Nacha, the electronic payments association, has notified banks that it is moving forward with a controversial proposal to require them to pay a fee for initiating automated clearing house transactions that turn out to be unauthorized.
The Herndon, Va., trade group says the network return entry fee is meant to shift the burden of processing bad payments from the receiving banks to the originating ones. However, it is clear from the size of the fee - which could be as high as $18.50 a transaction - that it is also designed to motivate banks to reduce the number of unauthorized ACH transactions.
Nacha formally issued a request for comments on the proposal Wednesday. Companies can submit comments until Nov. 30.
"This will incent the right behavior," said Leonard J. Heckwolf, the chairman of Nacha and the senior vice president and product head for ACH and retail lockbox operations at J.P. Morgan Chase & Co., the largest ACH originating bank.
He noted that while the percentage of ACH transactions rejected as unauthorized has been steadily dropping, the number of rejections has been climbing, because the overall number of transactions has been increasing. In the first quarter just 0.07% of all ACH transactions were unauthorized, down from a peak of 0.1% in early 2002. Still, there were 765,000 unauthorized ACH payments in the first quarter.
Nacha says the total will continue to increase for several years and could reach 4.65 million in 2006.
"It's a growing problem," said Norman Robinson, the president of EastPay Inc., a regional payment association in Richmond, Va. "And as we have more unauthorized transactions, there are more receiving banks that are becoming unhappy with the originators."
Unauthorized transactions typically result from fraud or because the originating bank inputs incorrect information, such as the amount or settlement date. The result is generally an unhappy customer calling the bank and a labor-intensive return process for the receiving financial institution.
The number of unauthorized payments can and should be reduced, because they "are the ones that are the most significant to the consumer," Mr. Heckwolf said.
The group has backed away from an earlier plan that would have also imposed the fee for payments rejected because of an invalid account number, because the originating bank is not always responsible for these returns.
Its board will decide by early next year whether to ask the group's full membership to formally vote on the unauthorized-transaction fee proposal. Such a vote could come as early as January, and the fee could go into effect in June, Mr. Heckwolf said.
John C. Kline, Nacha's vice chairman, said that despite its size, the fee is not meant to be punitive. A Nacha study conducted this year found that receiving banks typically spend between $12 and $17 to process a single unauthorized ACH payment. In addition, Nacha estimates that its own risk management efforts add up to $1 to $1.50 of overhead costs for each unauthorized payment.
The proposed fee of $13 to $18.50 a transaction is designed to cover these expenses.
Charles Bretz, the senior vice president for electronic commerce at Compass Bancshares Inc., a $27 billion regional banking company based in Birmingham, Ala., said there are no rules that require the originating bank to assume any of this financial burden.
"One of the goals here is to provide a cost reimbursement for the receiving banks for the work they have to do on unauthorized return items," he said.
And with Nacha expecting 3.27 million unauthorized transactions this year, that burden could cost the banking industry more than $58 million, said Mr. Bretz. "That's getting to be a significant number, and it's something that needs to be dealt with."
Reaction to the proposal so far has been mixed, he said. The receiving banks have been surprised to learn the overall costs are so large, and pleased that they might no longer have to foot the bill.
Mr. Kline, who is also the chief operating officer of Union Savings Bank in Danbury, Conn., said the plan is likely to be especially well received by smaller receiving banks, where the costs of handling unauthorized payments can have a disproportionately large effect on overall operations.
Many small banks and credit unions have historically felt that Nacha did not represent their interests, because they do not originate a high volume of ACH payments, he said. The proposal "sends a great signal to the receivers, especially the community bank receivers, that Nacha is not originator-focused."
However, Mr. Bretz said some of the originating banks will probably be less receptive. "I think there are always people that want to sustain an entitlement, but these entitlements are not sustainable."
Mr. Heckwolf, whose ACH origination operations at JPMorgan Chase could generate significant return entry fees, said he was happy to take on some of the expense, because the long-term result could be fewer returns.
Originating banks can limit their own expenses - and returns - by paying more attention to the ACH files they transmit, Mr. Heckwolf said.
Better know-your-customer initiatives could reduce fraud, and various software applications can be used to make sure the files that banks receive from their customers are formatted correctly before they are transmitted across the ACH network, he said. "There are a lot of tools that originators can use to get this right."
In contrast, there is nothing a receiving bank can do to reduce the number of unauthorized payments it receives, Mr. Heckwolf said. "There is a cost involved," and transferring it to the originators is "the right thing to do."
He also pointed out that many of the big ACH originators are also big receivers, though the two operations are generally housed in different business lines. As a result, the fee may produce a gain for the receiving operation, but it may also reduce income for the originating business, he said.
Still, Mr. Heckwolf conceded that JPMorgan Chase likely has more resources than others to throw at the problem, and that his unauthorized ACH transactions rates are probably much smaller than average. The proposal is "not going to have as big an impact on high-quality originators as it will on the smaller banks," he said.
Mr. Robinson agreed that imposing a fee for unauthorized transactions could prompt banks to rethink their processes to reduce the number of bad transactions. And even though some small banks are concerned about the costs of improving their ACH procedures, many of them also know doing so would bring significant benefits, he said.
"A lot of originators see this is a way to improve the quality of the ACH network," he said.
