Nacha explained: A guide to ACH payments and Nacha rules and compliance


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  1. Introduction
  2. What does Nacha stand for?
  3. What is Nacha?
  4. What’s the difference between Nacha and ACH?
  5. What is an ACH payment?
  6. How do ACH payments work?
  7. Nacha operating rules
  8. Why does Nacha compliance matter?
  9. What is the Nacha file format?

You might already be familiar with ACH payments, a popular type of US electronic bank transfer used for a variety of transactions, including consumer purchases, bill payments, employee pay cheques and tax payments. Thanks to the versatility of ACH payments, the ACH network processed 26.8 billion payments that totalled over £48 trillion in 2020 alone. But even if ACH payments are a fixture in your personal finances and your business’s payment operations, you might not know much about Nacha, the organisation that runs the ACH network.

It’s useful for businesses to become familiar with the purpose that Nacha serves as well as its extensive operating rules. Here’s what you need to know about the entity that governs the ACH network and what it takes to follow Nacha rules, stay compliant and derive the maximum benefit from using ACH payments with your business.

What's in this article?

  • What does Nacha stand for?
  • What is Nacha?
  • What’s the difference between Nacha and ACH?
  • What is an ACH payment?
  • How do ACH payments work?
  • Nacha operating rules
  • Why does Nacha compliance matter?
  • What is the Nacha file format?

What does Nacha stand for?

Nacha stands for the National Automated Clearing House Association. Previously, Nacha was written as "NACHA".

What is Nacha?

Nacha is an independent organisation that operates the Automated Clearing House (ACH) network, which is a centralised US financial network through which banks and credit unions send and receive electronic payments and money transfers. Nacha is owned by a large group of banks, credit unions and payment processing companies. Nacha provides a way to directly transfer money between accounts at different banks without using paper cheques, bank transfers, credit cards or cash.

Some of Nacha’s roles and responsibilities include:

  • Taking federal legislation and any executive rules that impact ACH payments and translating them into clear directions for the financial institutions, individuals and businesses that participate in the ACH network
  • Enforcing those operating rules for member banks and everyone else using the ACH network
  • Managing the continual evolution and development of the ACH network to make it relevant and serviceable to current needs in the world of payments
  • Promoting adoption and use of the ACH network
  • Functioning as a trade organisation by driving thought leadership, advocacy and education

What’s the difference between Nacha and ACH?

ACH is the network through which payments are sent and received and Nacha is the organisation that owns and manages that network and the technology that powers it. Nacha is also responsible for establishing and enforcing the rules and guidelines that govern the ACH network and ACH payments.

What is an ACH payment?

An ACH payment is an electronic transfer of funds sent using the ACH network. ACH payments are very common. ACH payments can be used for a variety of transactions, including:

  • Employee payments
  • Customer bills
  • Tax refunds
  • Tax payments
  • Retirement and investment account contributions
  • Commercial purchases
  • Charitable donations
  • University tuition payments
  • Funds sent between family and friends

How do ACH payments work?

Here’s an overview of the basic mechanics of ACH payments:

  • The banking institution that issues the ACH transfer request is called the Originating Depository Financial Institution (ODFI).
  • The banking institution that receives the ACH transfer request is called the Receiving Depository Financial Institution (RDFI).
  • An ACH payment begins when the ODFI sends a request to the RDFI to transfer funds from an account at the RDFI to an account at the ODFI.
  • Because the flow of an ACH transfer can work in either direction – the ODFI pushing funds to the RDFI or the ODFI requesting funds to be sent from the RDFI – the terms don’t necessarily indicate which banking institution is sending or receiving the funds, but rather which one is initiating the transfer request.
  • The ODFI creates a file containing all the key information about the transfer request, including:
    • Transaction type (credit or debit)
    • Routing numbers
    • Account numbers
    • Amount to be transferred
  • Within a set period of time, the ODFI gathers all ACH transfer requests into a batch and sends the batch of files to an ACH operator that then sends the files to the RDFI.
  • At this point, the bank from where the funds are being withdrawn releases the funds, which travel via the ACH network to the receiving account.
  • This process can take anywhere from several hours to a few days.

Nacha operating rules

Nacha has an extensive set of operating rules and regulations that apply to the different types of ACH payments. If your business wants to accept ACH payments from your customers, there are certain requirements to which you must adhere. Failure to do so might result in a series of warnings, fines and even suspension from using ACH payments altogether. Some fines can be as high as £389,000 per month (that’s an extreme case, but it can happen), so it’s important to make sure that your business is ticking every box that Nacha requires.

What exactly are those requirements? First, it’s important to note that Nacha’s operating rules can (and often do) change, so it’s a good idea to check the Nacha website regularly to make sure that your business still complies with the latest set of rules. Here are a few key requirements that businesses must follow:

  • Obtain authorisation from customers when they make an ACH debit payment to your business.
  • Communicate clearly to the customer during the payment process that they’re authorising either a one-off or recurring ACH payment.
  • Give adequate notice if you’re changing the amount of the ACH debit or the date.
  • Provide adequate security measures to protect customer payment information, such as:
    • Bank account and routing numbers
    • Social security numbers
    • Driving licence numbers
    • Billing addresses
  • When necessary, cancel recurring ACH payments in a timely manner and cease future debits.

There are also detailed requirements around the transmission and storage of sensitive data, including the level of encryption on web forms and emails, as well as rules about how to store physical copies of customer information.

These are just a few highlights from Nacha’s operating rules. If your business deals with ACH payments, especially as a customer payment method, you’ll want to get a full copy of Nacha’s rules and check for updates annually.

Why does Nacha compliance matter?

The goal of these operating rules is to keep customers’ financial and personal data safe at all times, while also making sure that payments are sent and received on time and with minimum hassle.

What is the Nacha file format?

A Nacha file is the document that contains all the crucial information and transfer instructions related to a requested ACH transaction. Just as Nacha has precise operating rules for every aspect of using the ACH network, they also have a protocol for putting together this file.

While there are some variables, depending on transfer type, most of the specifications remain the same from file to file. Here are some typical specifications:

  • Each line of the file is 94 characters long.
  • The file must contain:
    • Account numbers for the ODFI and RDFI accounts
    • Routing numbers for the ODFI and RDFI accounts
    • File header and trailer
    • Batch header record with service-class code
    • Entry detail record

Because of the specificity required by the Nacha file format, most banking institutions automate the process of compiling these documents to avoid human error.

With billions of ACH transactions happening every year, it’s important to understand the basic aspects of how ACH payments work, how the ACH network operates and what businesses and consumers need to know. For more information about how to accept ACH Direct Debit payments with Stripe, start here.

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