ACH Basics for Businesses Utility Payment Conference 2017 © 2017 NACHA — The Electronic Payments Association. All rights reserved. No part of this material may be used without the prior written permission of NACHA. This material is not intended to provide any warranties or legal advice and is intended for educational purposes only.

What is ACH? ACH (Automated Clearing House Network) refers to a specific electronic payment network. The ACH Network is used for business, government and consumer domestic and international payments Funds are moved between bank accounts by the banks Payments settle within 1-2 days for “Classic ACH”; payments settle in the same day for “Same Day ACH” The Network is governed by NACHA–The Electronic Payments Association

As Network Administrator, NACHA is responsible for the “Logical” ACH Network ACH Logical Network ACH rules set, and associated payment types and formats owned by NACHA Allows counterparties to logically and confidently pass transactions to each other, knowing how they will be recognized and dealt with NACHA holds the role of the Network… Administrator Rules Creator Rules Enforcer Educator Supporter Protector ACH Physical Network The physical environment required to move transactions The technology and communications environment, and associated product set, needed to initiate, clear and settle ACH transactions between counterparties ACH Operators take the role of… Processing and routing transactions Maintaining access to all sending and receiving endpoints Inter-operator exchanges Services to help financial institutions manage ACH volume and risk management Interbank settlement Network reporting to NACHA

What are the NACHA Operating Rules? Provides a common set of rules and formats Establishes the legal foundation for the ACH Network Creates certainty and interoperability Defines roles and responsibilities https://www.nacha.org/rules www.nacha.org

Who are the Participants? Receiver Originator ACH Operator RDFI ODFI

What is a Credit Payment? In a CREDIT ACH payment, the customer or buyer “pushes” funds from the customer/buyer’s bank account to a biller/merchant’s bank account. (Example – Direct Deposit; paying bills from online banking)

What is a Debit Payment? In a DEBIT ACH payment, the merchant/biller “pulls” funds from the customer or buyer’s bank account for transfer to the seller’s bank account

What is an Authorization? “An Originator must obtain authorization from the Receiver to originate one or more Entries to the Receiver’s account.” 2017 NACHA Operating Rules, Article Two, Subsection 2.3.1

Authorizations Consumer Authorizations Readily identifiable Have clear and readily understandable terms Provide that Receiver may revoke only by notifying Originator in manner specified

Authorizations Consumer Authorizations Debit entries to consumer accounts Notice of change in amount Notice of change in scheduled date Copy of debit authorization

Authorizations Consumer Authorizations Single Entries vs. Recurring Entries Single-Entry — one-time transfer of funds initiated by an Originator based on the Receiver’s authorization for a single ACH entry to the Receiver’s account Recurring Entry — entry that has been set up to occur, based on the Receiver’s authorization, at regular intervals without any additional intervention by the Receiver

Authorizations Non-Consumer Authorizations Originator and Receiver must have an agreement that binds the Receiver to the Rules No specific format for the agreement Agreement should contain authorization for ACH transactions, as well as any specific terms and conditions

Authorizations Authorization Retention Retain original or copy of authorization for 2 years from date of termination Upon RDFI request, provide copy of authorization so that ODFI can provide to RDFI within 10 banking days Non-Consumer transactions: provide record of Receiver’s authorization or contact information

Types of Authorizations Written Notice Oral Similarly Authenticated

Standard Entry Class (SEC) Codes Three-letter acronym to identify the ACH transaction type Distinguishes: Corporate from consumer payments International ACH payments Key aspects surrounding the initiation of the ACH payment (telephone, Internet or mobile, conversion of a paper check, at the point-of-sale, etc.) Indicator that certain provisions of the Rules, risk management practices, and/or legal requirements apply to the transaction

Standard Entry Class Codes PPD Prearranged Payment or Deposit

Standard Entry Class Codes TEL Telephone Initiated Entry

Standard Entry Class Codes WEB Internet Initiated Entries (P2P only)

Standard Entry Class Codes CIE Customer Initiated Entry

Standard Entry Class Codes CCD Corporate Credit or Debit

Standard Entry Class Codes CTX Corporate Trade Exchange

Check Conversion & Truncation Standard Entry Class Codes Check Conversion & Truncation Truncation RCK Conversion ARC BOC POP

Exceptions Returns Normal returns – return entry must be received by RDFI’s ACH Operator by its deposit deadline for the return to be made available to the ODFI no later than opening of business on second banking day following settlement date of original entry Account closed NSF Bad Account number Unauthorized entry to Non-Consumer Account Consumer extended return – “…no later than opening of business on the banking day following the 60th calendar day following settlement date…” Unauthorized entry to Consumer Account

Exceptions Re-initiation Originator or ODFI may reinitiate returned entry if: Returned for NSF/uncollected funds Returned for stop payment and reinitiation was authorized by Receiver Corrective action taken to remedy reason for return Re-initiation must occur within 180 days from settlement date of original entry Reinitiated entry must be for the identical amount as the original entry and must contain special formatting

Exceptions Reversals (files and entries) Erroneous entry Wrong Receiver Wrong amount Duplicate Also specific conditions related to payroll payments Must be sent within 5 days of erroneous file/entry

Best Practices Authorizations Pre-notes Trial deposits Confirm that customer paying is authorized on account to be debited Use clear authorization language, including means to revoke authorization Pre-notes Non-monetary entry sent prior to first live entry to notify customer’s financial institution that you intend to send ACH to their account holder’s account You must wait 3 banking days after prenote before sending live dollar entry Customer’s financial institution must verify account number and may: Return Send NOC If account number is valid – do nothing Trial deposits Partnership with account verification service

Best Practices Work with your financial institution Understand ODFI requirements and procedures for collecting debit authorizations Understand obligations for debit transactions returned as unauthorized Ask about dispute resolution services

Questions? Danita Tyrrell, AAP Director, Network Rules NACHA 703.561.3937 dtyrrell@nacha.org