ABA Letter to NACHA re: Account Information Improvements Through the ACH Network

Maribel Bondoc
Manager, Network Rules
NACHA, The Electronic Payments Association
13450 Sunrise Valley Drive
Herndon, VA 20171

Dear Ms. Bondoc:
Thank you for the opportunity to comment on the Request for Comment on Account Information Improvements Through the ACH Network issued on May 20, 2020. The American Bankers Association appreciates your efforts to improve the ACH experience and to increase the accuracy of account information. We look forward to working with you to make payments more seamless and safer for all.

The proposal intends to make changes and to standardize practices associated with account validation activities to improve their speed and accuracy. This includes changes to the prenotification processes and formats where Financial Institutions send a zero dollar entry to verify that an account number is valid. It will also standardize Micro-Entry processes and formats where FIs send small dollar amounts to verify that an account number is valid. The Notification of Change (NOC) process will also be accelerated under this proposed rule change.

Provide a “Yes/No” Response by a Receiving Depository Financial Institution (RDFIs) For All Prenotifications

Under the existing ACH Network Rules, RDFIs that receive a Prenotification Entry must provide a response if the account number is incorrect with a Return Entry or a Notification of Change Entry (NOC) that provides corrected account information. If the account information is correct it does not respond. The Originating Depository Financial Institution (ODFI) relies on that lack of response to confirm it has the correct account information.

This proposed change would require that RDFIs respond to every Prenotification Entry to confirm that either the information is correct or not using a repurposed Acknowledgment (ACK) Entry. This would replace the current requirements to send a Return or NOC.

Prenotification Entries give the ODFI confirmation that the information that they possess includes a valid account number. It does not confirm the name associated with the account or
its ownership. However, this incremental increase in assurance is valued by a number of ODFIs. The Prenotification Entry allows them to increase their confidence in a transaction at a cost below what a private sector account validation provider may charge for an enhanced product.

Analysis and Response

This section of the proposal generated a mixed response amongst the ABA membership with discussion focused on whether this proposed change represents any improvement to the
current Prenotification Entry methods to offset the costs of implementation. The primary obstacle to supporting this change is the requirement to respond to all Prenotification Entries, even those that were sent to valid accounts. Currently, no response is considered validation that the information is correct. This new requirement will create an additional burden on RDFIs that will now have to originate a new ACK entry to confirm that the ODFI sent an entry to a valid account. However, many ABA members believe there is significant benefit to ODFIs and Originators to use the ACH network for account validation. ACH is the most ubiquitous payment system in the US and prenote validation allows for the use of the network for nationwide account validation directly with the RDFI.

The new process also will limit ACK responses to either “Yes or No.” This will preclude an RDFI from providing any account repair information to the ODFI and generate more “No” responses. Currently, RDFIs may respond with a NOC that includes updated account information for the Originator to use with subsequent payments.

The new ACK entry requirement will subject to RDFIs to additional programming costs. These will either be absorbed internally or result in increased fees from service providers. At this time, it is not possible to determine if the proposed changes will result in benefits to the RDFIs to offset these costs.

Some ABA members noted that financial institutions have limited resources to dedicate to payment system enhancements. Each project must be evaluated to determine where to spend these resources wisely. Using that logic on this part of the proposal suggests that should not be a priority and that limited resources should be applied elsewhere.

Other ABA members reiterated their desire to enhance the Prenotification process because their institution values the benefits from validating account information prior to sending live transactions.

Given the diversity of opinion of our members, the ABA cannot make a definitive recommendation on the benefits of this portion of the proposal . We recommend that Nacha provide additional information on the actual improvements these changes will provide as compared to the current process so that the industry may be able to achieve a consensus view on this proposal. In addition, we request a detailed explanation of the need to respond to all Prenotifications, including those to valid accounts.

Shorten the timing for Prenotification Entry Response

The proposal would accelerate the response time to Prenotification Entries by requiring ACH Operators to process the transactions during the next available window, including Same Day ACH windows. The RDFIs would then have until the corresponding processing window the next day to send the response. This results in a turnaround period of usually one business day instead of the current two day period.

The process is further accelerated by allowing the Originating Financial Depository Institution (ODFI) to send live transactions immediately after receiving a positive response instead of having to wait for three business days.

