News & Resources

ACH Network Rules Merchants Need to Know for 2021

Sep 14, 2020 MicroBilt News

ACH Network Rules Merchants Need to Know for 2021

ACH (Automated Clearing House) payments have been a gamechanger for merchants. The efficiency, speed, and convenience make for a hassle-free experience when making or receiving payments. These transactions are fast, typically minimal cost, and are usually more user-friendly than writing checks or paying via credit or debit cards.

The National Automated Clearing House Association (NACHA), the organization that oversees the ACH Network, reports more than 24 million ACH transactions were processed in 2019. This number is expected to significantly grow. Current and future users of the ACH Network need to understand some major changes are on the horizon and it’s best to prepare sooner than later.

Merchants Need to Start Preparing

Merchants that use the ACH Network will see significant changes starting in 2021 that will affect how they utilize ACH. Currently, NACHA requires ACH Originators of WEB debit entries to use a “commercially reasonable fraudulent transaction detection system” to screen the system for fraud. This condition will now be expanded. Starting next year, NACHA will also be explicitly requiring users to utilize an approved account validation system as a part of this requirement. The WEB Debit Rule takes effect on March 19, 2021.

Starting on June 30, 2021, the initiative, Rule on Supplementing Data Security Requirements, will start to unfold phase one of its two phases. According to the NACHA announcement, Phase 1 will take effect on that date while Phase 2 will be enacted on June 30, 2022. These supplemental data security requirements are as follows:

  • Phase 1: Non-financial institution originators with total ACH origination volume exceeding six million entries in 2019 (calendar year) will be subject to compliance by June 30, 2021. Third-party senders or third-party providers with a total transmission volume (this includes a collective total of transmissions from all clients) in excess of six million must also be in compliance by June 30, 2021.
  • Phase 2: Starting in the calendar year 2020, the annual volume threshold is reduced to two million entries. Non-financial institution originators with a total ACH origination volume exceeding two million entries during 2020 (full calendar year) will need to comply with the new rule by June 30, 2022. Third-party senders or third-party service providers with total transmission volume in excess of two million entries in the calendar year 2020 (like Phase 1, also includes a collective total of transmissions from all clients) must be in compliance by June 30, 2022.

Once these two new rules take effect, any payment originator (the merchant) processing WEB debits will need to comply. Those merchants that have not sought out account validation options should begin to start exploring their options as soon as possible to ensure they make the right decision for their business.

Not All Platforms are Equal Quality

Merchants that need to upgrade their fraud detection protocols have many options. Not all companies offering account verification perform this process the same way, and it is important to evaluate all options to ensure the desired level of security is achieved. Here are some traditional options.

  • ACH prenotification (also called a prenote). This is a zero-dollar transaction a merchant sends to the issuing bank before processing the actual transaction. This is helpful because it confirms the account number, but unfortunately, it doesn’t give any other information. It’s also not timely enough since it takes up to three days to complete and also only validates an account, so money can still be sent to the wrong account.
  • Trial deposits (also called a micro deposit). This solution involves making a small deposit to the recipient’s account before the actual transaction to verify the account. It takes about one to two business days which means it doesn’t align with the swift processing of ACH. It also doesn’t validate the owner of the account which means it has the same security issue as ACH notification.
  • Account aggregators. This is a system where third parties are given an account’s username and password to log in to the system to verify it’s an open account. This method confirms an account is open. It also puts the consumer at risk since they are required to entrust their sensitive information.
ACH Network Rules Merchants Need to Know for 2021

Account Validation is Another (and Stronger) Option

Account validation in the ACH landscape is defined as a third party that verifies funds are coming from or going to a legitimate bank account. Essentially, account validation authenticates an account before approving any transaction for processing. This is a reliable process that provides a positive experience for both the sender and the recipient.

For instance, with a good account validation system in place, merchants are able to verify key account details such as a person’s name, address, phone number, email, and other important PII, along with additional relevant and important details. Businesses can also examine payment history, return history, account status, account ownership, and other pertinent details – all of which helps them to make better-informed decisions about customers and transactions.

In summary, account validation facilitates a better payment process. Finding a reliable account validation partner will go a long way towards ensuring all financial transactions process smoothly.

Benefits of Account Validation

NACHA has made this change with good reason. With the exponential growth and popularity of ACH payments, including same-day transfers, accidental errors might not be caught in time. Additionally, experts say the ability to make these rapid transactions have opened the door for fraudsters to sneak in to try to take advantage of illicit lucrative opportunities. This is due to untested networks and processes, along with shorter timeframes to identify suspicious behaviors. Account validation addresses these issues and more. Other benefits associated with account validation include:

  • Timely verification of bank account information
  • Decreased number of chargebacks
  • Mitigate risks associated with ACH returns
  • Avoid financial penalties associated with too many returned transactions
  • Gain an ability to develop a risk profile of customers
  • Generally can improve the transactional experience for participants

While there are many benefits associated with account verification, many merchants have not opted to establish a protocol to do so. However, this will need to change by the time NACHA’s new rules are in effect.

What Can Merchants Do to Become Compliant?

Account validation is an important tool for any business or organization that utilizes ACH transactions. Using the information provided by their account validation partner, merchants can make better decisions about transactions, and even make accurate predictions about individual customers.

All merchants, large and small, will be affected by the new NACHA rules since the need to have a robust account validation process will be mandatory. This means whether organizations are collecting any sort of payments over the internet or via mobile will need to comply. Types of transactions this rule will apply to include:

  • Point of sale purchases
  • Tax payments
  • Utility payments
  • IRA, SEP, and 401K contributions
  • Insurance premium payments
  • Loan payments (e.g. car, mortgage, HELOs)
  • Credit card payments
  • Membership payments
  • Donations to charity
  • Other types of payments people or businesses send electronically as WEB Debits

Due to new rules, the merchants currently relying on fraud solutions without account validation will need to rethink their strategy and start researching solutions they can use to become compliant with NACHA’s new WEB Debit Rule. While March 19, 2021, sounds a long way off, it really is right on the horizon.

Risk Verification Database (RVD) is an advanced data scoring system. RVD is designed to provide merchants with accurate predictions about ACH transactions and whether they will be likely to clear without return. How it works is RVD compiles and analyzes more than one billion real-time transactions and returns a rating which will be:

  • Accept
  • Decline
  • Warning

RVD is easy to integrate with existing processes and can work with API, batch, or web structures. To learn more about RVD and its secure methods to provide validation and meet NACHA rules, contact us today.