What is Nacha (National Automated Clearing House Association)? 

Nacha, which stands for the National Automated Clearing House Association, is the U.S.-based regulating organization for making ACH electronic transfers between banks through its member banks, credit unions, and depository financial institutions. 

Nacha does not process ACH payments or have access to information about individual payments sent by businesses. Rather, Nacha sets Nacha Operating Rules that govern how ACH payments are processed and define the roles of ACH network participants. 

The Nacha Operating Rules are designed to protect consumers, businesses, and government entities with the security and privacy of ACH transactions and their personal and banking information. 

One requirement of batched ACH transactions is that sender participants use a standard Nacha file format, which we will cover later in this blog post. 

Benefits of using Nacha

In short, Nacha allows businesses to safely send and receive money via ACH transactions supported by Financial Institution Direct Members like Webster Bank, N.A. Member FDIC. 

Here are a few other benefits of using the ACH Network via Nacha: 

• Cost-effective payments: You can make free or low-cost domestic direct payments and direct deposits to every bank and credit union in the United States. 
• Reduced reliance on paper checks: ACH reduces the risk of fraud related to paper checks, a common target of bad actors who aim to commit check fraud against businesses. 
• Widespread access: ACH deposits are used for most U.S. payroll, tax, business, and social security payments, reaching all U.S. bank and credit union accounts.‍
• Flexible payments: ACH handles sending (credit) and taking (debit) money, ideal for scheduled vendor payments or recurring bills.‍
• Growing network: The ACH Network is secure and expanding, processing over $76 trillion in transactions in 2022.

Drawbacks of using Nacha

For starters, Nacha only oversees domestic (US) ACH electronic payments and direct deposits, and global, cross-border payments if they involve US-based accounts.

Another drawback of Nacha is that its file specifications are unforgiving of errors. If everything differs from what it should be, you won't correctly submit the file, and the ACH payment won't go through. 

This is why it’s important to consider the business banking services and AP automation solutions your business leverages. Automation can help mitigate manual errors that otherwise might impact your success in sending ACH payments. 

When to use wire transfers instead of ACH

One other potential drawback is that ACH sets transaction amount limits of $1 million per payment for same-day ACH and standard ACH transactions. Wire transfers might be better if you need to send more in a single transaction.

Wire transfers and ACH transactions are electronic funds transfers (EFT) between banks. However, there are differences between ACH and a wire transfer: 

• ACH is only for domestic money transfers through the Automated Clearing House regulated by Nacha. 
• In contrast, wire transfers go through different communications and payment networks, including SWIFT, and can be used to make domestic and international electronic payments. 
• Wire transfers typically come with higher processing costs.

Real estate or M&A transactions are examples where wire transfers may be preferable to ACH given the significant payment amounts potentially involved. 

Fees associated with Nacha

Nacha charges its depository financial institution members network administration fees set by the Nacha Board of Directors, including annual fees and per-entry fees for ACH transactions. 

These fees support the upkeep of the Nacha Operating Rules, covering costs related to risk management, ACH application development, statistical analysis, communication, advocacy, and rule enforcement.

Bank fees associated with ACH transactions

Banks charge zero or low-cost transaction fees for ACH transactions regulated by Nacha. Rho always offers free ACH transactions to its business customers. 

What is Nacha best for?

Nacha is best for making domestic EFT payments and direct deposits up to allowable dollar amounts in the United States. Users of the Nacha ACH Network include B2B businesses, consumers, and government entities.

Nacha examples

Examples of ACH transfer use (requiring Nacha-standard ACH files) include:

• Recurring bill payments like utilities
• Paying supplier invoices
• Paying federal and state income taxes and receiving IRS or state tax refunds
• Paying property taxes
• Payroll direct deposit into employee bank accounts
• Medicare and Social Security payments

What is a Nacha file?

A Nacha file is a standardized electronic set of instructions submitted to the National Automated Clearing House Association (NACHA), facilitating batch business-to-business transactions related to direct payments and direct deposits within the ACH Network.

Businesses mainly use Nacha files for paying supplier invoices and making recurring payments. In the context of AP teams, whether they interact directly or indirectly with these files, understanding their role and structure in initiating electronic funds transfers (EFTs) is vital. 

Thus, AP professionals should familiarize themselves with Nacha file formatting to ensure seamless transaction processing. Successful payments equal happy vendors!

Why use Nacha files?

Nacha files are used because they are required to request and process batches of electronic payment and direct deposit ACH transactions through the Automated Clearing House (ACH) network in the United States.

Take one of the examples listed previously: Direct deposit payroll payments to employees. 

A Nacha file for payroll furnishes instructions for transferring funds from the company's bank account to the respective banking institutions of the employees via recurring ACH transactions each payroll period.

Nacha file format

The successful execution of domestic ACH payments necessitates using the Nacha file format, an alphanumeric ASCII file characterized by lines (records) that are each 94 characters long. 

The data values included in a Nacha file help instruct and facilitate batch payments involving more than one ACH transaction.

