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Understanding ACH Payments for Fraud and Risk Assessment

ach payments

Looking to optimize your business transactions? Consider ACH payments. At the electronic forefront of payments, the ACH network has a lot to offer.

Whether you prefer using cash, checks, debit cards, or credit cards, you can become a victim of transaction fraud or data security breaches. According to the Association for Financial Professionals, 40% of companies reported that fraud attempts have been on the rise since the onset of the COVID-19 pandemic.

While automated clearing house (ACH) payments have made things easier in the hyper-digital age, electronic transactions also present a wealth of opportunities for fraud attacks. As such, it’s important to understand how ACH payments work in order to implement effective fraud protection strategies for your organization.

What is an ACH Transaction?

ACH transactions run through the automated clearing house (ACH) network, an electronic funds-transfer system created to facilitate digital payments in the United States. Money transfers directly from one bank to another without the need for checks, wire transfers, cash, or credit cards.

ACH transactions often take the form of direct deposits and direct payments. One can use these transactions to pay bills online, pay vendors, or receive payments. Businesses can also use the ACH network for recurring deposits, such as payroll.

ACH payments accounted for 26.8 billion transactions in 2020 alone. This is an 8.2% increase compared to 2019 numbers. According to a report published by the National Automated Clearing House Association (NACHA), business-to-business (B2B) payments (for vendors, bills, and other transfers) accounted for 4.4 billion of these transactions.

Meanwhile, direct deposit of salaries, wages, benefits, and assistance payments accounted for another 8 billion.

This increase in ACH transactions comes as no surprise, considering the number of benefits businesses can reap. ACH payments enable:

  1. Faster transfers. According to NACHA guidelines, ACH debit transactions must be settled within one business day (two business days for credit transactions). As such, funds transfer shockingly fast. This translates to more efficient operations and timelier transactions.
  2. Lower processing fees. NACHA states costs can range from $0.20 to $1.50 per transaction. In most cases, ACH processors compute this based on a fixed percentage, but there are providers who offer flat fees.
  3. More convenient processing. ACH payments occur online, so there’s no longer a need to go to the bank to settle transactions. As an added benefit, the process also eliminates paper invoices and checks, which can be difficult to keep track of.

How Do ACH Payments Work?

Every ACH transaction involves five key parties:

  1. Originator: The consumer, business, or organization that initiates the transaction.
  2. Originating Depository Financial Institution (ODFI): The financial institution that receives the payment on behalf of the originator, and forwards the payment to an ACH operator.
  3. ACH Operator: The central clearing facility that receives entries from the ODFI and forwards them accordingly. Currently, there are only two of these facilities—the Federal Reserve Bank and the Electronic Payments Network.
  4. Receiving Depository Financial Institution (RDFI): The financial institution that receives an ACH transaction and directs it to the receiver's account.
  5. Receiver: The consumer, business, or organization to whom the originator intends to send the payment.

ACH transactions are quite straightforward. Say you needed to pay a vendor for supplies you ordered for your business. In this case, the process will start when you (the originator) initiate a direct payment or direct deposit with your bank (the ODFI). Once you’ve made the payment, your bank will then batch your ACH transaction with other ACH transactions, which it sends out in intervals throughout the business day.

These transactions are then received by the ACH Operator. Once all transactions have been sorted, they are forwarded to the correct RDFI ( in this case, your vendor’s bank). The RDFI then posts your payment on your vendor’s account (the receiver).

ach payments
Photographer: Franck | Source: Unsplash

Implementing an Effective Risk Management System for ACH Payments

The direct bank-to-bank system makes ACH payments more secure than traditional options such as checks, cash, and credit/debit cards. However, it is not completely immune to fraudulent activity. It is important to have policies and internal protocols in place to help you mitigate the risks associated with ACH transactions.

Here are some risk management guidelines to consider for your ACH transactions:

  • Establish an authorization protocol and approval workflow to make sure only reviewed and verified payments are processed
  • Create an authorized user list to control who has access to your payment portals and can initiate ACH transactions
  • Make one-time authorizations your payment default, particularly for vendors with whom you don’t regularly transact
  • Perform regular account maintenance, making sure to review account changes finalizing money transfers
  • Schedule regular audits to keep tabs on unusual or out-of-pattern activity
  • Specify value limits for each authorized employee

The aforementioned aside, you can also consider employing ACH blocking and filtering services to reinforce your reconciliation procedures. Keep up with NACHA’s quarterly updates to stay abreast of the latest developments in security recommendations.

Mitigating Risks of ACH Payments with NatPay

ACH payments, like any other payment, have their advantages and disadvantages.

While the process itself can make transactions more secure, one cannot control what ACH facility and bank employees do with your data. Computer failures, power interruptions, and systemic risks also always play a part in data loss, duplication, or alteration during the transaction.

These aside, however, ACH payments remain a great alternative to traditional payment methods. ACH payments are fast and convenient, and they can reduce errors common during cash, check, and credit card transactions.

With some policies in place to protect against ACH-unique threats, you’ll find this method is the superior method. Or, if you don’t want to go through the task of monitoring ever-changing safety protocols yourself, consider pairing with a third-party payment processor, like NatPay.

Founded in 1991, NatPay is a leader in the payment processing industry. From payroll direct deposits to e-invoicing, the platform provides secure and timely services for your business. NatPay is HIPAA-compliant and insured through three major insurance carriers, so you can rest assured that every transaction is as secure as possible. Are you ready to update and secure your payment methods?

Reach out to NatPay for more information today.

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