A Proposed ACH Fee for Unauthorized Debits Stirs Debate

A new proposal that would require banks that originate unauthorized automated clearing house transactions to pay fees to receiving banks went out to ACH members for comment this week, but not without controversy. “This is by far the most polarizing topic the ACH industry has seen in a long time,” says Amy L. Smith, president and chief executive of The Payments Authority, a Troy, Mich.-based regional ACH. “A lot of people are for this, a lot are against it.” Smith says she is neutral on the matter for now, while she awaits the sentiments of all 460 member financial institutions in her region, which includes all of Michigan except the Upper Peninsula. The new proposal would require banks that originate ACH debits for client retailers and other businesses to compensate consumers' banks?the so-called receiving banks?each time they send through a transaction that must be returned because the consumer didn't authorize it. The charges, officially known as network return entry fees, would be triggered automatically and would be tied to actual costs incurred by receiving banks in handling returns and in customer service. A recent study by the Herndon, Va.-based National Automated Clearing House Association indicates receiving banks incur costs ranging, on average, from $12 to $17 per return. NACHA, which sets ACH rules and has requested comment on this latest proposal, projects that unauthorized debits this year will total 3.27 million, resulting in costs to receivers of anywhere from $39 million to $55 million. NACHA estimates this cost could grow to $55 million to $79 million by 2006 as returns increase to 4.65 million at the current rate of growth. Because ACH volume is growing, unauthorized debits as a percentage of total volume are declining, but the sheer volume of such returns is increasing. NACHA says the volume of unauthorized debits has increased 68.5% over the past three years, though such returns as a percentage of volume has dwindled to 0.07%. In addition to compensating receiving banks, the new fees are intended to provide originating banks with an added incentive to make sure debits are authorized according to ACH rules. Under NACHA rules, originating banks must issue a legally binding warranty that all payments are authorized. The fees would apply, for example, in cases where returns are triggered by transactions entered in the wrong amount, settled on the wrong date, originated after a consumer has revoked an ACH debit authorization, or entered as a result of fraud. The fee would not apply to items returned because of invalid account numbers. NACHA says that, if the proposal is adopted, the actual fees would be determined by a panel of “ACH industry participants.” But a spokesman adds they would be linked to actual costs incurred by receivers. Smith of The Payments Authority says that the proposal stirs controversy because it introduces a new cost for originating banks at a time when the ACH is enjoying increasing volumes and is attracting favorable attention from merchants weary of the rising cost of credit and debit card acceptance. She adds the fact that the fees would be automatic also troubles some institutions. While all banks are receivers, some originate large volumes of transactions and would presumably shoulder the largest share of the new fees. An earlier proposal, which would assess fines on originating banks whose unauthorized returns exceeded 1% of total volume across all standard entry codes for any particular client, is also under consideration (Digital Transactions News, June 29). That proposal, which addresses the same issue but requires investigation before penalties can be assessed, went out for comment this summer but has not yet gone to ballot. Smith says some critics of the new fee proposal point to this earlier proposal, as well as the declining rate of returns, in support of their opposition. “A lot of people are asking, 'Why now?” she says, in reference to the proposal for fees on unauthorized debits. Comments on the proposal for a network return entry fee are due Nov. 30.