Heads up: Change is in the air for businesses on the ACH transactions front. As of March 1, 2021, the National Automated Clearing House Association—better known as Nacha—will require businesses to perform some form of online bank account verification before accepting and processing any ACH transaction. This will add work for, as well as present some logistical challenges to merchants of all kinds. Here is a closer look at the situation.
The ‘Whys’ of Change
The network that enables bank-to-bank transfers in the U.S. and administered by Nacha, ACH lies at the heart of the online payments system. According to Nacha’s most recently available figures, U.S. consumers sent or received nearly 23 billion individual electronic transactions in 2018, accounting for almost 82 percent of all U.S. payments and totaling more than $51 trillion.
NACHA is concerned that with the volume of ACH transactions growing by double-digits each year, such transactions could become a vector for fraud. For this reason, it is pushing for more robust anti-fraud controls, among them a new rule mandating account validation.
The new rule will make many companies’ methods of handling ACH payments non-compliant with NACHA standards. Under this rule, businesses that debit funds to pay for consumers’ online orders must implement enhanced fraud detection methods, including, at minimum, “account validation” as part of a “commercially reasonable fraudulent transaction detection system. Such “account validation” must involve ensuring that any account submitted for a given ACH transaction is valid.
Businesses that continue to use a payment process in which customers manually enter their account and routing numbers will be considered non-compliant with the standards. Credit and debit card payments will not be affected by the new rule.
Acceptable Validation Approaches
Five approaches to account validation will be acceptable under the new rule, and some have considerable drawbacks. Manual validation—obtaining a customer’s voided check or contacting the bank on which the check is drawn to verify the account and routing numbers—falls into the “acceptable” category. Still, it is a labor-intensive, friction-prone, time-intensive endeavor that requires up to six days before it wraps up.
Similarly, there is the micro deposit method, in which businesses make one or two small deposits (typically worth just a few cents apiece) into a customer’s account. The customer then confirms the amounts deposited. This, too, is not a fast option, taking two to three days. Moreover, it is not foolproof because customers often fail to complete the two validation steps.
Another alternative, pre-notes (also called pre-notification transactions), resembles the microdeposits method, but no confirmation from the customer is required. Rather, the other party sends a transaction with no monetary value ($0) through the ACH network to confirm the account’s validity. The problem with pre-notes: For one thing, they take two to three days, and for another, customers cannot initiate payments; only merchants can do so. Additionally, NACHA rules mandate that businesses must wait three business days after sending a pre-notification before placing the actual debit instruction to move funds.
Fourth on the list of acceptable verification options is database verification. In a database verification scenario, account and routing numbers are cross-referenced against a database maintained by a consortium of banks. Admittedly, database verification does prove that a bank account exists, and it takes mere seconds to complete. On the flip side, though, it does not verify that the individual who initiated the cross-referencing owns the account in question. This puts businesses at risk of fraud, as well as opens doors for potentially expensive errors that can be made when account holders manually enter their bank account and routing numbers.
Finally, there is instant account verification, which uses application program interfaces (APIs) and secures digital connections to banks. Account and routing numbers are retrieved directly from whichever account is being authenticated. Customers choose their bank from a list, then enter their bank login and password. Accounts are then digitally connected in seven to 11 seconds.
The Pluses of Instant Account Verification
Proponents of instant account verification note that in addition to being unwieldy, slow, and prone to significant drop-off rates, the other four above-mentioned account verification methods lack opacity. In other words, they do not include visibility into the customer’s bank account balance, in turn jacking up the risk of failed transactions, NSF overdraft fees, and possibly, expulsion from the ACH network should chargebacks become excessive.
By contrast, according to one E-Complish partner, instant account verification paves the way for businesses to convert and retain more customers and incur fewer NSF/overdraft fees. It also reduces fraud by affording visibility into customer name, address, and age of accounts.
Nacha initially set an account verification implementation deadline of January 2020. Still, it extended that deadline to March 2021 so that online merchants, financial institutions, and other businesses could have more time to prepare for the change. However, the new deadline will be here sooner than businesses think, meaning the time is ripe to get on board with compliant account verification now rather than later.
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