Formal Rules Interpretation on the Proper Use of Standard Entry Class Codes for Check Conversion Entries

Posted March 13, 2007

This Operations Bulletin has been issued in accordance with Section 13.3 (Interpretative Rules) of the NACHA Operating Rules to clarify the Rules with respect to the exclusive use of the BOC and POP formats for the electronic conversion of checks accepted at the point of purchase.

SUMMARY:

NACHA has issued a revision to its Formal Rules Interpretation on the Proper Use of Standard Entry  Class  Codes  for  Check  Conversion  Entries.  In  2006,  NACHA  issued  a  formal interpretation of the NACHA Operating Rules (Rules) with respect to the proper use of SEC codes for the conversion and electronic collection of checks collected in person at the point of purchase, clarifying that the Point of Purchase (POP) application was the exclusive SEC Code available for the conversion of checks presented in this manner. Since issuing that interpretation, the Back Office Conversion (BOC) application was approved for the conversion (during back office processing) of checks presented in person at the point of purchase or manned bill payment location and will become effective on March 16, 2007. To address this amendment, the Formal Rules Interpretation on this issue has been revised to clarify that the POP entry and the BOC entry, and the POP Standard Entry Class and the BOC Standard Entry Class (“SEC”) Codes, are the exclusive entry and class codes for ACH entries based on the conversion of checks received at the point of purchase.[1]    No other SEC code may be used for this purpose.

ISSUE:

NACHA has been asked whether the practice of using a one-time PPD entry for the conversion of a check received at the point of purchase rather than processing such a transaction as a POP entry (which was specifically designed for electronic check conversion) is consistent with the Rules.  NACHA understands that under this practice a retailer receives a consumer’s check at the point of purchase and stamps the back of the check with authorization language for an electronic debit.  The consumer then signs the authorization on the back of the check.  The retailer later processes the check, captures the MICR information from the check, and originates a PPD debit entry for the amount of the check.  The retailer may also provide the consumer with a copy of the authorization language on the consumer’s receipt or on another document.

NACHA OPERATING RULES

POP Entries

A POP entry is defined as:

a Single Entry debit initiated by an Originator pursuant to a source document as set forth in subsection 3.8.1 (Source Documents), provided to the Originator by the Receiver at the point-of-purchase to effect a transfer of funds from a Consumer Account of the Receiver. This type of entry may only be used for non-recurring, in-person (i.e., at the point-of- purchase) entries for which there is no standing authorization with the Originator for the origination of ACH entries to the Receiver’s account.[2]

A POP entry is initiated by an Originator based on a written authorization and account information drawn from a check obtained from a consumer at the point of purchase.  The check, which is voided by the merchant and returned to the consumer at the point of purchase, is used to capture the consumer’s routing number, account number, and check serial number, which are used to generate the ACH debit entry to the consumer’s account.

POP entries are subject to special requirements under the Rules.  For example, authorizations for POP entries do not need to refer to an ability to revoke the entry, because revocation would not be practical for POP transactions where the customer obtains the goods or services and then leaves the point of purchase.[3]   In addition POP entries are subject to requirements as to the types of checks that can be converted to POP entries,[4] the capture of MICR information,[5] and receipts.[6] The Rules require that the POP entry contain specific information, including, but not limited to, the Receiver’s bank routing number, account number, serial number of the consumer’s source document, and location (city and state) of the electronic terminal used for the transaction.[7]

BOC Entries [8]

A BOC entry is defined as:

a Single Entry debit initiated by an Originator to an account of the Receiver pursuant to a source document, as set forth in subsection 3.8.2 (Source Documents), provided to the Originator by the Receiver at the point of purchase or at a manned bill payment location to  effect  a  transfer  of  funds  from  an  account  of  the  Receiver  through  subsequent conversion to an ACH debit entry during back office processing.  This type of entry may only be used for non-recurring, in-person (i.e., at the point of purchase) entries for which there is no standing authorization with the Originator for the origination of ACH entries to the Receiver’s account.[10]

A BOC entry is initiated based on (1) notice posted at the point of purchase or manned bill payment  location,  informing  the  Receiver  that  the  check  may  be  converted  to  an  ACH transaction during back office processing and collected electronically as an ACH debit, and (2) payment information (routing number, account number, check serial number, and dollar amount of the transaction) obtained from a check obtained from the Receiver at the point of purchase.

BOC entries are subject to special requirements under the Rules related to the types of checks that can be converted[11], notice and the provision of a copy of such notice language to the Receiver[12], the capture of MICR information[13], verification of the identities of both Originator/Third-Party Sender and Receiver[14], documentation on Originators[15], maintenance of a customer  service  telephone  number[16,]  and  source  document  copy,  presentation,  and  secure storage requirements[17.]   The Rules require that the BOC entry contain specific information, including, but not limited to, the Receiver’s bank routing number, account number, source document check serial number, and dollar amount of the check.

