Formal Rules Interpretation on the Use of PPD Debit Entries for Check Conversion

Posted March 17, 2006

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 POP format for the electronic conversion of checks accepted at the point of purchase.

SUMMARY:
In accordance with Section 13.3 (Interpretative Rules), NACHA has been requested to issue a formal interpretation of the NACHA Operating Rules with respect to the practice of using the Prearranged Payment and Deposit (“PPD”) format for the conversion and electronic collection of consumer checks collected at the point of purchase.  This interpretation clarifies that the POP entry, and the POP Standard Entry Class (“SEC”) Code, are the exclusive entry and class code for ACH entries based on the conversion of checks received at the point of purchase.  The PPD entry and format may not 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 NACHA Operating 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.[1]

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  NACHA  Operating  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.[2]   In addition POP entries are subject to requirements as to the types of checks that can be converted to POP entries,[3]  the capture of MICR information,[4]  and receipts.[5]    The NACHA Operating 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.[6]

PPD ENTRIES

A PPD Entry is defined as

  • a credit or debit entry (other than an MTE of 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.[7]

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.[8]    Further, the NACHA Operating Rules require that the PPD entry contain certain information, including, but not limited to, the Receiver’s bank routing number and account number.[9]     In addition, the consumer must be provided an electronic or paper copy of the authorization.[10]

RULES ANALYSIS

The express language of the NACHA Operating Rules strongly suggests that POP entries are intended to be the exclusive entry and class code for ACH entries based on the conversion of checks received at the point of purchase.   The special requirements for POP entries would be largely unnecessary surplusage if the NACHA Operating Rules were interpreted to provide for POP transactions to be conducted as PPD entries without compliance with POP 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 entries, means that some, or all, transactions that meet the definition of POP entries may also be processed as PPD entries.  Similarly, it could be argued that because, for example, the rules for POP 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 entries and PPD entries are alternative ways of accomplishing the same general type of transaction.

Because the express language of the NACHA Operating Rules does not conclusively resolve whether or not POP entries are the exclusive means of conducting certain transactions, NACHA is issuing this interpretation under Section 13.3 of the NACHA Operating 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 NACHA Operating 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.[11]

The rules for POP 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  entries  also establish  requirements  for  the  provision  of  information  on  the  consumer’s  bank  account statement to enable the consumer to identify the converted check and the location where the payment was made.[12] The POP application was specifically designed to provide consumer 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 consumer’s source document.   Similarly, the rules for PPD entries do not require the placement of this information on the consumer’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 NACHA Operating Rules.  The rules for POP entries and POP SEC Code are the only rules, and the only SEC Code, that provide for the conversion of checks received in- person.  The use of all other SEC Codes for this purpose is not permissible under the NACHA Operating Rules.

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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 2006 NACHA Operating Rules § 14.1.42 (“POP entry”).
2 Id. at § 2.1.2.
3 Id. at § 3.8.1.
4 Id. at § 3.8.2.
5 Id. at § 3.8.3.
6 Id. at Appendix Two, § 2.1.4.
7 Id. at § 14.1.44.
8 Id.  at § 2.1.2
9 Id. at Appendix Two, § 2.1.16.
10 Id. at § 3.5.
11   2000 NACHA Operating Rules, page R2
12 Effective September 15, 2006, the POP application will accommodate the conversion of checks or share drafts
that (1) contain a pre-printed serial number, (2) do not contain an Auxiliary On-Us Field in the MICR line, (3) are in an amount of $25,000 or less, and (4) have not been previously voided and used by the Receiver as a source document for a prior POP entry.  This rule amendment will expand the legal framework for POP entries to more clearly identify business checks that are ineligible for conversion to POP entries.

 

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