Nacha expects to introduce a sweeping set of proposed rule changes this year that it says are aimed at curbing fraud on the automated clearing house network.
The new formats the electronic payments association has introduced in recent years were designed to make the ACH system more accessible to consumers and drive up volume, but they also have made it easier for criminals to exploit the system. Though fraud has risen, executives say that it has not yet reached a crisis point, and that the proposal is aimed at heading off the problem before it does.
Elliott C. McEntee, the Herndon, Va., trade group's president and chief executive, called the proposal "the most comprehensive thing we've done in risk management, probably, in the history of Nacha."
One of the proposal's key elements will be a fee for banks that originate unauthorized ACH payments - a fee that Nacha members rejected two years ago. The idea behind the "return network entry fee" then was to compensate receiving banks for the time and effort spent reviewing and reversing payments that other banks created and sent.
A majority of Nacha members supported the controversial proposal, but it did not get the two-thirds vote needed to pass.
Mr. McEntee said some members voted against the fee because they wanted it to be incorporated into a more comprehensive antifraud program. "They wanted us to more clearly identify what steps would be taken from a risk management perspective and how that fee would fit in," and Nacha is working on that now.
Leonard J. Heckwolf, the product executive in Bank of America Corp.'s payments and receipts unit, called the upcoming proposal "a stewardship issue" for the industry. Under the current rules, receiving banks must bear the costs of reviewing and correcting ACH payments that their customers say were not authorized; none of the costs may be passed on to the originating bank. Mr. Heckwolf called the setup a "structural flaw in the ACH network."
As long as transactions were confined to regular payments between known parties - such as direct deposit of wages into employees' accounts, or online bill payments - the error rates were low, and once a mistake is fixed, it generally stayed fixed.
However, some of the newer formats, which let consumers use the ACH network to make spontaneous, one-time payments, have increased risk. Mr. Heckwolf said the WEB and TEL formats, which let people initiate payments over the phone or online simply by providing a bank account number and a bank routing number, are particularly vulnerable to misuse, which has increased the number of unauthorized transactions that B of A must correct.
"This is very disruptive," he said. "I think the industry has got to solve this problem."
Mr. Heckwolf was the chairman of Nacha when the return entry fee was rejected, and he expressed some frustration with that outcome.
"We didn't do a good job of communicating the benefit to the receivers," he said.
However, Nacha says the upcoming proposal will give the industry the chance to evaluate both the fee and the broader issues that have led to increased ACH fraud risk.
Last year B of A was the top ACH recipient and the No. 2 originator. The number of payments it received rose 18.4% from a year earlier, to 972.6 million, and the number it sent rose 19.8%, to 879.1 million.
JPMorgan Chase & Co. was the top ACH originator by far last year, when the number of payments it sent rose 17.7%, to 2.7 billion. Mr. Heckwolf left JPMorgan Chase in March to join B of A.
Mr. McEntee said an advisory group has been studying risk management for 15 months and looking for ways to establish "economic incentives for people to change their behavior when that behavior creates higher costs for ACH network participants."
Much of the advisory group's work is based on a study released in May of last year by Two Sparrows Consulting LLC of Montvale, N.J.
Paul Tomasofsky, the president of Two Sparrows, said the ACH industry must address three risk factors: new participants in the network, ongoing requirements such as audits, and enforcement, including fines and fees.
For instance, an originating depository financial institution might need to review new third-party originators using the same kind of underwriting that banks now apply to borrowers, Mr. Tomasofsky said. Since the institution essentially is extending an unsecured line of credit to such clients, "should we look at this as if it's a loan?"
The network also needs a registration process to identify originators, including annual audits and a centralized database of third-party originators that are terminated for cause, "so that innocent ODFI's won't sign them up unknowingly," he said.
Ultimately, the proposal is about apportioning costs in accordance with the risks and benefits, Mr. Tomasofsky said. "Are the players in the system paying for what they get? Even if there's not a monetary loss, there's a fairness factor."
Craig T. Vaream, a vice president at JPMorgan Chase and the ACH product executive in its treasury services group, said the industry should reexamine its fee structure and risk management as ACH volume increases.
"We've gone far beyond our greatest dreams" by enabling new types of payments, but as the WEB and TEL formats become more popular, "we're trying to stay a step ahead of anybody who is trying to perpetrate fraud," Mr. Vaream said.
Even though JPMorgan Chase is the largest ACH originator, it is not concerned about fees it might be assessed because of unauthorized transactions, he said. "Those would be pass-through fees. We would pass those through to the originator."
David C. Robertson, a partner at the Chicago financial consulting firm Treasury Strategies Inc., agreed that the industry must find the appropriate balance between those who earn the fees and those who bear the expenses.
"The more aggressively Nacha creates new payment types, it's going to grow the system, but it's going to increase the stress," Mr. Robertson said.
With costs as low as a tenth of a penny per transaction, the ACH network is the best way to deliver high-volume, low-value payments without manual intervention, but a customer dispute - with the associated visits to the branch, complaints to the call center, investigations, and adjustments - can run up the expense quickly, he said. Even though the percentage of unauthorized transactions has not increased, the absolute number of them has grown along with ACH use itself.
Mr. McEntee said the proposed fee would not bear the same name as the one proposed in 2004. The new proposal will include guidance on how the industry should provide access to clients that originate transactions, as well as on monitoring network participants, he said.
"Now we're in the process of developing the detailed action plans that would go into place that will allow the strategy to be implemented," he said.
