NACHA Proposals for Reducing Exceptions Include New Fines for Sloppy and Risky Originators

In an effort to reduce the volume of returned transactions and motivate banks to crack down on originators of incorrect or risky automated clearing house payments, ACH network governing body NACHA today proposed two new rules to improve transaction quality. One would set new fines that the network could assess against banks that generate high volumes of returns.

Janet O. Estep, president and chief executive of Herndon, Va.-based NACHA, tells Digital Transactions News that the association “is taking a holistic” approach to reducing costly returns through the two proposals. NACHA is targeting returned transactions that trace their origins to mistakes, so called administrative returns, and others that result from consumers disputing ACH transactions involving high-risk merchants and businesses such as debt collectors, payday lenders, credit-repair services, sweepstakes operators, travel clubs, and telemarketers.

“We think they are complementary approaches to maintaining ACH quality by focusing on exceptions,” she says. “We do think as a result that everyone participating in the network will be better off.”

NACHA is taking comments on both proposals until Jan. 13. The first would strengthen NACHA’s existing risk-management and enforcement provisions. One provision would reduce the existing return rate threshold for unauthorized ACH debits from the current 1.0% to 0.5%. The rule also would establish a return rate threshold for so-called account data-quality returns, or administrative returns, at 3.0%, and an overall debit return rate threshold of 15.0%. Return rates above the thresholds could expose the transaction originators in the “outlier” ranges to penalties.

The proposal also would clarify permissible and impermissible practices for collection of ACH debits that are returned for insufficient funds, and apply various risk-management rules to third-party senders, according to NACHA.

The second pending rule would establish what NACHA calls “economic incentives” for originating depository financial institutions (ODFIs) to improve the quality of the ACH transactions they originate on behalf of companies. These fines would be passed on to receiving depository financial institutions (RDFIs) to partially compensate them for their costs to correct or return a transaction sent to them for payment.

NACHA is asking for comments on its suggested fines, which include a range of 10 cents to 40 cents for account-data-related returns; 25 cents to 75 cents for a “Notification of Change” return in which the RDFI corrects the information in the transaction and transmits it back to the ODFI, and $1.50 to $2.50 for an unauthorized entry.

The proposed rules are the result of an effort NACHA began last year to improve transaction quality, according to Estep. While debit returns for all reasons are only 1.51% of transaction volume and administrative returns are just 0.18%, NACHA says that after years of improvements, return rates have stabilized. The unauthorized return rate, for example, dropped from about 0.06% of transactions in 2004 to 0.03% last year, but is staying at that level this year.

And even though the administrative return rate is stable, the number of returns is increasing as overall ACH transaction volumes increase. NACHA projects there will be nearly 31 million administrative returns this year, up from 30 million in 2012 and 22 million in 2005.

RDFIs bear most of the costs of returned transactions. NACHA says the weighted average cost for handling administrative errors and corrections is 26 cents per transaction. But each bank’s costs can vary widely based on volume—as low as less than a penny for a very large bank to a high of $63.20 per exception item for a small bank in a NACHA study group.

Unauthorized exceptions are considerably more expensive, with a weighted average of $4.99 but individual banks’ per-transaction costs ranging from $2.30 to $509.09.

NACHA estimates the proposed fines could generate $17.1 million to $43.3 million annually. They still wouldn’t cover all of RDFIs’ return-related costs, which the association estimates at $47.2 million annually. That estimate doesn’t include non-ACH operations costs, such as customer service.

Executive summaries of the proposals can be downloaded here.