Understanding Payment Authorizations: Regulation E vs. NACHA Rules

Consumers often are able to effect transactions by providing payment authorization ahead of time. How often a consumer may authorize a prescheduled transaction differs slightly under Regulation E and the National Automated Clearing House Association (“NACHA”) Operating Rules and Guidelines (“NACHA Rules”). Very generally, Regulation E governs preauthorized electronic fund transfers (“EFTs”), while the NACHA Rules govern standing authorizations. However, both provide certain sets of rules and guidelines of how this can occur, and each is beneficial to the consumer.

At a high level, Regulation E provides guidelines for consumers and banks or other financial institutions in the context of EFTs, including point-of-sale transactions, ACH transactions and systems, and automated teller machines (“ATMs”). The requirements of Regulation E apply to a consumer account when there is an agreement for EFT services to or from the account between a consumer and a financial institution or between a consumer and a third party. A preauthorized EFT is a transaction that is authorized by the consumer in advance of a transfer that will take place on a recurring basis at substantially regular intervals. After the debit is authorized, further authorization or action by the consumer to initiate a transfer will not be required. In the scenario of a consumer and third-party relationship, the account-holding institution will receive notice of the agreement for preauthorized EFTs. 

The NACHA standing authorization permits advanced authorization of future debits initiated by a consumer at varied, unscheduled intervals, without requiring either a single or recurring authorization. The standing authorization must specify how the consumer may initiate future subsequent debits or “subsequent entries,” and each subsequent entry must be separately initiated by an affirmative act by the consumer. Examples of such permissible affirmative acts include, but are not limited to, text messages, mobile app confirmations, emails, telephone calls, and ATM or point-of-sale terminal transactions. All authorizations must be in clear and understandable terms, as well as readily identifiable.

There is some overlap between standing authorizations and preauthorized EFTs; generally, both types of transaction authorizations can be provided in writing or electronically. Regulation E’s requirements are more stringent, requiring a writing signed or similarly authenticated by the consumer. By contrast, standing authorizations can be provided orally, electronically, or in writing. Further, each governing scheme specifies the timing of how such authorizations must be provided to an originator, bank, or other financial institution in order to process the transaction; they also require record retention after the transaction settles. Practically, both types of transactions should simplify electronic payments for consumers by reducing the frequency at which a consumer needs to initiate an EFT.

While the preauthorized EFT provides consumers with a mechanism for consistent and convenient debits—which often come into play with, for example, certain monthly or quarterly transactions, such as making a car payment or mortgage payment—the standing authorization provides consumers with more flexibility to initiate EFTs for transactions that occur frequently enough to justify preauthorization, but not on a set schedule. The lack of rigidity coupled with the provision of a separately initiated subsequent entry by the consumer gives consumers greater access to financial services. Additionally, the standing authorization allows originators a middle ground between a single authorization/entry and recurring ones. Ultimately, both payment schemes provide consumers and originators with greater payment access.