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Letters to Regulators

NACHA Operating Rules regarding Internet-Initiated Debit Entries

August 30, 2004

NACHA - The Electronic Payments Association
Attn: Maribel Bondoc, Network Services Associate
13665 Dulles Technology Drive
Suite 300
Herndon, Virginia 20171

RE: Rules Work Group #32- Internet Issues-Request for Comment

Dear Ms. Bondoc:

The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to comment on NACHA's proposed amendments to its NACHA Operating Rules designed to bolster ACH network integrity and risk management by imposing additional authentication requirements for Internet-initiated (WEB) debit entries.


Two challenges face NACHA and the ACH network: (1) improving network quality and decreasing the volume of returns and notifications of change, and (2) developing methods to effectively manage risk in response to rapid network growth.

WEB transactions position the ACH network in a new, virtual marketplace that enables companies and their customers to transact business and execute payments electronically. The ACH network, while a proven, efficient means of sending and receiving payments, primarily has been used for recurring debit and credit transactions. The WEB entry places the ACH network in a new role, as a point of sale network, transmitting one-time debits, and imposing additional quality issues. For example, nearly 450,000 WEB entries were returned as unauthorized in 2003.


To address the issues referenced above, Rules Work Group #32 - Internet Issues, is proposing an amendment that would modify the NACHA Operating Rules by creating an Originating Depository Financial Institution (ODFI) warranty and an Originator obligation to use commercially reasonable methods of authentication to verify the identity of the Receiver. Currently, these procedures are implied under the requirement to employ fraud detection systems.

Additionally, this amendment would impose data security requirements for ACH entries involving banking information transmitted or exchanged via an unsecured electronic network (e.g. the Internet) on Third-Party Service Providers.

The proposed amendment would become effective on December 10, 2004 upon approval by the NACHA Board of Directors.

ICBA Comments

The ICBA supports this proposed amendment as a means to clarify and strengthen the existing Rules regarding ODFI and Originator responsibilities for WEB transactions. However, an additional warranty alone will not improve the overall integrity of WEB entries, nor will it control the associated risks of WEB transactions. Overall network integrity will not change until ODFIs are economically dissuaded from transmitting unauthorized transactions on an item-by-item basis.

ICBA urges NACHA to remain mindful that the greater issue, from a RDFI perspective is the burden associated with warranty breaches. Currently, a warranty breach resulting in an unauthorized transaction requires RDFIs to field the customer inquiry, obtain and store the affidavit, research the transaction, return the transaction and credit the customer's account, follow-up to ensure that the bank receives credit for the transaction, and to field any ODFI inquiries. This laborious process penalizes the RDFI for the Originator's breach of warranty. To address this inequity, the ICBA strongly supports the concept of a network return entry fee and awaits the recommendations of Rules Work Group #35, Enforcement Issues regarding implementation of such a fee.

Thank you for the opportunity to comment. For questions regarding our position on this issue, please contact me at (202) 659-8111 or by email at cary.whaley@icba.org.


Cary Whaley
Associate Director, Payments Policy

1 ICBA represents the largest constituency of community banks in the nation and is dedicated exclusively to protecting the interests of the community banking industry. We aggregate the power of our members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace.

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