What is the Verification Process for ACH Payments?

Electronic payments sent through the Automated Clearing House (ACH) network have created a new world of sending and receiving funds. Cash and paper checks are slowly being replaced by a quicker and more convenient form of payment processing.

But with increased efficiency comes added risk. Businesses that accept payments via the ACH network in real-time take on a variety of hazards that must be managed through an ACH verification process.

ACH Transfers Present Different Challenges Than Credit Card Payments

Merchants that accept credit cards receive authorization every time a credit card is presented for payment, whether online or during a point-of-sale transaction. That authorization guarantees that funds are available on the credit card to meet the transaction amount.

But NACHA (National Automated Clearing House Association), the organization that manages the ACH network, doesn’t provide that guarantee for ACH payments. Hence the need for a verification process.

Benefits of Verifying a Customer’s Bank Account 

There are many advantages that businesses can capture by adopting electronic verification services. These include:

• Less money spent on traditional check processing. A business that accepts ACH transfers will have fewer paper checks coming through. Such an old-school payment method takes more labor, and thus more time and money, to process compared to ACH transactions.
• Reduces the number of bounced checks. The ACH verification process can tell a business if the payer’s checking account has a history full of bogus checks.
• Lower return rate. Data entry mistakes are a frequent cause of declined payment transactions. Because the most commonly used ACH verification processes are done entirely online, there is less risk of a mistake. 
• It can be used in several payment venues. It’s possible to verify account ownership for Mail Order/Telephone Order purchases and e-commerce transactions where no check or card is present.

Overview of Verifying an Account

There are multiple verification options to make sure an ACH payment is genuine. The common thread running them all of them is to confirm the account information with the financial institution that holds the account.

Once the bank account has been verified, the payment can be processed. Depending on the exact account verification process chosen, the entire process can take a few seconds or a few business days.

Microdeposits

Perhaps the most common method to verify bank account information is to use micro-deposits. This technique involves sending a couple of small deposits (less than a dollar each) to a bank account. The customer provides the account number and routing number, and the business sends the micro-deposits to the account.

After a business day or two, the customer verifies the exact amount of the microdeposits and enters these values on the company’s web page. If the customer enters the correct values, the account is verified.

This method of account validation has several strengths. Although instant verification is not possible, it is possible for buyers to complete the process without using the Internet.

Older customers who don’t use online banking, or customers who for whatever reason don’t have immediate access to the Internet, could use this method of bank verification. They could wait for a bank statement or phone their financial institution for the micro-deposit details.

Instant Account Verification  

For customers who do have immediate access to the Internet, there is IAV, instant account verification. Using JavaScript, a business can verify that the online customer actually owns the account. The user selects a bank name from a drop-down menu of choices and then enters their online banking credentials.

These will be password and user ID, and not account number and routing number, as in the previous example. Most people are more familiar with login credentials than they are with account and routing numbers, which means this process is easier for most people.

Although a few lines of JavaScript code must be added to a website and managed correctly, the total cost of IAV is much lower than the traditional methods of processing paper checks in the United States. It is also a much faster way of establishing who the account holder is and what the account status is.

It’s possible to combine IAV with the first method that uses micro direct deposits. This would be a good alternative to offer in case a financial institution doesn’t offer online banking or its servers are temporarily offline. This hybrid method could also be used in cases where the consumer couldn’t remember their login credentials.

Third-Party Verification

The third and final (at least for now) verification method for ACH debits is to use a third-party that provides software for such purposes. The most widely used source is Plaid. With Plaid’s tools, consumers can enter their login credentials and be verified in a matter of seconds. This instant verification process obviously presents a huge advantage over microdeposits.

Third-party verification also has the ability to check for insufficient funds, which microdeposits can’t do. Moreover, third-party software can check an account’s balance in the future in cases where customers want to establish periodic debits. The software is able to do this without any additional input from the account holder.

Thus, much labor and oversight are no longer necessary on the part of the account owner. Third-party verification software handles the lion’s share of the work.

Third-party software, using just a user ID and password, can also collect other pieces of information on account ownership. These include the account owner’s name, address, phone number, and e-mail address. Details on transaction history—such as amount of transaction, date, type, and description—can be retrieved as well.

Third-party verification services are usually not available free of charge. Nevertheless, the benefits for businesses may outweigh the costs, which are usually priced on a per-transaction basis.

Putting It All Together

Businesses that accept ACH payments need to verify the bank accounts behind the payments and who owns them. Multiple processes are available, with different levels of cost and convenience. The ability to offer more than one option is probably the method that will please most customers.