PPD Entries

A PPD Entry is defined as

a credit or debit entry (other than an MTE or POS entry) initiated by an organization pursuant to a standing or a single entry authorization from a Receiver to effect a transfer of funds to or from a Consumer Account of the Receiver.[18]

Prior to the origination of a PPD entry to the consumer’s account, the consumer must have authorized the Originator to initiate the entry to such an account.  This authorization must be in writing and signed or similarly authenticated by the consumer, and the consumer must be provided with an electronic or paper copy of the authorization.   The authorization must be readily identifiable as an authorization and must clearly and conspicuously state its terms, as well as indicate that the Receiver may revoke the authorization by notifying the Originator in the manner specified in the authorization.   The authorization process must evidence both the consumer’s identity and his or her assent to the transaction.[19]   Further, the Rules require that the PPD entry contain certain information, including, but not limited to, the Receiver’s bank routing number and account number.[20]    In addition, the consumer must be provided an electronic or paper copy of the authorization.[21]

Rules Analysis

The express language of the Rules strongly suggests that POP and BOC entries are intended to be the exclusive entries and class codes for ACH entries based on the conversion of checks received at the point of purchase.    The special requirements for POP and BOC entries would be largely unnecessary if the Rules were interpreted to provide for POP and BOC transactions to be conducted as PPD entries without compliance with POP and BOC requirements.  Nevertheless, it could be argued that the fact that the definition of PPD entry excludes MTE and POS entries, but does not exclude POP and BOC entries, means that some, or all, transactions that meet the definition of POP and BOC entries may also be processed as PPD entries.  Similarly, it could be argued  that  because,  for  example,  the  rules  for  POP  and  BOC  entries  do  not  require  the Originator to provide the Receiver with a copy of the authorization at the point of sale, the requirements of POP and BOC entries and PPD entries are alternative ways of accomplishing the same general type of transaction.

Because the express language of the Rules does not conclusively resolve whether or not POP and BOC entries are the exclusive means of conducting certain transactions, NACHA is issuing this interpretation under Section 13.3 of the Rules.

Interpretation

NACHA intended the rules for POP entries to be the exclusive entry and class code for ACH entries based on the conversion of checks received at the point of purchase.   Recognizing the importance of providing a legal framework within the Rules that would protect ACH participants with regard to the initiation of point-of-purchase entries, in March 1999, the NACHA Voting Membership approved an interim rule designed to expand the definition of the PPD entry format to allow its use in initiating one-time ACH debit entries for purchases made at the point of purchase.  This interim rule was, however, only intended to be a one-year interim rule to permit the implementation of a newly created Standard Entry Class Code for point of purchase transactions-the POP entry.   Subsequently, in September 2000, the POP SEC Code and the requirements for POP entries became effective and superseded the use of the PPD interim rule for point-of-purchase entries.[22]   As of March 16, 2007, an additional application (BOC) for the conversion of checks presented at the point of purchase was adopted with a legal framework and technical requirements designed to protect ACH participants with regard to the initiation of check conversion entries.

The rules for POP and BOC entries establish the legal framework and requirements that the NACHA Voting Membership determined were needed to protect ACH participants with respect to check conversion transactions initiated at the point of purchase.  The rules for POP and BOC entries also establish requirements for the provision of information on the Receiver’s bank account statement to enable the Receiver to identify the converted check and the location where the payment was made.  The POP and BOC applications were specifically designed to provide Receiver protections and requirements unique to this type of conversion activity.

These unique requirements were intended to mitigate risk and reduce customer service problems. These requirements do not apply to PPD entries and therefore the use of PPD entries for conversion of checks received at the point of sale could result in more risk to ACH participants and customer service issues.  For example, the PPD format cannot accommodate the inclusion of the check serial number from the Receiver’s source document.   Similarly, the rules for PPD entries  do  not  require  the  placement  of  this  information  on  the  Receiver’s  bank  account statement.

Conclusion:

The practice of receiving checks at the point of purchase and then converting those checks to one-time PPD entries is inconsistent with the exclusive application of POP entries to such payments under the Rules.  The rules for POP entries and the POP SEC Code and BOC entries and the BOC SEC Code are the only rules, and the only SEC Codes, that provide for the conversion of checks received in-person.  The use of any other SEC Codes for this purpose is not permissible under the Rules.

* * * * 

This formal interpretation may also be found within the Formal Rules Interpretation section of the ACH Rules: A Complete Guide to Rules & Regulations Governing the ACH Network.

NACHA CONTACTS

Questions about this ACH Operations Bulletin should be submitted via info@nacha.org

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1 The Rules for BOC entries are effective as of March 16, 2007.
2 2007 NACHA Operating Rules § 14.1.48 (“POP entry”).
3 Id. at § 2.1.2.
4 Id. at § 3.9.2
5 Id. at § 3.9.3
6 Id. at § 3.9.4
7 Id. at Appendix Two, § 2.1.15
8 Id. at § 14.1.15 (“BOC entry”)
10 Id. at § 14.1.15
11 2007 NACHA Operating Rules § 2.10.1
12 Id. at § 2.1.5
13 Id. at § 2.10.2
14 Id. at § 2.10.3.1 and § 2.10.3.4
15 Id. at § 2.10.3.2 and § 2.10.3.3
16 Id. at § 2.10.3.5
17Id. at § 2.10.3.7, § 2.10.3.8, and § 2.10.3.9
18 Id. at § 14.1.50
19 Id.  at § 2.1.2
20 Id. at Appendix Two, § 2.1.17
21 Id. at § 3.5.
22   2000 NACHA Operating Rules, page R2

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