Nacha file format

What does a Nacha file look like for ACH transactions? The Nacha format for an ACH file is an ASCII file of a fixed-with, with each line (called a record) with a length of 94 characters. 

As you can see, records are in a specific order. In Nacha file format, each record representing an ACH file line contains fields in particular positions within the 94-character line.

ACH files in Nacha format contain one or more batches (of multiple ACH transactions), as identified by data elements within the Nacha file format for the ACH file. If the Standard Entry Class (SEC Codes), effective entry date, company ID, and batch descriptor are identical. 

The Nacha file format includes specifications for these record types:

• File header record (type code 1)
• Batch header record (type code 5)
• Entry detail record (type code 6)
• Addendum (type code 7)
• Batch control total (type code 8)
• File control record (type code 9)

File header record

The file header record always begins with 101 followed by the routing number of the sending bank. 

The file header record is the first record line in an ACH file in the standardized Nacha file format.

Batch header record

The batch header record is called the company/batch header record. The company/batch header record includes the company name and company ID. 

The batch header record type code is 5, signifying the first digit of the three-digit batch header record number (5##), starting the ACH file line.

Entry detail record

The entry detail record is a type 6 line item, beginning with a three-digit number (6##) for each ACH batch in an ACH file. Include a separate line for the entry detail record of each ACH batch. 

For example, for a five-batch ACH file, the entry detail records may contain a series of entry detail records containing the first three digits of 617, 627, 637, 647, and 657.

Addendum

The addendum, also known as the addenda record, has a type 7 code, and its sequence in the ACH file, using Nacha file format, is after the line items for an entry detail record (each for a batch of ACH transactions). 

The addenda record line begins with the digit 7 with two other digits as its number, for example, 742.

Batch control total

The complete name for the batch control total is the company/batch control record. According to Nacha, the batch control total “sums up all entries' count and dollar amount. It also includes a hash total (i.e., checksum) to ensure validity of the batch.”

Nacha describes the company/batch control record (type code 8) as matching with the company/batch header record (type code 5), like matching braces or XML tags. 

You can also consider these as parentheses, with an open and closing parenthesis, for matching type 5 and type 8 record line items in the standard Nacha file sequence for an ACH file. 

The batch control total has a type code of 8, meaning that the line item for this type of record begins with the number 8 and the rest of its 3-digit number. 

For example, suppose batch control record 820 begins the line for this record. The type 8 batch control record line follows line types 1, 5, and 6 (and any type 7 addendum) in the ACH file using the standard Nacha file format. 

File control record

The file control record (also called the file trailer record) is a type 9 record, meaning that a file control record line begins with the number 9, followed by the rest of its 3-digit identifying number and additional file control record information. 

According to Nacha: “This [file control] record contains various counts (number of batches, number of entries, etc.), sums (debit total and credit total), and another hash total to ensure that the file was generated correctly.”

If needed, extra file control record lines, with 3-digit line numbers starting with 9, are used as file padding lines at the end of the file control record section to achieve a blocking factor of 10, as required by the Nacha file format for ACH files. 

The number of lines in the ACH file must be a multiple of 10. 

Data specifications, types of files, and effective dates for Nacha/ACH files

Nacha file rules also cover data specifications, types of files (unbalanced or balanced), and effective dates. 

Data specifications

In line with Nacha's guidelines, it's fundamental to adhere to certain standards for record fields:

• If required, alphanumeric fields should align to the left and be supplemented with spaces at the end.
• Numeric fields should not contain signs aligned to the right and zero-padded at the beginning.
• Fields representing codes should exclusively consist of uppercase letters.
• The ODFI, or the Originating Depository Financial Institution, assigns trace numbers that must follow an ascending order within a batch, though they need not be consecutive.

Balanced file vs. unbalanced file

For ACH files in Nacha file format:

A balanced file carries the offset (settlement) account within the ACH file. The offset (settlement) account is managed by the ODFI (Originating Depository Financial Institution). 

In contrast, an unbalanced file doesn’t carry the offset (settlement) account within the file. 

Understanding ACH File Effective Dates and the Role of Prenotes

An ACH file's effective date defines when the Originator intends the transactions to occur. The Originator must confirm a valid and accurate effective date for the ACH file, considering whether the file is sent traditionally or via Same Day ACH.

What is a Prenote?

Think of a prenote, or prenotification, as verifying account information before the first live transaction called 'entry.' In essence, prenotes are zero-dollar entries — they don't involve the actual transfer of funds but help ensure that the account details are correct. 

Initiating a prenote is advisable if there are changes to an account number or financial institution.

For instance, an Originator (or the Originating Depository Financial Institution - ODFI) would issue a prenote to the Receiver (or the Receiving Depository Financial Institution - RDFI). 

This notification gives the receiver a heads-up, at least three days in advance, about an impending transaction. The prenote confirms that the account information is correct and that the effective date for the ACH file is valid.

