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The Green Sheet Online Edition

May 13, 2024 • Issue 24:05:01

Payment Processing via ACH

By Ken Musante
Napa Payments and Consulting

ACH processing is distinct from card processing in many ways and often misunderstood by card processing professionals. ACH processing can be lucrative and beneficial for many merchant types, but it's important to understand how it differs from credit card processing. In part, because ACH processing is not as well understood, the pricing disparity for ACH is many times greater than it is for credit card processing.

Big picture

Similar to credit card processing, ACH processing is a four-party system with an originating depository financial institution (ODFI) and a receiving depository financial institution (RDFI). (See the image accompanying this article, which was created by Nacha, www.nacha.org/content/how-ach-payments-work). From a merchant’s perspective, ACH fees should be far lower than credit card fees. ACH costs are based on the number of items, not the value of the item, so it can be incredibly inexpensive for larger dollar transactions.

Credit card interchange is typically priced with both a percentage and a transaction fee: 2.20 percent plus $0.10, for example; then there are the 0.14 percent assessments (for additional credit card cost information, see this article: www.greensheet.com/emagazine.php?article_id=7537).

ACH on the other hand has no such percentage fee. Many vendors charge a percentage, but there is no corresponding percentage network cost associated with ACH fees. Sure, there is risk, and processors do need to price for that risk. But the pricing differential within the marketplace for ACH is many times greater than it is for credit cards.

Cradle to grave

The National Automated Clearing House Association, now known simply as Nacha, was formed in 1974 to coordinate ACH movement nationwide from the patchwork of ACH associations. The first ACH format was created in 1975: the Prearranged Payment and Deposit (PPD). My favorite application was implemented in 1982. The Death Notification Entry (DNE) was adopted to allow the government to notify financial institutions that the recipient of a government benefit payment had died.

Same Day ACH for credits came in 2016. Same Day ACH debits followed the next year. Though the cost for Same Day ACH is many multiples higher than standard ACH transactions, it is still far less than credit card transactions.

Like with Visa and Mastercard, Nacha maintains a negative database, called the Terminated Originator Database (TOD). TOD provides a mechanism for ODFIs to share information regarding "for cause" terminations and is an additional tool for ODFIs to use when underwriting merchants and third parties.

It can also be used during periodic reviews to validate that their client has not been closed for cause by another ODFI. Unlike with Visa and Mastercard, however, use of the TOD for either merchant adjudication or monitoring is optional.


A main drawback for ACH transactions is there is no authorization mechanism through which funds may be authenticated and held. If car rental agencies utilized ACH, they would be trusting those funds to be available when the client returned.

NACHA has instituted micro-entries as a method for account verification whereby small denomination debit and credit entries are simultaneously sent with the company entry description, ACCTVERIFY. A host of third-party verification companies have also attempted to compensate for the authorization deficiency.

Vendor selection should be based upon validation for a particular use case, but ideally the solution should authenticate the account, validate the user is associated with the account, and provide a risk score that the validated user would be likely to engage in the specific transaction.

Unlike with credit card transactions, ACH transactions for consumers fall under Regulation E. Because Nacha rules are typically more onerous than Regulation E, as long as entities are following Nacha rules, they will typically also maintain compliance with Regulation E.

A chargeback by any other name....

Like with credit card transactions, unauthorized returns must be kept in check, but the levels are different for ACH transactions. Though there are two ways for calculating the return reason codes ratio, in both cases, the ratio is calculated over a 60 day period, rather than 30 as is done with credit cards.

Unauthorized returns must be maintained below 0.5 percent for the following return reason codes:

  • R05 – Unauthorized debit to consumer account using corporate SEC code
  • R07 – Authorization revoked by customer
  • R10 – Customer advises not authorized
  • R29 – Corporate customer advises not authorized
  • R51 – Item Related to RCK (re-presentation check entry)

Administrative returns must be maintained below 3 percent for the following return reason codes:

  • R02 – Account closed
  • R03 – No Account/unable to locate account
  • R04 – Invalid account number

The overall return rate must be maintained below 15 percent and would apply to all return reason codes.

Though, there are over 20 ACH types, the most common ACH entry codes are:

  • CCD – Commercial credit or debit entry
  • CTX – A Corporate Trade Exchange is a commercial transaction, but requires the originator to include extra remittance data and in a specific format
  • PPD – A Prearranged Payment and Deposit entry is a consumer credit or debit
  • TEL – Telephone-initiated consumer transaction with authorization given via phone
  • WEB – Internet/Mobile initiated consumer transaction authorization given electronically.

Acknowledging and understanding the differences will assist you in being able to offer merchants an optimal ACH solution and at an efficient price. end of article

As founder of Humboldt Merchant Services, co-founder of Eureka Payments, and a former executive for such payments innovators as WePay, a division of JPMorgan Chase, Ken Musante has experience in all aspects of successful ISO building. He currently provides consulting services and expert witness testimony as founder of Napa Payments and Consulting, Zwww.napapaymentsandconsulting.com. Contact him at kenm@napapaymentsandconsulting.com 707-601-7656 or www.linkedin.com/in/ken-musante-us.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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