The Automated Clearing House (ACH) network feels like a big complicated banking term meant only for professional bankers. In fact, even a few professionals do not entirely understand the inner workings of the ACH network. Although it seems complex, the reality is that the ACH network is straightforward, and understanding its intricacies helps bankers do their jobs better. A deeper insight into third-party sender relationships with ACH payments processing facilitates more streamlined communication within the banking network. It also clears any confusion around the flow of information and funds via ACH transfers.
In this blog, we discuss the critical components of the ACH network and how third-party senders fit into the puzzle.
Conventional ACH Network Participants
- Originator: A consumer or a business entity that wants to initiate a transaction. The originator usually obtains an ACH authorization from the receiver before initiating the transaction. Learn more about the different types of ACH authorizations.
- Originating Depository Financial Institution (ODFI): It is the financial institution that receives the payment instructions from the originator. The originator and the ODFI usually have an active agreement in place to follow the Nacha rules while carrying out ACH transactions.
- ACH Operator: This is the clearing facility responsible for receiving transaction information/entries from the ODFIs, batching them correctly, and forwarding them to the concerned RDFIs. There are primarily two ACH operators in the United States, the Federal Reserve Bank, and the Electronic Payments Network (The Clearing House).
- Receiving Depository Financial Institution (RDFI): This is the financial institution that receives ACH entries from the ACH operator and posts them to the receivers’ accounts.
- Receiver: The consumer/corporation that has authorized the originator to initiate an ACH entry on its account.
Step 1: The Originator sends the origination agreement to the ODFI.
Step 2: The ODFI reviews, batches, and forwards the agreements (usually in bulk) to the ACH Operator.
Step 3: The operator completes due diligence on the agreements and forwards them to the respective RDFI.
Step 4: The RDFI forwards the agreement to the Receiver of funds.
Step 5: The Receiver then shares the completed and verified authorization agreement with the Originator.
ACH Network with Third-Party Senders
- Originator’s Financial Institution
- Third-Party Sender (TPS): It is the third-party agency that transfers the ACH entries to the ODFI on behalf of the originator when the originator does not have any direct contractual agreement with the ODFI.
- Originating Depository Financial Institution (ODFI)
- ACH Operator
- Receiving Depository Financial Institution (RDFI)
As you can see, the key participants in this process are pretty much the same with and without third-party senders, with one essential addition, the third-party sender. The workflow is slightly modified to include the following steps:
Step 1: The Originator sends the origination agreement to the Third-Party Sender.
Step 2: The TPS verifies and sends the agreement plus the ACH file to the ODFI on behalf of the originator.
Step 3: The ODFI reviews, batches, and forwards the agreements (usually in bulk) to the ACH Operator.
Step 4: The operator reviews the agreements and forwards them to the respective RDFI.
Step 5: The RDFI forwards the agreement to the Receiver of funds.
Step 6: The Receiver then shares the completed and verified authorization agreement with the Originator.
So, this brings us to the question. What do third-party senders do? Why do we need them?
What Are Third-Party Senders, and Why Do We Need Them?
Third-party senders essentially act as intermediaries between the originator and the ODFI. It is essential to understand that under Nacha operating rules, an ACH agreement usually exists between the ODFI and the TPS in the case of TPS-based transactions. Also, there is NO direct relationship/agreement between the Originator and the ODFI.
Third-Party Senders Make Payments
A large company that pays its employees (the originator paying the receiver) usually does not reimburse the salaries directly to their bank accounts. Instead, it leverages the services of a third-party sender (payroll processor) to do so. In such situations, the TPS ensures the efficient flow of funds.
Examples of TPS models to make payments:
- Payroll Processing
- B2B Payment Providers
- Consumer-Initiated Bill-Pay Providers
- Accounting Firms
Third-Party Senders Collect Payments Too
Sometimes, a TPS acts as an intermediary between the receiver and the RDFI. Here, the role of a TPS is to collect payments from the RDFI and send them to the receiver.
Examples of TPS models to collect payments:
- Online and Mobile-Based Payments
- Telephone Payments (IVR Technology)
- Electronic Bill Presentment and Payment (EBPP)
- eCommerce Shopping Bill Payment
To avoid confusion, you can identify a third-party sender by asking, “Is this agency responsible for transmitting entries and funds on the ACH network between another organization and the ODFI/bank, or is it transferring funds for itself?” For example, a payroll processing agency that pays its own employees without the help of another payroll processor (another TPS) is not leveraging the TPS service. However, when the same agency processes payroll for its clients (other companies), it acts as a TPS. There are currently more than 9,000 Third-Party Senders registered with Nacha.
Large TPSs usually have their own TPS that mediate the relationship between the originator and the large TPS. Such additional smaller TPSs, that act on behalf of the bigger TPS are known as Nested-TPSs. Learn more about Nested Third-Party Sender Relationships, risk management and best practices for TPSs, auditor expectations, and the difference between TPS and Nested-TPS.
Partnering with a reliable TPS is an excellent way for large commercial organizations to grow without hiring additional workers. The best TPSs go the extra mile and provide additional services/software that helps their clients do more. Such partners are known as Third-Party Service Providers (TPSPs). These TPSPs have active partnerships with well-known ODFIs and RDFIs to help large organizations seamlessly make and collect payments. Learn more about the various innovative payment solutions offered by one of the top TPSPs.
Date originally published: May 24, 2022
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