August 2, 2014
Dear NACHA Voting Member:
I am writing on behalf of the Third Party Payment Processors Association (TPPPA), and as a long-‐time member of the NACHA family, to respectfully request that you vote against NACHA Ballot 1-‐14.
I have proudly participated in the extensive growth of the ACH Network over the last 20 years, but I am concerned that politics, as opposed to substantive considerations of the membership, are driving the adoption of this ballot, and that this could not only have detrimental effects on the ACH Network, but that the precedent that it establishes could have harmful effects in the future, as well. Reacting to shifts in political perspectives by changing the rules of the ACH Network sets a poor precedent. The Network will find itself in continual reaction to political considerations rather than spending its efforts and resources on moving the network forward to meet the needs of its members and demands of the future.
The Right of Return is the basis for the efficient, straight-‐through processing of payments. Check payments have worked in this manner for decades. ACH payments are based upon this same principle. The ACH Rules expressly address this in Article Three, Section 3.1.1 RDFI Must Accept Entries, which states “ An RDFI must accept Entries that comply with these Rules and are received with respect to an account maintained with that RDFI subject to its right to return Entries under these Rules.” Additionally, the ACH Network has built into its rules the protections afforded consumers through Regulation E. This utilizes the right of return and expands return timeframes to provide consumers an extended period to return payments they did not authorize, or for which authorization had been revoked. The ACH network provides even greater protection to consumers than Regulation E through the warranties that the ODFI provides that all payments it has originated are properly authorized. (SUBSECTION 2.4.1.1 The Entry is Authorized by the Originator and Receiver). These provisions give the highest level of protection to a consumer with the greatest timeframes for return and recredit than any other payment network.
In other words, the industry, regulators and government agencies should encourage the processing of higher-‐risk payments through the ACH network where it can be efficiently monitored, efficiently returned and provide consumers with the greatest level of protection. However, as proposed, this ballot will merely migrate high-‐risk originators to checks, which are more costly for paying banks/RDFIs to process, particularly related to returns and exceptions, and provide consumers with lesser protections. This does not serve the consumers and it does not serve NACHA’s own members.
In addition, NACHA’s proposal is based on a belief that the reputation of the ACH Network is being damaged by allowing high-‐risk originators to utilize the network. This is not true. Comments by a politically polarized and misinformed press that clearly do not understand payments in general, and the ACH Network specifically, should not be considered the basis for reputation risk. Government agencies aligned with a political agenda targeting specific industries should also not be considered the basis for reputation risk. The ACH Network has had an excellent reputation for securely and efficiently processing payments for companies of various risk profiles for decades, and the notion that there is suddenly an issue related to the reputation of the network and RDFIs is misguided. We cannot allow the press or regulators to create reputation risk based upon their current agenda and then use it against the ACH Network, its members and participants. The strength and beauty of the ACH Network is the longstanding structure where the membership determines the direction of the network based upon its needs and makeup. True reputation risk would be created by a network that lacked the courage, leadership and standards to address and defend the strength of its design.
The genesis of this proposal appears to arisen from a list of industries that the FDIC considered to be “high risk” that it unofficially announced in 2011 Summer Supervisory Insights. NACHA adopted and referred to the same list in their justification of the proposal to impose an overall return rate threshold. They state “Among its many other uses, the ACH Network is used by some high-‐risk originators, such as payday lenders, credit repair services, sweepstakes, travel clubs, and online and telemarketers, which “occasionally” (emphasis added) results in episodes of high rates of customer disputes, returned transactions …”
However, the FDIC has disclaimed this list in its recent guidance related to Clarifying Supervisory Approach to Institutions Establishing Relationships with Third Party Payment Processing FIL-‐41-‐2014, dated July 28, 2014, and other agencies that have made reference to this list are also revising their stance related to targeting these industries based upon this list. NACHA should do the same. Second, instead of NACHA targeting whole industries
that have “occasional episodes” of high rates of customer disputes, NACHA should focus on weeding out wrongdoers. This approach has been adopted by all of the bank regulators and the Department of Justice, and should be followed by NACHA.
