Collector - May 2020 - 39

BUSINESSOPERATIONS

In 2015, additional Nacha research found
that, once again, account validation was the
highest priority among all groups surveyed.
The change to require the account validation
tools on certain transactions simply follows
suit to address the needs that year after year
continue to be expressed.
That said, although the industry should
neither be surprised nor hopeful to see a
positive shift because of the requirement, it's
important to understand what Nacha means
by account verification so you can find a
solution that best meets your needs.
Account verification goes beyond the
basic routing number verification to validate
payments; it provides insight into the actual
standing of a particular account. Nacha
does not have a preference for a particular
method to complete this extra step to
validate the account, but rather advises that
the account validation method must be
commercially reasonable. To help merchants
try to determine what is "commercially
reasonable," Nacha has provided some
examples of methods companies can use to
validate accounts, which can vary widely in
terms of time and user experience.
The first example is known as
microdeposits. Under this method, the
account is validated by depositing one or
two small amounts-in most cases, only a
couple of cents-into the customer's account.
The customer will confirm the amounts

deposited to validate the account. While this
validation method causes a two to three day
delay, much less than for the manual process,
it includes a dependency on the customer
to assist in the process. In many cases,
customers fail to complete the process and
the payment cannot be validated.
The second example is similar to the first
and known as a prenotification transaction.
This method requires the merchant to send
a $0 transaction through the ACH network
to validate the account. Confirmation of the
account is received in two to three days. The
merchant is required per Nacha rules to wait
three days after the pre-notification is sent
to submit the actual payment information.
While it does not include a dependency on
the customer, the validation will still delay
the payment a minimum of three days, at
which time the account could have changed
its good standing.
The last example is the use of a third-party
verification service. This method differs from
the previous two as it allows for validation
without a delay in processing. Some financial
institutions and third parties have access to
a large number of accounts (both their own
and others) and offer account verification
products that leverage this information.
Verifications can be real-time, same-day or
next-day, depending on the level of service
used by a merchant. Third-party services
leverage the pool of information to decipher

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an account's standing by considering recent
non-sufficient funds, prior history of fraud,
account abuse, forgery, counterfeiting/
check alterations, paperhanging, check
kiting, identity verification and owner
authentication. In addition to responding
with the status of an account, a thirdparty service could be used to validate the
ownership of the account.
After a merchant decides which method
is best for its business, the next step will
be to create processes and procedures for
implementation. The good news is that
the account verification requirement only
applies to web transactions and only when
an account number is first used and again
if there are any changes to the account
number. Recurring schedules with no
account changes would only require account
verification on the first payment that is
processed; the remaining payments can be
processed without account verification.
Your processes for account validation
must be in place for covered transactions
no later than March 19, 2021. Nacha rule
violations are not to be taken lightly, and
if a merchant fails to meet the standards
provided by the rules, it may be subject to
penalties and fines ranging from a one-time
$1,000 fine for a Class 1 infraction all the
way up to a $500,000 per month fine for a
Class 3 infraction.
As a reference point of how easily these
fines could apply, failure to reduce return
rates after receipt of a Nacha notice is a
Class 2 infraction and the ACH Rules
Enforcement Panel may levy a fine against
the participating depository financial
institution in an amount up to $100,000 per
month until the problem is resolved.
Upon discovery of any Nacha violation,
banks also have the ability to terminate
agreements due to Nacha violations as
compliance is required to be made part of
any third-party relationships. Nacha rules
cannot be ignored, and compliance should
be considered a top priority.
Laurie Nelson is general counsel and chief
compliance officer for Autoscribe Corp. She
can be reached at LNelson@autoscribe.com.

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