Overview
The National Automated Clearing House Association (NACHA) sets the rules and standards that govern ACH (Automated Clearing House) payments in the U.S. All businesses using ACH must comply with these rules to ensure secure, authorized transactions and avoid potential penalties or disruptions.
This article outlines what you need to know to stay compliant with NACHA regulations, including obtaining proper authorization, managing return rates, and securely handling customer data.
What Is NACHA?
NACHA is the governing body that oversees the ACH Network. It enforces rules and standards to:
- Promote secure electronic payments
- Prevent fraud and abuse
- Ensure timely processing of ACH transactions
Any business that initiates ACH transactions must adhere to NACHA rules.
Key Compliance Requirements
To remain in good standing, merchants must follow these core NACHA guidelines:
1. Use an Approved ACH Processor
Work with a payment processor that complies with NACHA standards.
2. Obtain Proper Authorization
Before processing any ACH transaction, you must obtain customer authorization based on how the transaction was initiated. Acceptable methods include:
- Written Authorization – Signed paper or digital agreement.
- Verbal Authorization – For phone payments (must be recorded or documented).
- Online Authorization – Through a website or app, with clear acceptance.
Note: Merchants must keep Proof of Authorization (POA) for at least two years.
3. Use the Correct SEC Code
Standard Entry Class (SEC) Codes indicate how authorization was obtained. Using the wrong SEC code can lead to compliance issues or rejected transactions. See the next article on SEC Codes for more information.
4. Protect Customer Data
Ensure sensitive bank information is encrypted and securely stored.
5. Monitor Return Rates
High return rates can trigger fines, audits, or suspension of ACH processing privileges. Actively track returns and take corrective action.
Common Non-Compliance Issues
- Using incorrect or default SEC codes without merchant-specific review
- Failing to maintain customer authorization records
- Submitting unauthorized or disputed transactions
- Excessive return rates, especially for R05, R07, R10, or R29
Tip: If you're ever unsure about a specific rule, reach out to your ACH processor or Merchant Service Provider.
Merchant Impacts
Non-compliance with NACHA regulations can lead to:
- Financial penalties
- Termination of ACH processing
- Mandatory audits and remediation
- Delayed or rejected payments
Following compliance best practices helps protect your business and ensures smooth transaction processing.
Common Questions
What is a Standard Entry Class (SEC) Code?
An SEC code identifies how an ACH transaction was authorized (e.g., written, phone, online). Each transaction must be labeled with the correct SEC code.
Do I need written proof for every transaction?
Yes. Regardless of the authorization method, you must retain documentation or proof that the customer approved the transaction.
What happens if my return rate is too high?
Your ACH privileges could be suspended or terminated, and you may be fined. Monitoring and reducing returns is essential.
Need Help?
If you’re unsure about your compliance status or need guidance on best practices, please contact your Merchant Service Provider.