Automated Clearing House (ACH) payments are electronic payments made via the ACH network. It facilitates funds transfer between two bank accounts. ACH payments are secure, convenient, and cost-effective.
ACH payments eliminate paperwork and offer an efficient way to receive payments. It is inexpensive since these payments are processed in batches reducing the transactional fees.
It lets banks access the network to pull or push funds at request with a one- to two-day settlement timeframe.
Here are a few benefits, challenges, and risks of ACH payments
Benefits of ACH Payments
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Recurring Billing
ACP payments are ideal for businesses that operate on a subscription-based model. Subscription-based companies, or regularly billing businesses, face many challenges.
The payment processing costs are high due to recurring transactions. The customers can also sometimes miss paying the bills. It results in cash flow issues and unpaid invoices.
ACH payments help businesses save on their payment processing fees. Cumulatively, these savings can significantly affect the merchant’s bottom line. With repeat billing, customers can pay their bills on time.
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Rapid Processing Time
Businesses primarily prefer ACH payments over paper checks. It is because they can make ACH payments online, unlike a traditional paper check, which has to go through the mail. It cuts down the processing time.
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Improves Sales Conversion and Customer Relationships
Customers are not required to write a check while making ACH payments. It increases the acceptance of converting them at a scale.
During recurring purchases, payments through ACH are automatic. It means the customer does not have to worry about paying bills or receiving funds. It eliminates the friction in customer relationships with the business.
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Remote Payments
Credit cards offer customers the option to pay online or by phone. However, ACH provides an ideal alternative for customers who prefer to hide their credit card information or do not have one.
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Better Payables Management and Automated Recordkeeping
ACH payments run in batches scheduled to optimize cash on hand. At the same time, businesses can record, compile and report the ACH transactions. Companies can download the records into a business’s accounting system.
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Minimizes Human Errors
It saves time since ACH payments do not need a physical paper check. It allows the employees to prioritize more productive tasks since ACH payments take less time to process.
As per a recent report by IBM, “Cost of a Data Breach Report 2022,” 21% of breaches occurred due to unintentional or negligent employee actions. Thus, ACH checks eliminate the chances of human mistakes.
Challenges of ACH Payments
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Scheduled Transaction Timings
ACH operators process transfers in batches. Clearing houses have fixed timings for sending requests to ACH operators. Hence, instant or same-day payments and processing are unacceptable. Thus, initiating a transfer after the scheduled time results in delays.
It can lead to paying penalties and missing payment deadlines. Thus, ACH transfers are unsuitable for emergency or time-sensitive transactions.
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Transactional Limitations
Financial institutions using the ACH system set limits on the frequency of ACH transfers. They also developed several limits for deposits and withdrawals. They may also likely restrict international transfers.
For example, individuals may have monthly or weekly limits depending on how often they can use the ACH system. Adhering to these limitations results in penalization fees.
Moreover, if errors occur, the ACH system facilitates fund reversals. But the process takes a long time and requires paperwork.
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Account Details Sharing
The ACH system requires customers to share their account details with clearinghouses and banks. Thus, the transfer systems offer account links to banks the customer might not prefer.
An ACH system may need customers to have enough funds. It is because recurring payments might overdraw the account. Overdrawn accounts need service fees that lead to high customer costs.
How Financial Organizations Can Prevent Fraud on ACH Systems
Banks must deploy security measures to secure their accounts and customers against ACH fraud. Adding extra protection will help protect sensitive information.
Here are three best practices to help secure payment.
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Authorization
The originator and the Receiver enter into an agreement where the originator initiates a debit entry to the Receiver’s bank account.
Authorization is when the Receiver grants access to the bank account. Also, the Receiver must prove that they trust the other party.
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Authentication
Authentication is the identity verification of the ACH transfer’s Receiver. It checks the type of transaction, the customer, and the stakeholders.
Also Read: Efficiencies and Challenges of B2B Real-time Payments
How Financial Organizations Can Prevent Hacking Risks on ACH Systems
Banks facilitate ACH payments online. It allows hackers to compromise ACH transactions. Hackers can threaten ACH users by phishing or account takeovers. Hence, businesses must store data in Payment Card Industry (PCI)-approved software and hardware.
They must rely on National Automated Clearing House Association (NACHA)-approved service providers. Moreover, they must encrypt the electronic storage of debit and credit card information.
Banks must set up secure storage of confidential financial information. It will facilitate proper ACH network payment processing.
Security Best Practices for ACH
Banks must set protective measures around unauthorized ACH transaction requests. They can put an ACH debit filter that auto-returns all the ACH items to a designated account.
An ACH debit block auto-returns the ACH debits or credits directed at a specific bank account. NACHA-approved financial organizations must enhance their cybersecurity literacy to mitigate ACH transaction attacks.
Here are a few best practices banks can take to improve cybersecurity literacy.
- Banks must be FDIC insured
- They must use NACHA’s third-party risk management resources
- Conduct audits on the cybersecurity model
- Allocate enough funding for cybersecurity
- Seek adequate NIST maturity level
- Conduct an ACH risk assessment to identify risks associated with ACH transaction
Banks must understand that risks arise the same day banks make or receive payments. A NACHA representative conducts audits every two years. However, the banks must also conduct internal audits to maintain compliance.
The banks must ensure that they are always compliant with NACHA guidelines. It will allow them to successfully operate as an ODFI or RDFI on the ACH network.
