ACH verification: what is the best strategy to block fraud?

ach verification

Last modified on March 26th, 2024

Cyber Security company fell victim to $6M invoice fraud. For 4 years, a former executive posed as a supplier and received payments to his bank account. This could have been avoided had the company completed its ACH verification process before sending funds. Keep reading to find out what is the best ACH validation method to protect your company from fraudulent activity.

Trustpair checks ACH payments before they’re processed and ACH information all along the payment chain to prevent fraud from happening. It’s the ultimate ACH control tool. Request a demo to learn more!

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Manual verification

Manual ACH controls are pretty straightforward: it means checking your vendor or customer bank account numbers by doing some research yourself. You might look up the routing number of their financial institution online, or even use an online tool that validates ACH routing numbers for you.

Pros:

  • It’s cheap!
  • A lot of online tools are free and will tell you if the bank account details you have recorded are correct.

Cons:

  • Doing manual checks of your ACH entries opens a doorway to fraudsters and mistakes.
  • Free tools online only check the format of your ACH account number, not its validity or the identity of the receiver account. For example, in case of vendor fraud, you wouldn’t be protected.
  • Doing it manually for all your ACH transactions is time-consuming and error-prone.

In brief, manually checking your credentials before sending your ACH transfers isn’t enough. It might work for small businesses that are just starting, but we don’t recommend doing it for too long.

 

ACH prenote

ACH prenote means sending a zero-dollar transaction to your recipient to test if their bank account can receive funds. If the prenotification goes through, you will know that the account is valid and in use (not frozen). You will be able to send ACH entries three business days after sending a successful prenote.

Pros:

  • There is no direct cost to sending a prenote.
  • It’s a good way to check the bank account details are correct and the account is operational.

Cons:

  • It requires a specific infrastructure and technology to send ACH prenotes, which come with a cost.
  • It only checks the validity of your recipient’s bank account, not who it belongs to.
  • It takes 3 days to do the control process and start sending live payments, creating delays in your payment.

Sending ACH prenotes is ideal for businesses who need to authorize bank account or credit card payments to ensure they work for later. When it comes to sending money to third parties or employees, however, it’s not enough to protect yourself.

 

Micro-deposits

Penny drop account validation (also called micro deposits, or micro entries) is a way to do ACH verification that’s similar to a prenote. With this method, you deposit a micro entry (usually a few pennies, hence the name) in two transactions to the account you want to verify.

You then ask your recipient to validate their account by saying the exact amount that was deposited for each transaction.

Pros:

  • It ensures the account is in use and not frozen at minimal cost.
  • It’s a two-step process, which increases safety.
  • It doesn’t require users to log in to their online banking app.

Cons:

  • Doing manual micro entries will take time and is almost impossible to track.
  • Automatic solutions require money on top of the amount you send.
  • It takes a couple of days to process and requires the user to have access to the Internet.

Micro deposits are, like above, a great way to check an account you want to debit. If you want to credit the account, however, it’s better to use another ACH control means.

 

Instant account validation

There is another way to do ACH verification while remaining compliant with the NACHA account validation rule: using a third-party app. Many anti-fraud software exist nowadays to help you secure your payment processes. Trustpair is one of them!

Pros:

  • Software solutions can handle a high volume of transactions and ACH checks are done in real-time.
  • The check is more thorough, as they have access to otherwise hard-to-reach information.
  • The best ones (like Trustpair) use AI and predictive modeling to detect fraud before it happens

Cons:

  • Not all of them deal with other payment methods and international bank accounts.
  • It can create friction if it doesn’t integrate into your payment chain smoothly.
  • It’s an investment (to be balanced with the indirect and direct costs of fraud).

The good news? Trustpair gives you the pros without these cons:

  • We work with international companies and help secure their payments overseas,
  • We integrate seamlessly in your payment chain (and we’re even listed in the SAP Spotlight Partner App)

Every instant account check software is designed to prevent and detect fraudulent activity, so they’re your best solution for ACH verification. Trustpair also does account validation for wire transfers and ACH, securing your organization across various payment methods.

This is great for large companies that handle a large amount of transactions.

With those 3 options laid out, we hope you found the best process for your business. Whichever you choose, it will always be better than using no verification method at all!

 

What are the risks of not having any verification method for ACH payments?

Completely foregoing ACH account validation endangers your business in 3 ways:

  • Increased failed payments. Without checking first your beneficiary’s bank account, you run the risk of having more failed transactions. That’s extra work for your account payables team, and potentially damaging to your customer relationships too.
  • Non-compliance with NACHA rules. The National Automated Clearing House Association is the organization that rules the ACH network. In 2021, because of the abundance of fraud on the network, the clearing house introduced the web debit account validation rule. Any ACH payment originator must implement a “commercially reasonable fraud detection method” to verify their debit payee’s validity and identity. Not doing so exposes you to hefty fines.
  • Doorway to third-party fraud. Not checking your third party’s credentials means you could be sending money to scammers, participating in money laundering, or funding terrorism. It’s no joke, especially when in 2022, 56% of US companies were affected by payment fraud. Financial fraud has direct consequences on your organization’s cash flow (the money directly lost) but also indirect costs due to reputational damages.

With Trustpair, you always know who you’re sending funds to. We use three-way matching to automatically check your suppliers’ credentials in real-time, and use AI to detect fraudulent transactions before they happen.

Using our software protects you from third-party fraud while ensuring you remain compliant with Nacha operating rules. It’s the most efficient and secure way to sends ACH transactions.

Key Takeaways:

  • ACH verification can be done through ACH prenote, micro-deposits, or instant account validation. The latter uses third-party apps like Trustpair to ensure protection and compliance.
  • Trustpair is an anti-fraud software that does ongoing and automatic account validation.

FAQ

As a payment originator and per NACHA web debit rules, you must adopt a commercially reasonable fraud detection system to verify bank accounts: ACH prenote, micro deposits, or instant account verification.

Absolutely! Trustpair does ongoing and automatic ACH verification, so you always know to whom you’re sending funds. Our solution works in real time and we have access to international and otherwise hard-to-find data.

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