Unlocking the Power of ACH Compliance Reviews: Requirements and Benefits for Third-Party Senders and Service Providers

5/31/2024 - By Sallie O'Brien AAP, APRP

The Automated Clearing House (ACH) system has become integral to electronic payments in today's fast-paced payment environment. With the increasing reliance on ACH transactions, both Third-Party Senders and Third-Party Service Providers play crucial roles in facilitating secure and efficient payment processing. These entities must undergo regular ACH Compliance Reviews annually to ensure compliance, mitigate risks, and maintain trust by December 31st. Let us explore the requirements and benefits of ACH Compliance Reviews for Third-Party Senders and Service Providers, along with examples of their roles in the financial ecosystem.

Understanding Third-Party Senders, Nested Third-Party Senders, and Third-Party Service Providers

Third-Party Senders act as intermediaries between businesses or organizations and the ACH network. They process ACH transactions on behalf of their clients, providing services such as payroll processing, vendor payments, and bill collections—for example, ADP, Gusto, Stripe, Square, FIS, and Fiserv. TPSs contribute to the seamless movement of funds within the ACH network, supporting businesses and individuals.

A Nested Third-Party Sender is an intermediary entity between the originator of an ACH transaction and another Third-Party Sender. The originator sends the transaction to the Nested Third-Party Sender, who then forwards it to another Third-Party Sender for further processing or distribution to the receiving financial institution. The benefit of Nested Third-Party Senders is that it allows for a more streamlined and efficient flow of ACH transactions. They can help consolidate and aggregate transactions from multiple originators before passing them on to the appropriate Third-Party Sender or receiving financial institution. This can be particularly beneficial for originators with a large volume of transactions or who prefer to outsource certain aspects of ACH transaction processing.

The term Nested Third-Party Senders can sound confusing, so let’s explain it further. An easy example of a Nested Third-Party Sender is a payment gateway, accounting software, or e-commerce platform. For example, a company called Perfect Payment Solutions provides payment processing services to businesses. Perfect Payment Solutions wants to offer ACH payment options to their clients, but they do not have the infrastructure or expertise to handle ACH transaction processing internally. Instead, they partnered with a specialized ACH processor called Smart ACH Services. In this case, Perfect Payment Solutions is the primary third-party service provider, while Smart ACH Services acts as the nested third-party sender. Perfect Payment Solutions engages Smart ACH Services to handle the technical aspects of processing ACH transactions, such as verifying bank account information, initiating transfers, and handling transaction settlement. By leveraging Smart ACH Services, Perfect Payment Solutions can offer ACH payment capabilities to their clients without the need to build and maintain their own ACH processing infrastructure. Smart ACH Services specializes in ACH transaction processing, ensuring compliance with ACH rules and regulations and providing the necessary tools and systems for secure and efficient payment processing.

A Third-Party Service Provider offers various services to support the ACH transaction process. These services include ACH origination, transaction routing, settlement, and compliance monitoring. Some examples of these entities are Finastra, Jack Henry & Associates, PaymentCloud, Dwolla, Plaid, and PayPal. Third-Party Service Providers can offer various services across various industries such as marketing, logistics, technology, and finance.

The Importance of ACH Compliance Reviews for Third-Party Senders/Nested Third-Party Senders and Third-Party Service Providers

Compliance with Industry Regulations:

Reviews ensure that Third-Party Senders and Service Providers adhere to industry regulations and guidelines set forth by organizations such as NACHA (National Automated Clearing House Association), the (OCC) Office of the Comptroller of the Currency, and (FDIC) Federal Deposit Insurance Corp, to name a few. These reviews assess whether the entities follow proper procedures, maintain accurate records, and safeguard customer data.

Risk Management and Security:

Reviews help identify vulnerabilities in the ACH transaction process and assess the effectiveness of risk management preparations. By conducting thorough risk assessments, including evaluating authentication controls, data encryption, and fraud prevention measures, Third-Party Senders and Service Providers can enhance their security position and protect against potential threats.

Operational Efficiency:

Reviews provide an opportunity to evaluate the efficiency of ACH processes, identify bottlenecks, and streamline operations. Third-Party Senders and Service Providers can optimize operations, reduce costs, and improve client experiences by evaluating transaction flows, system integrations, and reporting methods.

Enhanced Compliance:

By undergoing regular ACH Compliance Reviews, Third-Party Senders and Service Providers demonstrate their commitment to compliance, instilling trust and confidence in their clients and partners. Compliance ensures that they meet regulatory requirements, avoid penalties, and maintain their reputation in the industry.

Risk Mitigation:

Reviews enable Third-Party Senders and Service Providers to identify and address potential risks associated with ACH transactions. By executing recommended controls and best practices, they can minimize the risk of fraud, unauthorized access, and data breaches, safeguard sensitive information, and ensure they protect themselves and their clients.

Competitive Advantage:

By proactively conducting the Nacha required ACH Compliance Review, Third-Party Senders and Service Providers differentiate themselves in the market. Clients are more likely to choose partners prioritizing security, compliance, and operational efficiency. A strong audit report can be a valuable marketing tool, attracting new clients and retaining existing ones.

Business Continuity:

With ACH Compliance Reviews, Third-Party Senders and Third-Party Service Providers can assess their disaster recovery plans and proactively evaluate business continuity in the face of unexpected incidents. A review helps identify weaknesses and ensure robust backup strategies. This could minimize downtime and maintain uninterrupted client services.

Third-Party Senders, Nested Third-Party Senders, and Third-Party Service Providers are pivotal in facilitating secure and efficient payment processing in the dynamic world of ACH transactions. Those prioritizing ACH Compliance Reviews are more likely to thrive in this ecosystem. By meeting industry regulations, managing risks, enhancing operational efficiency, and safeguarding customer trust, these entities can unlock tremendous benefits, including improved compliance, reduced risks, competitive advantage, and more effective business continuity preparedness. It is time to view ACH Compliance Reviews as more than a regulatory requirement. Your review is a strategic investment in a secure and prosperous future.

Questions?

Interested in learning more about ACH compliance reviews? Reach out to a member of our Financial Institutions team.

Resources

Third-Party Sender Roles and Responsibilities | Nacha

About the Author | Sallie O'Brien, AAP, APRP

Sallie is a senior consultant in the Financial Institution Advisory Group at Saltmarsh, Cleaveland & Gund. She has over 19 years of experience working with financial institutions. Sallie specializes in risk-based Nacha compliance audits and provides ACH-consulting services to the firm’s financial institution industry clients. Prior to joining Saltmarsh, Sallie was a senior director of education at a regional consulting firm where she provided payment education and Nacha compliance programming for third-party providers.