ACH Origination has become a common Cash Management tool for businesses. ACH Origination services allow businesses to effectively manage their payables and receivables process. The inefficiencies of dispersing payments via traditional paper check or manually coordinating complex payroll can be replaced with a faster, more secure electronic alternative.

If you are new to ACH Origination, it might seem overwhelming to get started. We are a resource for you and want to make it a little easier to understand ACH Origination and Rules compliance.

In this three-part blog series, we will discuss ACH basics, ACH processing, and ACH fraud risks and mitigations. Follow along to broaden your knowledge in the world of ACH Origination.

For easy access to the ACH Rules, you can create an account and claim a basic subscription at no cost by visiting: https://www.nachaoperatingrulesonline.org

ACH Basics

What is the ACH Network?

The Automated Clearing House (ACH) Network is an electronic payments network used by individuals, businesses, financial institutions, and government organizations. The Network functions as an efficient, electronic alternative to paper checks. It allows funds to be electronically debited or credited to a checking account, savings account, financial institution general ledger account, or credited to a loan account. Common uses for ACH credit transactions include payroll direct deposit or vendor payments. Uses for ACH debit transaction includes collection of payments such as rent or utilities.

Who are the ACH participants?

There are five key participants that contribute to the successful completion of an ACH transaction:

1. Originator: Your company is the Originator and has been authorized by the Receiver (consumer or company) to either credit or debit their account.
2. Receiver: The Receiver can be either an individual or a company that has authorized the Originator (your company) to credit or debit their account.
3. Originating Depository Financial Institution (ODFI): The ODFI (Border Bank) is the financial institution that your company has a contractual relationship with for ACH services and is responsible for sending ACH entries into the ACH Network on your behalf. You will enter into an ACH Agreement with Border Bank before beginning ACH Origination services.
4. ACH Operator: The ACH Operator is the central clearing facility for ACH transactions. The ACH Operator is responsible for accepting files of ACH entries from ODFIs, which are then sorted and batched and forwarded to the Receiver’s financial institution. The Federal Reserve Bank is the ACH Operator for Border Bank.
5. Receiving Depository Financial Institution (RDFI): The RDFI is a financial institution where the Receiver has an account relationship. Credit or debit entries sent to the Receiver’s account will be received by the RDFI from the ACH Operator and then posted to the Receiver’s account.

How Does the ACH Network Function?

As the Originator, your company must first obtain authorization to initiate a transaction to the Receiver's account. Your company (Originator) then creates a file of ACH transactions. The file is then sent to your ODFI (Border Bank).

The ODFI collects ACH files from their Originators, verifies the validity of these files, and transmits these files to the ACH Operator (The Federal Reserve Bank). The ODFI takes on the warranties and responsibilities for the ach entries they transmit into the ach network.

The ACH Operator receives ACH files from the ODFI and distributes files of entries to the RDFI.

The RDFI’s receive files of entries from the ACH Operator for its account holders. Entries are posted based upon the settlement date and account number.

How Are ACH Funds Settled?

Settlement is the actual transfer of funds between financial institutions to complete the payment instructions of an ACH entry. Your company as the Originator will determine the Effective Entry Date of the file you send to your ODFI. This is the date your company intends the entries to post to the accounts of the Receivers (for example, your company’s pay date would be the Effective Entry Date if you are doing payroll origination). When the ACH Operator processes an ACH file, the Effective Entry Date is read and entries are settled based upon that date, known as the Settlement Date.

Standard Entry Class (SEC) Codes

Each ACH transaction must be accompanied by a standard entry class (SEC) code. SEC codes are payment types used by originators to identify ACH debit and/or credit entries transmitted to a corporate or consumer account at the RDFI. SEC codes must be used appropriately and in accordance with the NACHA Rules. The use of SEC codes determines the applicable ACH return rules, which we will discuss in part 2 of this blog series.

Border Bank accepts the below SEC codes.

ACH APPLICATION (SEC) CODE	APPLICATION USE
PPD	Payment from or Deposit to a Consumer (person)
CCD	Payment from or Deposit to a Corporation (business)
CTX	Corporate Trade Exchange - Payment to a Corporation (business) which accommodates addenda records

Obtaining Proper Authorizations

ACH Originators must obtain authorization from the Receiver to originate one or more debit or credit entries to the Receiver’s account. The authorization is a key component of the ACH transaction, as it gives your company, as the Originator, the authority to send transactions to the Receiver’s account. There are different authorization requirements based on the Receiving account belonging to a consumer (person) or company (business).

Authorization Requirements for Consumer (PPD) Transactions

Debit Transaction Authorization

• Must be in writing and signed or similarly authenticated prior to initiating an ACH entry
• Needs to be easily identified as an authorization and state the term clearly (amount and timing of debits)
• Must state how the Consumer can revoke the authorization
• A copy of the authorization must be provided to the Consumer
• You, as the Originator, are responsible for retaining the authorization but must be able to make a copy of the authorization available to Border Bank upon request. Examples: In the case of a dispute by the receiver or by request of an auditor.
• Authorizations must be securely retained for two years after the last ACH debit to the customer

Credit Transaction Authorization

• Consumers may provide authorizations for credit entries orally, however, we would recommend you receive them in writing as you would a debit authorization.

Authorization Requirements for Commercial (CCD) Transactions

• A written agreement must be in place between you and the other company
• Agreements do not have a specific format requirement, but you must obtain the Receiving Companies agreement to be bound by NACHA Operating Rules
• Trading Partner agreements should contain authorization requirements and procedures as agreed upon by the parties

Third Party Service Provider

A Third Party Service Provider or Third Party Processor is any entity other than an Originator, ODFI or RDFI that has an agreement to perform any function on behalf of an Originator, ODFI or RDFI with respect to the processing of ACH Entries.

Many Originators use a Third Party Processor such as a Payroll Processor or Accounting Firm to assist them with Originating ACH Entries.

If your company is using a Third Party Processor, Border Bank will execute a Third Party Processor ACH Origination Agreement among your company, the processor, and Border Bank.

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