The proposal also contains several new formatting requirements including mandating that “VALIDATION” be in the Company Entry Description Field of each Prenotification Entry. It would also require that the Company Name Field contain the name of the Originator as it would be known to the Receiver and the same name that will be associated with later, live transactions. The new Prenotification Entry must also have an appropriate Transaction Code.

Analysis and Response

If the proposal remains in its current form, ABA supports the accelerated turnaround time because it relies on merely a “Yes or No” response. If the proposal remains in its current form, ABA supports the ODFI being able to send transactions immediately after receiving a positive response. However, ABA would recommend the ODFI be able to send a transaction if it receives no response during the agreed upon time period.

If the proposal remains in its current form, ABA recommends modifying the Company Name Field requirement to allow for some latitude. ABA agrees that the Company Name Field in the Prenotification Entry and subsequent live transactions should be consistent and recognizable to the Receiver, but requiring an exact match could be burdensome to the Originator in practice.

For example, transactions should not be considered out of compliance if the Prenotification Entry contained “Ford” and the live transaction contained “Ford Motor Company.”

Standardize practices for Micro-Entries

Micro-Entries are small dollar transactions initiated by ODFIs to validate account information. Currently, there are no rules in the ACH Network that apply specifically to Micro-Entries. They can be used to establish account ownership or access, a step beyond just confirming a valid account number through a Prenotification Entry. An ODFI can send a micro-entry to an account and if the recipient can confirm the exact amount of the transaction, the ODFI has assurance that the recipient can access the account.

This proposal would establish rules and formatting requirements for micro-entries. These transactions would be no more than $1 and if offsetting debits are used, they must not excee the credits. Once the Receiver completes the validation process, live transactions may commence.

ABA membership generally expressed support. Others were not sure of the value of these requirements since micro-transactions are occurring organically now without the need for rules.

Analysis and Response

These changes will improve a consistent use of Micro-Entries across the industry. ABA supports the proposed changes.

Standardize Formatting for Micro-Entries

New formatting requirements would include populating the Company Entry Description Field with “VALIDIATION.” In addition, the Company Name Field should contain an Originator name that the Receiver recognizes and that will be used for future transactions.

Analysis and Response

Standard formatting of these transactions will benefit RDFIs and the entire industry.

ABA supports these formatting requirements with the exception of the Company Name Field requirement. As noted previously in the Prenotification section, it is important that the
company names in the Micro-Entry and subsequent transactions should be consistent and recognizable to the Receiver. However, it should not require an exact match that may invalidate a live transaction if the Micro-Entity and live transaction Company Name Fields are not exact matches.

Modifications to the Notification of Change Requirements

The proposal makes three changes to how NOCs are handled in an effort to improve efficiency. In the first case, ODFIs would be required to inform Originators of NOCs within one business day, instead of the current allowable two day period. This is intended to speed up the process and result in improved account accuracy in a shorter time period.

The second change would prohibit Originators from invalidating a Receiver’s authorization because it received an NOC. This is meant to discourage the common practice of some Originators to require that the Receivers confirm that the information on the NOC is correct before initiating a transaction. This slows the payment process down and leads to greater use of paper checks.

The third change, would be an increase in the penalties on Originators for not using NOC information to correct account information. The first instance would be considered a Class One Violation and the second instance would be a Class Two Violation. This would change the current practice of giving a warning when the first violation is reported.

Analysis and Response

ABA supports the proposed rule change to accelerate the time period where ODFIs must inform Originators of NOCs within one business day.

ABA supports the proposed rule change to prohibit Originators from invalidating authorizations because of receiving NOCs.

ABA members did not reach consensus on the changes to the enforcement penalties on Originators for not updating payment information received via NOCs. A portion of the membership supported the change to encourage better compliance from Originators. Another portion believed that the warning should remain in place.

ABA would like to thank NACHA for the opportunity of responding to the Request for Comment on Account Information Improvements Through the ACH Network. We look forward to further discussion on the Prenotification Entry section of the proposal. If you have any questions about these comments, please contact the undersigned at (202) 663-5147.

Sincerely,

Stephen K. Kenneally
Senior Vice President, Payments