The business of moving money and information electronically from one bank to another is a complicated matter, and it’s in the best interest of everyone involved that the process is quick, convenient and secure.
That objective is the guiding principle of the non-profit Electronic Payments Association — NACHA — which governs the activities of the Automatic Clearing House (ACH) network payment system.
The NACHA Operating Rules define the roles and responsibilities of financial institutions and establish guidelines for each participant in the system, such as small businesses. Operating Rules have become increasingly complex as the ACH payments industry grows. In order to maintain the integrity of the system, it’s essential for participants to understand their own obligations as set out in the Rules.
The ACH network allows funds to be electronically transferred between large and small financial institutions in transactions for consumers, governments and businesses. The network exchanges funds and fund-related information throughout the United States and internationally.
Billions of payments are processed every day through ACH; the funds are stored and then forwarded at a specified time in batch mode.
An ACH transaction is completed with the involvement of five main participants. The Originator is the company or business that has been authorized to credit or debit an account by the Receiver — an individual or business that authorizes the Originator to initiate the entry.
The Originating Depository Financial Institution (ODFI) is the sending institution, and the ACH Operator accepts the ACH entry from the ODFI — the Federal Reserve Bank and EPN (Electronic Payments Network) are ACH operators. The Receiving Depository Financial Institution (RDFI) receives the entry and posts it to the Receiver’s account.
Additionally, third-party senders and third-party receivers may also be participants in the transaction flow; for example, a payroll processor may be a third-party sender or receiver, depending on their role.
NACHA Operating Rules
NACHA Operating Rules apply to any institution or third-party that utilizes the commercial ACH network; the rules are contract law that is made binding through agreements — all participating financial institutions and businesses agree to comply with the Rules by the act of sending or receiving entries.
The Rules are enforced through a system of warnings, escalating fines — up to $500,000 a month for the most severe class of violations — and may extend to suspensions. Arbitration procedures include three levels; the appropriate level for the issue is determined by its complexity and the financial amount for damages.
The Rules are a living document and, as such, amendments and updates continue to be introduced. The process is designed to be “deliberate and inclusive” and NACHA has indicated willingness to address industry “pain points” when incorporating industry feedback into Rules revisions.
Best Practices for NACHA Rules Compliance
NACHA Operating Rules are comprehensive and detailed. While there are consistent concerns with accountability, security and risk management across the flow of a transaction, each participant in the process must study the obligations for their particular role closely.
Among its regulations, the Rules outline exacting accounting procedures; reporting and disclosure requirements for electronic consumer transactions; require financial institutions to conduct a risk assessment of their ACH activities, followed by risk management programs; and call for financial businesses to conduct an annual audit of ACH Rules compliance.
Compliance awareness should be incorporated into daily operations as an integral part of the company culture, with particular attention to documentation, due diligence in client and personnel screening protocols, and security. Best practices should extend to third-party relationships, which need to be scrutinized and monitored with the same rigor as internal practices.