The role of an ACH network in bank verification
Because of the pandemic, more and more buyers are relying on digital shopping, triggering a huge rise in electronic payment transactions. Behind the ease of all things done online, though, comes a high risk of fraud and other questionable transactions.
Closeup image of asian woman using credit card for purchasing and shopping online on mobile phone
As the world slowly turns into a cashless society, the financial sector is continuing to strengthen the digital payment and funds transfer systems. These steps have been undertaken over recent decades to make sure that all transactions stay easy, safe, and reliable.
To ensure that electronic fund transfers remain robust, the United States has established its own system called the automated clearing house (ACH) network. In this article, let’s try to find out more about ACH and what it does, and take a look at how bank verification tools help make all transactions seamless.
What is the automated clearing house (ACH)?
Put simply, an Automated Clearing House Network refers to the electronic funds transfer (EFT) mechanism managed by the National Automated Clearing House Association (NACHA). This electronic fund transfer system is utilized by almost all of the banks in the US to facilitate swift transactions between banks, making transfers safe and cheaper.
More than facilitating electronic payments, ACH transactions are also responsible for other types of fund transfers including payroll, direct deposit, recurring bills, and tax payments. You’d be quite surprised to know that the NACHA has existed since 1974, being that the surge in digital funds transfers hadn’t happened expansively before a few years ago.
The NACHA is a nonprofit organization, and while the agency governs the ACH network, the latter is also subject to the supervision of Federal Reserve. It’s said that the ACH is one of the most efficient systems in the world. The Electronic Payments Network (EPN) falls under the ACH Network.
Why Is There a Need for Bank Verification in ACH Transactions?
ACH Automated Clearing House Written on Green Key of Metallic Keyboard. Finger pressing key.
Because transactions are done digitally, making it quite vulnerable to cyberattacks and tampering along the way, there’s a need to use bank verification tools. This ensures that the fund sources actually exist and the account where it’s supposed to be transferred to is legitimate.
ACH transactions then are great alternative payment methods in lieu of checks and credit cards. But, while these transactions are relatively safe, some problems do happen. Take for instance the case of unauthorized returns, where an Originating Depository Financial Institution (ODFI) orders that the amount debited from the payee’s bank account, to be returned from its payor’s source bank account.
Problems like these happen when you, as a business receiving payments through ACH transactions, don’t have a set of reliable bank verification tools. If this happens more often than expected, you may pay hefty penalties and eventually lose your access to the ACH network. This means you’ll have less chances of providing your customers with easy and convenient payment options.
How is bank verification done?
Before anything else, let’s start with a brief explanation of a few ACH-related terms.
“Originator” refers to an individual or business entity that initiates the transaction. You may submit the ACH transaction to the originating depository financial institution (ODFI). You also have the option to use a “third-party processor” to perform the transfers on your behalf. On the other side of the coin, the “receiver” will be your customer or donor. A receiver is defined as a person or an entity who has allowed an originator to make a transaction in an account under the Receiving Depository Financial Institution (RDFI).
Before any ACH network is initiated, the funding source should be validated through a payment platform. A network member such as a business will have several options for bank account verification.
Initiating Microdeposits: A micro deposit is a fund transfer of less than ten cents. A business who wants to verify a bank account can make a micro deposit to make sure that the funding source exists. The user keys in their online banking details and routing information.
The customer’s bank account is credited with the small amount later. Once it’s deposited, the amounts are used to confirm that the user can access the account, who’d later input the specific amounts to validate the funding source.
Attaching Unverified Funding Sources: Businesses or those who have access to the ACH network can skip third party processors and ask the user to directly add an unverified funding source. The ACT network member will have to collect the user’s account and routing details.
Instant Account Verification (IAV): This is, by far the most convenient and fastest way to verify an account number. All you have to do as a business or ACH network member is to use a third-party app and ask your user to input his or her banking details, in order to validate the account.
In all these transactions, the ACH operators or clearing facilities, namely the Federal Reserve and EPN, receive the entries from financial institutions, and therefore move the funds from ODFIs and RDFIs. Most recent developments in the financial sector have allowed most ACH-initiated debit and credit transactions to clear within the same say, so it’s really convenient.
