network. Financial institutions are either ACH originators (because they can create payment instructions either in or out of their institution) or ACH receivers (because they can only execute instructions, not create them), or both. Brooklyn Coop is an ACH receiver but not an originator. Also ACH is useless for international payments since no non-US financial institution can use it.
Who’s in Control – Remember we said that routing numbers are assigned by a banking association. This means one US-based private-sector organization sets the rules, the costs, the coverage – they are in charge. It’s not the Federal Reserve nor is it the government. The Social Security Administration is just like Macys or Con Ed or your employer in that it uses the ACH system but it doesn’t own it.
Vulnerability to Fraud — Not very much fraud happens using the ACH network. Perhaps this is because only a bank employee can originate a transaction over a specific and secured internal system. Most consumer disputes we see regarding ACH have to do with incorrect amounts, not fraud. The best way to protect against ACH fraud is to keep your bank account number safe.
Cost – ACH transactions are extensively automated and fairly cheap. Most financial institutions offer ACH-based services like direct deposit or online billpay for free. The cost rises dramatically for rejected payments because each rejected ACH transaction at BCoop is reviewed individually by a human just in case the computer made an error. The consequences of getting someone’s direct deposit wrong or incorrectly bouncing a mortgage payment can be awful so a manual double-check is critical. With hundreds of ACH payments a day, however, double-checking each reject is quite time-consuming. This is why we, as well as most other banks, charge fees of $25-45 for bounced ACH transactions as a way to discourage consumers from creating inaccurate ACH instructions.
Samira Rajan is the longest-serving employee of Brooklyn Coop and currently the Director of both the credit union and Grow Brooklyn. She started here as an Americorp*VISTA for a single year of service back when we were Bushwick Coop in 2001, got hooked by the challenge of building a community financial institution, and hasn’t left.