Open Banking
Payments
Regulation
Open Banking
Payments
Regulation
May 23, 2024
5 Min

What Is Nacha: Background, Operating Rules, and Impact on You

Trustly

We have all used Nacha’s Automated Clearing House (ACH) payment methods at least once in our lives, including making online bill payments, getting direct deposits on payday, receiving an electronic tax refund, making recurring electronic payments, or sending money via apps like Venmo or Zelle.

Making e-payments is one of the most valuable and innovative tools today, especially as the world becomes increasingly digital. Still, you may wonder how exactly these transactions are processed online, and, even more importantly, how these payments and private information exchanges remain secure. ACH payments are governed by the nonprofit association Nacha, which enforces operating rules and regulations that keep our ACH transactions secure. 

This guide will provide an overview of what Nacha is, its background, and its impact so you know what happens to your money as a consumer or business owner.

What Is NACHA and ACH?

Nacha is what oversees the ACH network to ensure it is used correctly and within regulations. The organization formerly went by its acronym “NACHA,” or National Automated Clearing House Association, but has since rebranded and now officially goes by “Nacha.” In addition to governing ACH transactions, Nacha aims to improve the nationwide payment system.

ACH is an American interbank system allowing users to transfer funds from one bank to another. ACH specifically relies on batch processing that keeps financial transactions completely secure. This process drives direct deposits and payments because it can reach all U.S. banks and credit unions with the tap of a finger. It makes bank account transactions possible without wire transfers, credit cards, or paper checks.

Examples of ACH payments include:

  • Same Day ACH, which allows multiple financial transaction processing within a day
  • Business-to-Business (B2B payments), which securely facilitates high-volume, high-value transfers between companies
  • International ACH (or International ACH Transactions (IAT)), which processes cross-border payments
  • Healthcare Electronic Fund Transfer (EFT), which facilitates payments between health plans and providers

These electronic account-to-account transactions use the ACH network instead of card networks and can be categorized into two transaction types:

  • Direct deposits, which are made from businesses or governments to employees or consumers (e.g., payroll, tax refunds)
  • Direct payments, which are funds used by organizations or individuals to make payments (e.g., ecommerce)

What Is Nacha’s File Format?

One of the primary strengths of the ACH network is that it uses Nacha’s standardized file format, making it easier for banks to process transactions. For payments to go through, they have to be encoded with electronic instructions that trigger payments once it’s uploaded to the bank portal and goes through the scanner. These files are populated line by line, each matching payment data. A line comprises 94 characters, which serve as a record of information (or fields), such as:

  • Account numbers of the Originating Depository Financial Institution (ODFI) and Receiving Depository Financial Institution (RDFI)
  • Routing numbers of ODFI and RDFI
  • Standard Entry Class (SEC) code
  • File/batch headers

Major banks often have their own application programming interface (API) that is compatible with the ACH format. Some use third-party providers to generate and upload these files to the banks’ platforms.

The History of Nacha

Since the 1970s, Nacha is what has been responsible for rules and standards governing money transfers between accounts held at different financial institutions or payment companies. In 1974, several regional banking associations were formed to standardize specific banking processes.

This standardization led to the development of “automated” clearing house practices instead of using physical clearing houses to exchange paper checks. Since 1985, Nacha has overseen the governance of the ACH Network as an independent and nonprofit organization.

The association also facilitates risk management best practices, including hosting a Risk Management Portal that contains valuable databases, such as the ACH Contact Registry and the Third-Party Sender Registration. In addition, members are encouraged to immediately report data breaches through the site.

Nacha also has educational programs, such as payments training and conferences, to keep professionals updated on the emerging trends in the financial service industry.

What Is Nacha’s Process for Regulating ACH Payments?

Nacha develops, implements, and updates the ACH Network Operating Rules to ensure they meet current market needs and security standards. Here is an overview of how  Nacha enforces these rules:

  1. A potential violation, such as unauthorized payments, is reported through the official site.
  2. Nacha’s enforcement team evaluates the report. If the complaint has merits, the financial institution that potentially committed this violation is given an opportunity to respond.
  3. If the financial institution is found guilty, they will be penalized, including paying potential fines. 
  4. Nacha then monitors if there are more complaints filed against the financial institution to check if it’s still not following the rules.

What Are Nacha’s Operating Rules?

Anyone who makes ACH transfers, whether as a participating bank or consumer, must follow Nacha’s rules. These policies are periodically updated and can be found on the official website’s New Rules page.

Those who violate these rules can receive warnings and fines. In more severe cases, penalties can reach $500,000. If failure to comply continues, institutions can be permanently removed from the platform.

Some of the basic regulations and practices include:

  • Businesses need to obtain authorization from customers for one-time and recurring ACH debits. Customers must clearly indicate that they understand and authorize this transaction.    
  • Businesses must provide notice if there is a change in the amount or date of a debit transaction.     
  • They must ensure they correctly and thoroughly secure consumer information (e.g., bank account numbers, routing numbers, social security numbers) to initiate the transfer.  
  • If customers cancel their subscriptions, businesses must quickly stop their payments to ensure customers are not wrongly charged.
  • Banks and credit unions must maintain an unauthorized return rate threshold of 0.5%. Unauthorized returns often occur when an account holder informs their financial institution that they did not authorize a particular debit transaction. Meanwhile, the administrative return rate (often due to closed accounts or incorrect account details) is set at 3% and the overall return rate at 15%.

Is Your Business Nacha-Compliant?

Third-party vendors and senders are growing and influencing the nationwide payment ecosystem, which means Nacha compliance is more critical than ever. It’s also worth noting that Nacha constantly updates its compliance standards to keep up with technological developments and ACH payment methods, so your business needs to keep track of those changes. 

Staying up to date with relevant changes to payment processing and NACHA guidelines will make your business more competitive and keep you ahead of the game. Still, business owners wear many hats and don’t always know when or how to stay caught up with the latest Nacha developments. 

For example, in 2021, Nacha created data security requirements that explicitly require large, non-financial institution originators, Third-Party Service Providers (TPSPs), and Third-Party Senders (TPSs) to protect deposit account information by rendering it unreadable when stored electronically. Learn more about these requirements and how Trustly helps our merchants comply. 

The good thing is that when you use banking solutions, most compliance standards are built into these technologies and systems. As long as you keep up with the basics and use a trusted ACH payment system, you can focus on your business with little worry. For example, Trustly is a Nacha Preferred Partner for online banking and account verification. 

Let Trustly Do the Heavy Lifting for Your Business

Complying with Nacha’s rules ensures that your business is not only operating legally but also ethically. It also creates a secure payments network that consistently makes things better for its members and users. 

Trustly takes care of Nacha compliance so merchants can focus on what’s most important to them. Not only do we fully leverage the advantages of Nacha ACH payments, but we also ensure that you can easily follow their standards.

Contact us today to learn more about our Open Banking-powered payments and how you can maintain compliance while lowering processing costs and improving approval rates.

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