What is An ACH Origination Agreement?
An ACH origination term agreement is the document that sets forth the terms of the various types of ACH transactions that can be processed for a customer of an Originating Depository Financial Institution. Such payments or transfers are set forth in the NACHA Operating Rules and includes payments described as Consumer Debit, Corporate Debit, and Corporate Credit and the types of transactions that are permitted under these descriptions. Transaction information is submitted to an ACH Network to facilitate the distribution of ACH transfers for the customer to a Receiving Depository Financial Institution . No transaction may be processed without the customer having signed an authorization that complies with the NACHA Operating Rules. Such authorizations are typically given in writing in person, through the mail, electronically, or in some cases, over the telephone. The terms under which the information is submitted and how quickly the resulting distribution is completed for the Originator and Receiving Depository Financial Institution are set forth in the ACH Origination Agreement.
Essential Aspects of an ACH Origination Agreement
At a minimum, an ACH origination agreement should include the following terms and conditions:
Terms and Conditions. The terms and conditions of an ACH origination agreement typically include:
Parties’ Obligations. The obligations of the parties to the agreement may include technical and instructional details, as well as provisions concerning confidentiality, term and expiration.
Fees. An ACH origination agreement typically includes a number of different types of fees, including but not limited to: account analysis fee; maintenance/annual fee; per entry/transaction fee; per file transmission fee; monthly/quarterly/annual software maintenance fee; and stop payment fee.
The Function of an Originator in ACH Transactions
A "Originator" is an entity that has entered into an ACH Origination Agreement with a financial institution for the purpose of initiating a single ACH entry or a batch of ACH entries to consumer accounts or non-consumer accounts. The Originator must register with the National Automated Clearing House Association ("NACHA") and be assigned an ACH Company ID number in order to enter into an ACH Origination Agreement.
If the Originator will only be receiving direct deposits from the financial institution, the agreement may only be for one or two entries per month. However, if the Originator will initiate a larger number of ACH debits to initiate debits to consumer accounts, the agreement will be for a larger number of entries each month. Debits initiated by the Originator must be paid-out by the financial institution at the time the debit is posted to the consumer’s account. If the Originator is an Employer that hits employees’ payroll accounts, it may need to increase its line of credit with the financial institution. It is the Originator who warranties that the transaction will be sent as represented to the financial institution and that the payment was not initiated via fraud or in violation of law.
Advantages of Creating an ACH Origination Agreement
For many businesses and consumers, the benefits of ACH are further enhanced by contracting with financial intuitions to transfer funds electronically from one or more business or consumer accounts. These contractual arrangements with your financial institution are known as ACH origination agreements. There are many advantages to having an ACH origination agreement – perhaps the most important of which is that it allows for the efficient movement of payment transactions from your system to the receiving business or consumer bank account electronically without the need of either party to process any physical checks, and thus the costs of processing are much lower (.10 cents per transaction) than the all-in costs of processing paper checks ($.75-$1.00 per check). Moreover, the risks of fraud are mitigated by controlling the timing of the transmission and the transactions. For instance, if you mistakenly send the same file twice, the second transaction will not be processed, as it will be flagged as a duplicate transaction. Additionally, if a dollar amount is improperly transmitted in the payment file, the bank is authorized to reverse the erroneous transaction and return the funds to your account for reprocessing. This sort of remedy is not generally available in the paper payments world.
Common Issues with ACH Origination
Many originators may not be able to anticipate the potential return items that might return under ACH. This is all subject to the NACHA operating rules mandates and regulations. Some of the potential return items include the following: In the event that funds are returned, those funds may be returned for any number of reasons, including but not limited to, a closed account, missing/transposed information, or a deposit to a non-customers account at the bank of deposit. Again, this is not an exhaustive list and an originator must know not only the potential reasons, but also the potential time period for return of these items. An originator and financial institution entering into ACH origination may want to negotiate turn back times, as well as the window of time to start reversing debts against an account . An agreement to enter into ACH origination should stipulate the turn-back, return time and reversal time for returns and reversals. These time periods are critical, as, depending on the category, the return time can be 60-120 days, with an additional 60 days for not-Readily Accessible Records. Furthermore, with reversals of controversy or unauthorized debit, the time period for reversal pursuant to NACHA rules are ten (10) banking days. As noted above, when entering into an ACH origination agreement, there are additional costs and exposure that both parties need to be aware of, such as auditor requirements, NACHA or state mandated remediation, consumer protections, and breach or fraud.