Specifically, during recent congressional hearings, the Department of Justice, and the bank regulators all testified that they were not targeting particular industries, but rather those organizations that were knowingly and intentionally harming consumers. NACHA’s rule change directly targets entire industries, rather than focusing on methods by which irresponsible originators can be distinguished from those that are behaving in a responsible manner, but may be dealing with high-‐risk consumers that are more likely to have insufficient funds. Comparing industries with high returns related to insufficient funds against the return rate of the entire network that has large numbers of recurring payments that are unlikely to be returned, government payments and business-‐to-‐business payments, which are also unlikely to be returned should not be considered a reasonable basis for discriminating against certain industries.
In NACHA’s justification of theses proposed rules, they quote regulatory agencies like the CFPB and the FTC, and suggest that pushing certain high-‐risk industries out of the ACH Network is a service to consumers. This is not necessarily the case. Return rates for high-‐ risk origination often tends to be higher primarily due to insufficient funds. NACHA, the Department of Justice and many regulatory agencies have lately referenced return rates as high as 30-‐50%. Even with these high return rates, this means that 50-‐70% process without exception. When you factor in the fact that the larger percent of returns are likely to be returned for insufficient funds due to consumer mishandling of their bank account, and not for lack of authorization, there is a clear indication that the vast majority of these consumers are choosing these so called high-‐risk products and services. It is not NACHA’s role or right to eliminate consumer choices by blocking industries from the ACH Network.
Fraudulent payments can happen in any industry. Recognizing that payments returned as unauthorized is the best indicator of fraudulent originator behavior, NACHA took steps to reduce originator fraud by placing a threshold on unauthorized returns. This was consistent with chargeback thresholds implemented by the card networks. While NACHA does not provide an opportunity for originators to dispute these returns when they do have a valid authorization, the process does tend to be workable. Even the proposal to further reduce this threshold to .5% is not problematic, other than there is still not a dispute process afforded to originators with legitimate authorizations.
Given that unauthorized returns are capped at 1% today, the majority of the higher rates of return are related to insufficient funds. These payments are returned immediately with little impact to consumers, other than potential NSF fees. If the consumer did not authorize these payments, the RDFI is required to refund these fees. There are some originators that either through ignorance of the rules or through outright disregard, do reinitiate payments more times than allowable, or split payments in an attempt to increase their opportunity for collection of some part of the payment that may otherwise be returned as insufficient funds. Partial payments may be returned as unauthorized today and consumers are afforded the longer timeframes. NACHA’s proposed clarification of the Reinitiation Rule, along with the opportunity to return payments improperly reinitiated as unauthorized, provides consumers recourse for these inappropriate payments with the built in penalty to the originator through the increased unauthorized return rate. This is exactly the kind of solution that the network should provide to deter and eliminate irresponsible originators from the ACH Network. It provides greater right to return and allows payments that may be higher risk, but still initiated by consumers, to be processed. Further it distinguishes inappropriate originator behavior from the irresponsible consumer behavior related to insufficient funds.
ODFI’s and third-‐party senders should understand the baseline of the industries and the specific originators they process for, and then monitor for anomalies. If the ODFI is inclined to process payments for legal higher risk originators, this is the decision of the financial institution, and not of NACHA, nor government and regulatory agencies, as acknowledged by the bank regulators and the Department of Justice during congressional hearings in mid-‐July. The ODFI is of course required to be responsible in their managing of these relationships, as the FDIC has indicated in recent guidance, and should be held to these responsibilities on a case-‐by-‐case basis. NACHA and these agencies should be addressing specific banks that fail to have proper controls in place, and not impose rules that inhibit or discourage all ODFIs from engaging in specific industries. Although NACHA has relaxed their stance on return thresholds by providing for opportunities for further information to be provided by the ODFI prior to enforcement actions, the additional scrutiny and efforts are highly likely to discourage banks from continuing to engage these originators with higher return rates. It is not NACHA’s role to interfere in the business decisions of its members.
Let’s get back to basics. Through extending the right to return and expanding the return timeframes for payments that are not properly reinitiated, and focusing on the behavior and responsibilities of specific organizations rather than targeting entire industries, we can restore order to the payment system and provide consumers with expanded levels of protection while allowing them their choices. We also preserve the design of the ACH Network as a member-‐driven organization, rather than an unwitting target or tool of political campaigns.
We hope you will consider these points in your decision and vote against ballot 1-‐14.
Thank you for your consideration of this request. Please feel free to contact me with questions.
Sincerely,
Marsha Jones, AAP, NCP
President
Third Party Payments Processors Association (TPPPA) (602) 402-‐0416 – Cell 20 F Street NW, 7th Floor Washington, DC 20001 [email protected]