ETA Expert Insights: Key Considerations for PayFacs in ACH Transactions

The ETA Industry Affairs Payment Facilitator Committee discussed Third Party Roles in ACH and their applicability to Payment Facilitation with guest speaker Nicole Meisner, partner at Taft Law.

Key takeaways for PayFacs to consider:

The Nacha Operating Rules (“Nacha Rules”) recognize the roles of third parties in facilitating ACH transactions, including Third Party Service Providers and Third Party Senders. All Third Party Senders are Third Party Service Providers but not all Third Party Service Providers are Third Party Senders. Generally, Third Party Service Providers are entities that perform any function on behalf of an Originator, ODFI or RDFI with respect to the processing of ACH entries. This includes mere creation of the ACH files. Third Party Senders, however, are Third Party Service Providers that serve as an intermediary on behalf of an Originator in transmitting ACH entries between that Originator and the Third Party Sender’s ODFI when there is not an Origination Agreement between the Originator and the ODF.

It’s imperative for payment facilitators to understand their role/classification under the Nacha Rules with respect to the ACH transactions that they facilitate.  This includes ACH transactions that are utilized to move back-end settlement funds to a sub-merchant’s operating account. If a payment facilitator is designated as a Third-Party Sender under its agreement with its bank partner, it is subject to additional obligations under the Nacha Rules such as: registering with Nacha, conducting an annual ACH audit, and entering into an Origination Agreement with the Originators of such ACH transactions.

Beyond the requirements under the Nacha Rules, Payment Facilitators should carefully evaluate their role within the flow of funds for each segment of ACH transactions they facilitate to determine whether there are money transmission implications under state or federal law.  Further, a Third Party Sender should never be identified as the “Originator” for entries that it transmits on behalf of another party in its capacity as a Third Party Sender.

If a Payment Facilitator is designated as a Third Party Sender, it must have a compliant Origination Agreement in place with its Originators, which at minimum must include the required provisions set forth in the Nacha Rules. Among other things, such agreement must bind the Originator to the Nacha Rules and include an authorization from the Originator for the ODFI to originate entries on the Originator’s behalf.