ACH SEC Codes

ACH SEC (Standard Entry Class) codes are an essential element of transaction processing, as they describe how a business or a customer authorizes the payment. Every ACH transaction, whether ACH credit or debit, has to have an SEC code – there are no exceptions.

Why are they so important? It’s mostly because, in case of a dispute, they serve as evidence that the party has authorized the payment. As a business, it is your responsibility to make sure that the correct SEC code is used for each ACH transaction. Using an incorrect one can have negative consequences for your company, including fines or penalties.

SEC codes are not permanent, meaning they can change based on the decision of their governing body – Nacha (formerly known as the National Automated Clearing House Association).

Now that we got the basics out of the way, here’s everything you might need to know about ACH SEC codes.

Key Takeaways

• What is the SEC code meaning? SEC (Standard Entry Class) codes are used to describe in what way a transaction has been authorized. They are managed by Nacha.
• How many SEC codes are there? There are many SEC codes, all of which can be divided into four categories – consumer codes, consumer or corporate codes, corporate codes, and debit card/POS entries.
• What is a real-life example where an SEC code would be used? Nacha SEC codes are actually used daily by businesses around us. One real-life example of an SEC code being used is paying your utility bills every month – in this case, your utility provider would use a PPD code, meaning a Prearranged Payment and Deposit).

SEC Codes – How Do They Work

All ACH payments, whether we’re talking about ACH debit or ACH credit, need to include an SEC code. The responsibility for using the right one falls on ODFIs – and considering the fact that adding the wrong code can result in a violation of NACHA Operating Rules, having a good understanding of what different Standard Entry Class codes mean and when they should be used is vital.

Using the wrong SEC code can also result in an ACH return. In this case, the ODFIs will have to pay any fees associated with it, and they will also be responsible for redoing the submission process, this time with the correct code.

Another thing that the ODFIs are responsible for, is having the right authorization in place – which one that is depends on the specific SEC code. For instance, most ACH debits would require written authorization, while in other cases, an oral authorization obtained during a phone call is needed (in this case, the ODFIs have to keep the recording of the telephone call for a period of two years from when the transaction took place, or they have to send a written confirmation of the oral authorization).

ACH SEC Codes – The List

As mentioned, different authorization types are signified by different Standard Entry Class (SEC) codes. Contrary to ACH return codes, which make up quite a long list, there’s a significantly lower number of SEC codes.

All ACH SEC codes can be divided into four categories – consumer codes, consumer or corporate codes, corporate codes, and debit card/POS entries.

* (this Standard Entry Class code can only be used by Federal Government Agency)

Keep in mind that some of the codes can be used for more than one thing. For example, a number of SEC codes can be used for both ACH credits and debits, while with others, it isn’t possible. The same goes for single and recurring transactions – some SEC codes can be used for both, while orders only with one.

Some codes also have a restriction on which entity can use them, as was the case for the Death Notification Entry. A number of SEC codes should only be used for customer or retail transactions, while others are reserved for ACH transactions done by the government or businesses.

SEC Codes – The Most Common Ones

There are some SEC codes that are more used than others. For that reason, here is a short explanation for a few of the most common ones, so that you know more or less in which situations they are used. We’ll also share some simple, everyday examples where the specific ACH SEC codes would be used:

• ACK/ATX – These are acknowledgement entries – the RDFIs acknowledge that the payment was made via the CCD or CTX format (ACK for CCD and ATX for CTX). Thanks to those codes, the originator knows that the payment was received and that the RDFI will try to forward the payment to the Receivables account.
  • Example: A company paying their employees’ salary.
• MTE – Clearing of transactions via automated teller machines.
  • Example: Withdrawing money from your account via an ATM.
• POP – This ACH debit application is used by ODFI as a payment method for an in-person purchase. This type of single entry debit entries is initiated based on written authorization, as well as account information such as the consumer’s routing number or account number, which is taken from a source document, or simply a check. All this is happening at the point of purchase and the check is returned to the customer.
  • Example: Paying for your groceries at the store.
• RCK – This is a single-entry debit transaction that is used by institutions to present a check that has already gone through the check collection system but has been returned for whatever reason (in most cases, insufficient or uncollected funds).
  • Example: A customer paid for their shopping using a check, which bounced due to insufficient funds.
• TEL – This standard entry class (SEC) code is used in single entry debit transactions in which the authorization is received orally, via a phone call. There are two situations in which it can be used – when there is already a relationship between the two parties, or there is no relationship but the receiver was the one to initiate the contact. It can be used for some types of consumer debit entries.
  • Example: Paying your utility bill by providing payment information through the phone.
  • Example: Ordering a product from a company via a phone call.
• WEB – This is a SEC code that is used for the internet payment environment. The originator receives the authorization via the Internet.
  • Example: Making a purchase on an e-commerce website.

SEC Codes – A Real Life Example

Most people better understand certain concepts if they’re given an example from their life, so let us provide you with that.

Let’s say that you just signed new life insurance. As you know, those require you to pay monthly insurance premiums, but you don’t want to deal with manually sending them every month. For this reason, you provide your bank with all the information they will need to make the payments automatically, such as the name of the bank, the bank account, the amount of money that needs to be withdrawn from your account and sent to the insurance company’s bank account and so on.

Every month, once the deadline for the payment comes, your insurer’s bank will create an ACH entry, requesting an agreed-upon amount of money to be taken from your account. The request is then sent to an ACH operator.

In the US, there are two ACH operators – the Reserve Banks and EPN (Electronic Payments Network). They are a third party that manages the requests and settlement of ACH transactions between different institutions that are part of the ACH network.

Once the operator receives the request from the ODFIs, they will send a request to your bank so that the money can be taken from your account. Your account is debited, and once the debit becomes cleared by the operator, the money will be sent to your insurer’s bank. 

Insurance premiums are just one example of when SEC codes are used – there are plenty of other ones, including mortgage payments or installment loan payments. 

Summary

SEC codes are helpful in determining how a certain ACH transaction was authorized, and are more common in your life than you might think, even if you don’t notice them. While there is a number of different codes, they can all be divided into four categories – consumer codes, consumer or corporate codes, corporate codes, and debit card/POS entries. 

As we already mentioned, there are many instances in your life where SEC codes are used – the most common ones being subscriptions, insurance premiums, or mortgage payments. However, don’t worry if you’re having a hard time understanding them – it is not your responsibility to insert them. Instead, ODFIs need to take care of that. 

With that being said, we have concluded our article on what SEC codes are, as well as given you the most important information one needs to know about them. If you’re interested in gaining more knowledge in the financial field, you can always check out the rest of the articles on our blog.