Bank lobbying groups are at odds with the industry body that governs the nation’s automated clearing house (ACH) network over its proposal to shorten the timeframe for a variety of ACH returns by 9.5 hours. Nacha believes its proposed change would both increase efficiencies on the ACH network and provide financial institutions with better liquidity. But organizations representing banks, credit unions and even the largest ACH provider in the country argue that shortening those timeframes would place substantial burdens on financial institutions.
Nacha in May released a request for comment on a proposal that would shorten the ACH return timeframe for certain administrative return reason codes. Nacha provides financial institutions with more than 80 codes they can use to identify the exact reason they are returning an ACH transaction to the originating financial institution. Code R01 identifies insufficient funds; R13 denotes an invalid ACH routing number and so on. Nacha is proposing to shorten the timeframe for eight of those return reason codes, which it says are typically processed with no human review but “account for approximately 35% of ACH return volume.” They are:
- R02 – Account closed.
- R03 – No account/unable to locate account.
- R04 – Invalid account number structure.
- R08 – Stop payment.
- R12 – Account sold to another depository financial institution.
- R16 – Account frozen.
- R20 – Non-transaction account.
- R24 – Duplicate entry.
Nacha claims that shortening the timeframe for those returns will create more efficiencies for the ACH network and benefit financial institutions by boosting their liquidity. “For example, a [receiving institution] can get settlement for a debit return on the first banking day after the settlement of the original entry, rather than the second,” Nacha wrote. “Faster returns, therefore, bestow an ACH network-wide benefit.”
Not All Returns Are Automated
Banking groups contend that Nacha is incorrect to assume most financial institutions currently handle those returns automatically.
Kari Neckel, vice president of payments policy for the Independent Community Bankers of America (ICBA), says that is certainly not the case. “For many community banks, ACH returns are not fully automated, nor should they be,” she says. “Staff often manually review transactions before initiating a return to see if they can post the transaction. The diligence community banks apply to ACH returns is fundamentally a customer service function.”
DJ Seeterlin, chief innovation and strategy officer at $1.7 billion Chesapeake Bank, based in Kilmarnock, Virginia, says his institution still processes R02 (account closed) returns manually. “The customer will tell us in advance, ‘I’ve got these expected transactions coming in. I know I have to close my account for fraud, but these are legitimate.’ So we’re looking out for those customers,” he says. “If we automated all the returns, it actually becomes detrimental.”
The Clearing House Payments Co., which operates the Electronic Payments Network, the largest private-sector ACH system in the country, wrote in its June 26 comment letter to Nacha that financial institutions of all types operate that way. “For example, returns for entries originated to frozen accounts often require manual review and decision making, and therefore are not suited for an accelerated processing timeframe,” the group stated.
A Problem of Functionality
The industry groups also point out that even if financial institutions wanted to automate those returns, they aren’t necessarily being provided with that functionality by their cores or the other third-party systems they are using to process them.
Caitlyn Mullins-Smith, vice president and director of Neach Payments Group, often provides consultation to financial institutions on ACH return issues, and points to return reason code R08 (stop payment) as a prime example of that.
“Technically, with the Nacha rules, you could have a stop payment on indefinitely,” Mullins-Smith says. But she adds that some cores require stop payments to have an end date, and if that end date expires, debits on an account that were once revoked by the system could start up again. Because of that, they must be manually reviewed.
Working with core providers to automate those return processes can be expensive and time-consuming — something Stephen Kenneally, senior vice president of payments for the American Bankers Association, affirmed in his June 26 comment letter to Nacha. “Accelerating these time frames would require substantial systems reengineering, enhanced exception processing, vendor coordination and changes to staffing models,” he wrote. “These costs are immediate and unavoidable, particularly for institutions relying on third-party service providers.”
Nacha’s proposed effective date for the shortened timeframe on return reason codes is September 15, 2028. The deadline to comment on the proposal has passed. The organization did not respond to FinXTech’s questions for this article, but a spokesperson provided a statement, which reads in part: “As part of Nacha’s established rulemaking process, the Rules & Operations Committee is now reviewing stakeholder feedback and evaluating next steps.”
More Return Times In Question
Banking groups are also wary of a request for information Nacha put out at the same time in May that sought industry feedback on shortening the timeframe for dishonored ACH returns as well as contested or corrected dishonored returns.
Mullins-Smith says those types of returns are often much more complex. When a bank or credit union returns an ACH transaction to the financial institution that originated it, the originating institution is allowed to dishonor that return. “If they dishonored the return entry, it was probably because [the receiving institution] used a wrong return reason code of some sort,” Mullins-Smith says. “So, if you used a return reason code that’s only for consumer entries and it was a corporate entry, they’re probably going to reject that and you could correct that return for the correct entry.”
But if the receiving institution feels there are no corrections required on its behalf, it can double down on its original return. “The [receiving institution] has the ability to say, ‘Nope, we are contesting your dishonor. We are returning this entry to you,’” Mullins-Smith says. She adds that manual reviews are even more likely to happen on dishonored returns and corrected or contested dishonored returns.
Andrew Morris, director of innovation and technology at America’s Credit Unions, wrote in a June 26 comment letter that if Nacha were to propose a rule to shorten the timeframe for those returns, it would be very burdensome for credit unions. “While the exact balance of automation depends significantly on a credit union’s size and the experience of personnel handling ACH processes, there is limited evidence to suggest that credit unions possess excess bandwidth to contest or correct dishonored entries faster than the current two banking day timeframe,” he wrote.
While industry groups have expressed their opposition to Nacha’s proposals and ideas for shortening ACH return timeframes, banks and credit unions might want to use this as an opportunity to review their systems and strategies, says Bridget Hall, leader of real-time payments in the Americas for the global payments company ACI Worldwide.
She says Nacha’s actions are a clear indicator that payment rails are only going to become more efficient, and the financial institutions that can adapt quickly are more likely to thrive. “If they do that now, it will set them up well in the future, rather than . . . finding out years down the road that their bank’s competitors have been doing this for years already, and they’re already too far ahead,” Hall says.
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