NACHA’s New Account Validation Rule

On March 19, 2021, National Automated Clearing House Association (NACHA) will be issuing a new rule for ACH payment processing. The rule will require merchants and billers that use WEB Debits (any ACH debit payment that takes place online) to validate the consumer’s account information before accepting the first payment made.

Angela Nielsen, product manager for payment strategy at Nelnet Campus Commerce, hosted a webinar covering the ins and outs of NACHA’s new rule change. Since she’s been an accredited ACH professional for six years, it’s a topic she knows a lot about.

The new NACHA rule seeks to accomplish two primary goals:

1. To protect the integrity of transactions flowing through the ACH system
2. To protect receiving banks (RDFIs) from posting fraudulent, incorrect, or unauthorized payments

With the rise of ACH and other non-cash payments (which has only increased more due to COVID-19), NACHA is ultimately hoping that the new rule tightens online activity up by adding another layer of verification. Since the entity being paid is the entry point to receive the account number, they are in the best position to prevent fraud. This means wherever the account number is accepted for payment online is where this validation must occur.

For a while, account validation has been presented as one way that organizations can detect fraud. The rule change simply makes account validation a requirement, rather than a suggestion. Specifically, the rule says that:

“Such a fraudulent detection system must, at a minimum, validate the account to be debited for the first use of such an account number, and for any subsequent changes to the account number.”

At its core, an account validation system needs to validate that the account is open and will accept ACH entries. It doesn’t need to verify that funds are available in the account, or validate account ownership (unless that information is deemed commercially reasonable for the market you’re in).

The rule change doesn’t mandate that every payment needs to be validated. Only that the account be validated before the first payment on an account, or when a consumer changes payment accounts to one that isn’t known. Plus, if you’ve already validated or have known an account before March 19, you won’t need to validate them again (unless they change their payment account).

Interestingly enough, while NACHA takes a hard stance on whether your institution needs to validate accounts, they don’t have a stance on the method of validation you use. That was an intentional move on their end – their goal was simply to leave the door open for new technologies and give you the flexibility to find a system that works for you.

So, which are the most common online validation methods?

Using prenotes creates a non-dollar line item that notifies the bank that a payment will be processed in the future. Since these prenotes are stored in the ACH file, it’s ubiquitous, and can touch any account that an ACH payment can.

However, because there are extra layers associated with this method, it’s a little slower. You won’t be able to process a payment until three days after sending the initial note. This extra time makes it create for bills like utilities or insurance premiums – but if you need to make immediate or fast payments, this isn’t the best route to go.

Micro deposits are simply very small dollar amounts (often only a few cents) that are sent through the ACH network to verify that the account can send and receive ACH payments. Like prenotes, micro deposits live in the ACH file.

And, also like prenotes, they’re a little on the slower side. Plus, the customer needs to take some sort of action to verify that the appropriate amount of funds went through before you can process any payments. It’s an effective approach, but time may be a concern for many institutions.

Your institution can also partner with companies that sit outside of the ACH network to validate account information. Since this method doesn’t live on an ACH file, you may lose the ubiquity that comes with prenotes or micro deposits. (Although, NACHA has said that if an API request to verify an account comes back uncertain, it’s a no-hit response, and you’re cleared to process payments.

The big benefit here is immediacy. You’ll be able to validate and process payments in real-time, so student and other payments aren’t delayed. This tends to be a little more expensive than the other methods – but for many institutions, the real-time nature of it may be worth it.

We’re partnering with Giact, a preferred validation partner of NACHA, to ensure that our partners are compliant with NACHA’s new rule. Giact provides real-time validation at the time a bank account is provided for payment. This allows Nelnet to process payments for you immediately without introducing friction into the Nelnet payment experience. For partners using our Enterprise payment platform, you won’t need to take any action. Those who use the QuikPay version will simply need to prepare for an update in March 2021.

Rest assured that no matter which product or version of our solutions you’re using, we’re dedicated to making sure that you’re compliant and prepared to offer secure, efficient payment processing.

Want to learn more about the new NACHA Validation Rule? Watch on-demand a here.