When it comes to payment processing, there are many parties involved in the transaction. One of these parties is the third-party sender. However, there are also nested third-party senders that can further complicate matters. This article will showcase the differences between third-party senders and nested third-party senders. We will understand the responsibilities, obligations and warranties as per the new NACHA rule..
What is a Third-Party Sender?
A third-party sender is an intermediary that processes payment transactions on behalf of a merchant or other payment originator. The third-party sender receives payment instructions directly from the originator or from another third-party service provider acting on behalf of the originator. The third-party sender then relays these payment instructions to the appropriate financial institutions for processing.
Please note that a third-party sender is not the same as a payment processor.
In simple definition, A payment processor is a company that provides the technology and infrastructure for processing payments, while a third-party sender is a company that uses that technology to facilitate payment transactions.
What is a Nested Third-Party Sender?
A nested third-party sender is a third-party service provider that is utilized by another third-party service provider i.e the nested TPS is present in nested stats in the payment process and acts as a middleman between a third-party sender and the financial institution that processes the payment. This can occur when a third-party sender outsources some of its payment processing functions to another service provider.
For example, a third-party sender may use a nested third-party sender for fraud prevention services or other specialized payment processing functions. In this case, the nested third-party sender would receive data about payment instructions from the third-party sender, and then relay those instructions to the financial institution for processing.
Differences and Responsibilities for TPS & Nested TPS
The primary difference between third-party senders and nested third-party senders is the number of intermediaries involved in the payment processing chain. While a third-party sender is an intermediary between the payment originator and the financial institution, a nested third-party sender is an intermediary between the third-party sender and the financial institution.
In terms of responsibilities, both third-party senders and nested third-party senders are subject to the same regulatory requirements under the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations. However, nested third-party senders may have additional responsibilities due to their position as intermediaries.
For example, nested third-party senders is required to perform additional due diligence on the third-party sender that they are working with, as well as on the payment originator. This is because nested third-party senders have a greater level of access to the payment processing chain and may be more vulnerable to fraud or other illicit activities.
Key TPS obligations to maintain a secure and efficient ACH payment system.
Identification of Originators by Third-Party Senders
One of the primary TPS obligations is to correctly identify the originator of each ACH transaction. This identification is vital to ensure that ACH payments are processed accurately, and there is no possibility of fraud or money laundering. The TPS must ensure that the originator’s identity is verified and documented. The TPS must also confirm that the originator is authorized to initiate ACH payments.
TPS warrants that the Originator has agreed to assume the responsibilities of the Originator under the NACHA Operating Rules. In simpler terms, this means that TPS is responsible for ensuring that the Originator is aware of their obligations under the ACH rules and regulations. For instance, if an Originator fails to comply with the ACH rules and regulations, TPS is responsible for informing the Originator of their obligations.
Upon ODFI request, TPS must provide information necessary to identify the Originator within two Banking Days of receipt of ODFI request.
TPS are required to complete an annual ACH audit
The NACHA Operating Rules mandate that all TPS must complete an annual ACH audit. The audit ensures that the TPS has adequate internal controls and risk management procedures in place to safeguard the ACH payment system. The audit evaluates the TPS’s compliance with NACHA’s Operating Rules and Federal Regulations. In accordance with the NACHA Operating Rules, a TPS that performs any ACH function on behalf of an Originator or a Participating DFI must conduct an annual ACH Rules Compliance Audit
The audit report must be submitted to the TPS’s ODFI and the ACH operator. The audit must be conducted by an independent auditor with expertise in ACH payment processing.
Performance and Warranty of ODFI Obligations by TPS
TPS must perform and warrant the ODFI obligations to protect the ACH network from unauthorized or fraudulent ACH transactions. The TPS must adhere to the NACHA Operating Rules and ensure that their clients are also compliant.
Monitoring the origination and return activity across multiple settlement dates , enforcing restrictions on the types of Entries may be originated, and enforcing the exposure limit as set by the TPS or ODFI
The performance by a TPS of any of the obligations of the ODFI shall not relieve the ODFI of any of its obligations under the Rules.
For example, if a TPS initiates an ACH payment on behalf of a client, the TPS must warrant that the payment is authorized by the client and complies with the NACHA Operating Rules.
Payment to ODFI
Another essential TPS obligation is to pay the ODFI for the ACH transactions that the TPS initiates on behalf of their clients. The TPS must settle their obligations with the ODFI in a timely and accurate manner.
TPS agrees to make payments to ODFI for any credit Entries it originates and for any debit Entries returned by the RDFI
An Originator utilizing a TPS to authorize an ODFI to transmit Entries agrees to make payment to ODFI for any credit Entries originated and for any such Entries returned by the RDFI to the extent if the ODFI does not receive payment from the TPS
For example, if a TPS initiates an ACH payment on behalf of a client, the TPS must pay the ODFI for the transaction.
Performance of Originator Responsibilities by TPS
TPS must perform the originator’s responsibilities to ensure that the ACH transaction complies with the NACHA Operating Rules.
The TPS has to ensure that the originator provides the necessary information for the ACH transaction and also confirm that the transaction is authorized by the originator. TPS warranty contains the provision to indemnify the ODFI from any and all claims, demands, losses, liabilities, and expenses that result directly or indirectly from the Originator’s failure to perform its obligations. For example, if an Originator fails to initiate an ACH transaction, TPS is liable to indemnify the ODFI for any losses incurred by them due to such a failure.
TPS shall be jointly and severally liable with each of it’s Originators for the retention and delivery to the ODFI or RDFI
Pertaining to records, documentation, or data regarding records of authorization of Entries, copies of items and Eligible Source Documents as required by the NACHA Operating Rules
For example, if a business hires a TPS to initiate ACH payments, the TPS must ensure that the business provides all the necessary information, such as the amount, date, and recipient of the payment, and that the business authorizes the payment.
In conclusion, third-party senders and nested third-party senders are both important players in the payment processing ecosystem. They essentially share many similarities in terms of their responsibilities under the BSA and AML regulations, there are important differences in their roles and the number of intermediaries involved in the payment processing chain.
Also there are important obligations to ensure the safe and efficient functioning of the ACH payment system. The TPS obligations discussed above are critical to ensure that ACH payments are processed accurately, and there is no possibility of fraud or money laundering. Compliance with these obligations is essential for the TPS to maintain the trust of its clients and the ACH network.