How to Establish an ACH Origination Agreement
ACH origination involves companies entering into an agreement with a financial institution, whereby they will be granted access to the ACH Network through the financial institution. The agreement is a requirement of NACHA, and requires several details to be considered as part of the setup, including the types of transactions (deposits or withdrawals) that will be processed as part of the relationship. It’s also important to note that the financial institution may require the completion of additional documentation.
A common format for ACH origination agreements is one developed by Nacha and available on the Nacha web site, although some financial institutions may have their own agreements which they would use in lieu of this type of industry form.
An important detail of ACH origination agreements is the requirement to designate a "company administrator" who will be responsible for actions taken on behalf of the company. In addition to identifying the administrator, the agreement will identify the types of transactions which the financial institution will be authorized to handle for the company, and set limits on dollar amounts, frequency of transactions and the scheduling of pre-notification files that will also be required in order to notify accountholders of your intent to conduct ACH origination transactions. You will also be asked to agree to comply with the NACHA rules.
There are agreements available which eliminate the requirement for electronic records and require only a traditional paper signature, which may be preferable in some circumstances — however, others may find that ACH origination agreements can be signed electronically.
Legal Aspects of ACH Origination Agreements
There are legal considerations that need to be addressed when an ACH origination agreement is drafted and entered into. Some of these considerations are unique to the NACHA Rules and the Uniform Commercial Code Articles 4 and 4A. Many ACH origination agreements (and, for that matter, some ACH processing agreements) are drafted by financial institutions or vendors who do not have a good understanding of these legal considerations. These agreements end up creating a pitfall for their clients. It is therefore important that clients approach these documents with extreme caution, and work closely with their own legal counsel in the process of reviewing drafts and finalizing the agreements.
The NACHA Rules have program requirements and conditions that are intended to provide a stable ACH Network and a mechanism for risk management. Some of these program requirements are referenced in the NACHA Rules but should be made more specific in the agreements of the originators, and of their financial institutions or processors. For example, NACHA has indicated that its program risk limits apply to any risk management program that is based on prospective risk assessments. Therefore, those limits should be incorporated into the NACHA agreements.
There are also NACHA "Risk Management Payments" provisions that may be referenced in the NACHA Rules. These payments are intended to be used only in extreme circumstances where the risk cannot be avoided by other means. But, many financial institutions and vendors believe that these payments are far too favorable to the originators and do not provide enough assurance of payment. Each financial institution will need to review these provisions carefully, with their own legal counsel, to determine whether they should be incorporated into the agreements.
Additional legal risks that need to be addressed include risk of privity with a federal regulator under the Uniform Commercial Code Articles 4 and 4A. When the NACHA Risk Management Payments are utilized in a manner that is reasonable under the circumstances, there is no privity of contract between the financial institution and the originator’s creditors. This is because the originator’s creditors (or even other third parties) are not intended beneficiaries of the NACHA Rules and any payments made under NACHA have been authorized. However, although NACHA has been careful to state in its risk provisions that any payments are "voluntary", this is just not accurate. Article 4A of the Uniform Commercial Code makes clear that the NACHA Rules cannot be avoided merely by calling them voluntary. Any removal of NACHA’s Risk Management Payments provisions must be handled by removing the payment provisions altogether, and should not merely be removed by attempting to make them "voluntary".
Emerging Trends in ACH Payment Systems
Emerging trends in ACH payment systems may include increased use of API or mobile applications to initiate debit or credit transactions, rather than as a mechanism to transfer funds between banks. These alternative payment methods may be subject to revisions and changes that merchants and others will need to keep up with in order to effectively transfer funds using these systems. For example , RTP has debuted a real-time payment system that is already being implemented by several financial institutions. Blockchain technology also continues to grow in prominence in the ACH world, allowing for cross-border transfers that avoid the delays associated with the ACH system. As the ACH system continues to evolve, origination agreements must ensure that the parties’ rights and responsibilities are consistent with the prevailing technologies in the marketplace.