The National Automated Clearing House Association (Nacha) is the industry organization that administers the electronic payments system connecting all U.S. bank accounts and facilitates the movement of money among those banks. As part of this role, Nacha sets fraud prevention and other guidelines within the Automated Clearing House (ACH) network.
In November 2018, Nacha approved a security rule changes to reduce fraud across the ACH network. Effective March 19,2021 the rule will become mandatory for Nacha compliance. Due to the impacts of COVID-19, enforcement of this rule will not begin until March 19, 2022 for organizations “that are working in good faith toward compliance, but that require additional time to implement solutions.”
This article explores what those changes entail and how to help your organization become (and remain) compliant.
Under the current Nacha rules for internet payments (or “WEB debits”), ACH Originators are required to use any “commercially reasonable fraudulent transaction detection system” when screening for potential fraud. Effective March 19, 2021, the new Nacha rules will require that “account validation” be a part of the fraud detection system for all ACH WEB payments sent across the network.
Approved in November 2018, the new ACH rules were originally scheduled to go into effect on Jan. 1, 2020. However, Nacha extended the deadline to March 2021 to help ensure financial institutions and ACH Originators had sufficient time to learn about and implement the required account validation changes. As mentioned above, enforcement has since been pushed out to 2022.
In the past, Nacha has required that ACH Originators use any commercially reasonable fraudulent transaction detection system when screening ACH WEB payments for fraud. The new Nacha rules add “account validation” as a requirement. This validation process involves verifying that ACH accounts are open and ready to accept payments. Note that proof of account ownership is not part of the updated ACH verification rules.
Nacha does not dictate the solution for complying with these new ACH rules; it is important for the Originator to make that decision
Impacts of Nacha’s operating rules include:
The new ACH rules are neutral with regards to specific methods or technologies used to validate account information but do require that the account number is validated. This means that the account number is valid and that the account can accept transactions. It is up to Originators to determine what is commercially reasonable based on the risk assessment of their customer, their services, as well as their internal business practices.
It is notable that Nacha has not prescribed one required compliance solution. Indeed, Nacha acknowledges the variety of solutions that may be available and appropriate based on the Originator’s business. Existing customer relationships and customer characteristics as well as the Originator’s business practices should all be considered.
Although Nacha offers little guidance on compliance steps, there exist several established methods for validating ACH accounts, including:
The two methods represent the fastest ways to verify individual accounts. However, if you lack the in-house resources to handle either, Nacha maintains a list of third-party validation service vendors that can guide you through the ACH verification process. In addition to prenotification entries and micro-transactions, these third-party vendors can aggregate and verify online bank credentials and other relevant information on your behalf. When evaluating potential account validation solutions, it is important to consider the following:
For ACH Originators, the upcoming Nacha WEB debit rule change will undoubtedly introduce extra costs and headaches – especially with the deadline fast-approaching. As with all Nacha operating rules, these new guidelines should help prevent abuse across the ACH network. Given the short- and long-term impact of payment fraud, the benefits of this added protection far outweigh the additional costs involved. Equally important, non-compliance with Nacha’s operating rules exposes you to penalties and, in some cases, account termination.
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This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.