September 25, 2005

Use of PPD Debit Entries for Check Conversion

In 2000, Nacha implemented a set of rules and formatting requirements related to Point-of- Purchase (POP) entries – transactions designed specifically for use by Originators as a means to convert, at the point of purchase, a consumer’s check to an ACH debit for an in-person purchase of goods or services. The POP application established the legal framework and formatting requirements needed to protect ACH participants with respect to check conversion transactions initiated at the point of purchase and requires, among other obligations, the explicit authorization of the consumer and the specific handling of the consumer’s check as a source document. It also defines requirements for the provision of information on the consumer’s bank account statement to enable consumers to identify the converted check.

It has recently come to Nacha’s attention that some ACH participants plan to use one-time Preauthorized Payment and Deposit (PPD) entries for the conversion of checks collected at the point of purchase rather than processing such transactions as POP entries, which were specifically designed for electronic check conversion under the Rules. In these cases, a retailer accepts 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 subsequently signs the authorization on the back of the check. The retailer later transports the check to a back office for processing, at which time it captures the MICR information from the check and originates a PPD debit entry for the amount of the check.

Use of the PPD Standard Entry Class Code for the conversion of consumer checks accepted at the point of purchase for payment of goods and services is not expressly recognized under the Nacha Operating Rules, as the POP application was designed with the express purpose of converting checks at the point of purchase. The practice of using PPD entries for check conversion activity for in-person payments is inconsistent with the intent of the Nacha Operating Rules, as the POP application was specifically designed to provide consumer protections and formatting requirements unique to this type of conversion activity. No similar provisions currently exist with PPD, potentially resulting in customer service issues or problems for the consumer. For example, the PPD format does not accommodate a field within which the check serial number from the consumer’s source document can be placed, nor do those rules require the placement of such data on the consumer’s bank account statement. The POP format was intended to be the exclusive means by which an Originator may initiate a debit entry to a Receiver’s account for purchases made by check at the point of purchase.

Nacha is in the process of developing a business case for a set of proposed rule changes that would establish an appropriate legal framework and set of technical specifications to support the conversion of checks in a back office processing environment.


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