The 7-Day and 10-Day Rules in ACH Transactions

When the date or amount of an ACH transaction changes, the ACH Network brings into play a set of rules dubbed the 7-day rule and the 10-day rule, serving as prenotifications.

For members of the Nacha regulating organization, these rules dictate that they must notify their customers promptly if there are changes in ACH dates. Specifically, under the Nacha 7-day rule, customers must receive seven calendar days' notice for any changes. 

Further, the Nacha 10-day rule warrants that if changes in the ACH amount are debited, customers must be given at least ten calendar days' notice.

If funds are made available to the recipient before the ACH transaction has cleared, this may be a separate scenario and would typically be dictated by the terms set by the financial institution or service provider.

Nacha ACH network rules for ACH reversals

The ACH Network rules (Nacha Operating Rules and Guidelines) for reversals and enforcement of ACH transactions (and enforcement) include the Nacha 5-day rule. 

In alignment with Nacha's guidelines, the 5-day rule serves as a protocol for dealing with erroneous ACH transactions. Here's what it entails:

The originator or the Originating Depository Financial Institution (ODFI) is responsible for transmitting a reversal. 

However, it should be sent to reach the Receiving Depository Financial Institution (RDFI) within five banking days after the erroneous entry's settlement date. This rule ensures the timeliness and rectification of errors in the ACH transaction process.

Nacha standard entry class codes (How to read a Nacha file)

Nacha standard entry class (SEC) codes in a Nacha file (ACH file) include: 

• ARC – Accounts Receivable Conversion
• BOC – Back Office Conversion
• CCD – Cash Concentration or Disbursement
• CIE – Customer Initiated Entry
• CTX – Corporate Trade Exchange
• IAT – International
• POP – Point of Purchase Entry
• PPD – Prearranged Payment and Deposit Entry
• RCK – Re-Presented Check Entry
• TEL – Telephone-Initiated Entry
• WEB – Internet Initiated Entry

How to create a Nacha file

With Treasury Software

Treasury Software is a Nacha Preferred Partner for ACH experience and enablement focus. Basically, it enables you to quickly and easily create and transmit ACH Files in NACHA format.

With Rho

The Rho platform lets clients initiate ACH transactions without having to fill out a Nacha file; that aspect is handled on the backend.

With QuickBooks

QuickBooks alone can’t create a Nacha file. Your company can create a Nacha/ACH file with QuickBooks integrated with a third-party add-on software solution. 

With NetSuite

You can create a Nacha/ACH file in NetSuite by installing and using the Electronic Bank Payments SuiteApp from NetSuite. 

With Excel

Nacha files can be created by importing Excel files into third-party software. With Premier ACH, you can generate a Nacha file by entering information in the fields or importing Excel files in Excel or CSV format. 

FAQ: Nacha and Nacha files

Who regulates Nacha? 

Nacha is regulated by its Board of Directors, appointed from depository financial institutions. The Nacha Board has a fiduciary duty to oversee the Nacha organization and ensure proper governance.

Is Nacha the same as ACH?

Nacha is not the same as ACH (Automated Clearing House). Rather, Nacha is the organization regulating ACH transactions. 

The ACH Network is the payment system used for processing bank-to-bank transactions. ACH is also the name for this type of payment method, a domestic U.S.-only electronic funds transfer (EFT) processed through the ACH Network, not to be confused with wire transfers. 

Which financial institutions are members of Nacha? 

Nacha maintains a summary list of Financial Institutions Direct Members on its website, but they are brands you may recognize, like American Express, Capital One, and Webster Bank. 

Is my organization eligible for Nacha membership? 

If you are a federally insured depository financial institution and a member of a payments association, then you are eligible to join Nacha as a participating Financial Institution Direct Member. 

Is Nacha membership mandatory for financial institutions? 

Nacha membership isn’t mandatory for all financial institutions, but any financial institution (bank or credit union) that processes ACH transactions through the ACH Network must be a Nacha member. 

Is Nacha rules compliance required? 

Yes. To use Nacha for EFT payments, its financial institution members must comply with Nacha Operating Rules. Non-financial institutions also involved with Nacha ACH transactions use the Nacha rules as guidelines. Learn more about ACH vs. EFT.

What is an ACH operator? 

They are institutions that act as clearing facilities for batch payments from ODFIs. There are two: the Federal Reserve Bank and the Electronic Payments Network.

Conclusion: Nacha file explained

A Nacha file (also called an ACH file) creates a standardized format for ACH (Automated Clearing House) transactions, where Nacha is the regulating organization for its bank and credit union members.

Nacha financial institution members originate electronic ACH transactions to all U.S. financial institutions through the ACH network. 

These member banks and credit unions act in a specific transaction either as the originator (ODFI) or receiver (RDFI) for making domestic U.S.-only ACH direct payments or direct deposits between bank accounts on behalf of their customers. 

The Rho platform's AP automation capability is designed to help finance teams quickly process batch vendor payments in seconds, without any need to manage complicated Nacha files. Sign up to demo the platform today!