Important ACH Changes Right Around the Corner

December 2, 2020 at 9:32 am Leave a comment

In 1974, when a bunch of major banks got together in California and created a network to facilitate the electronic payment of paper checks, the internet wasn’t even called the internet. It was used by only a handful of universities to facilitate research, much of which was funded by the Department of Defense. Fast forward to today. What we now call the world wide web was used to expedite an estimated 24.7 billion transactions in 2019. That’s before we knew what COVID-19 was. 

Why am I presenting you with this interesting factoid? Because in March 2021, the NACHA Operating Rules are changing in a way that will place more legal responsibility on financial institutions that originate Web Based Debits. A web transaction is generally a debit of a consumer account using the internet or a mobile device to verify the consumer’s account. Specifically, the new rule reads as follows:

(a) Fraud Detection Systems. The Originator has established and implemented a commercially reasonable fraudulent transaction detection system to screen the debit WEB Entry.

(a) Fraud Detection Systems. The Originator has established and implemented a commercially reasonable fraudulent transaction detection system to screen the debit WEB Entry. Such a fraudulent transaction detection system must, at a minimum, validate the account to be debited for the first use of such account number, and for any subsequent change(s) to the account number.

(b) Verification of Receiver’s Identity. The Originator has established and implemented commercially reasonable methods of authentication to verify the identity of the Receiver of the debit WEB Entry.

(c) Verification of Routing Numbers. The Originator has established and implemented commercially reasonable procedures to verify that the routing number used in the debit WEB Entry is valid.

Remember, the NACHA system consists of originators, which are businesses that enter into contracts with banks and credit unions to participate in the ACH network. This network electronically sends payment information to receiving depository financial institutions. By making this change, originating depository financial institutions will be warranting the legitimacy of the account number. This has always been a best practice, but by making it a warranty, originators are now on the hook for a greater number of fraudulent transactions. The change is being made because under the ACH system, the institution initiating a payment transaction is typically in the best position to detect the fraud. 

If you aren’t aware of this change and your credit union is an originator of ACH transactions, the good news is you still have time. The network is giving participants an additional year to incorporate these updates to their transactions, provided they take steps to comply with the changes. For those of you who act as receivers of ACH transactions, you should anticipate seeing more micro debits as originators verify the validity of account numbers. 

Entry filed under: Compliance, Regulatory, Technology. Tags: , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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