Best Strategies for Fraud Prevention on ACH

Fraud prevention methods are becoming more common in Fintech companies and are just as crucial as providing innovative financial services.

Fintech companies use many methods to flag fraud incidents from ordinary transactions. The purpose is to identify the fraud before it even happens and prevent consumers and businesses from losing money.

Fintech organizations must make it a priority to combat fraud and protect users from it. The use of technology plays an essential role in identifying new methods of fraud prevention. 

The Importance of Fraud Monitoring for Fintech Apps

Fraud can happen from many different sources. Even with all the technological advancements society has made in the last few decades, fraud still occurs and increases due to ever evolving technology structures. Stealing credit card data can be costly. And while stealing user data might not sound like a big deal, this data theft can lead to identity theft, fraud, and other criminal activity.

Businesses use the Automated Clearing House Network (ACH) to process payments. Its security features and convenience make it an appealing option compared to other payment forms. However, fraud is still prevalent on these networks and fintech operators need to take this into account.

Even though fraud and bank payment errors can happen, it's not always easy to catch them and alert the bank. You can protect your business from ACH fraud by following a few simple steps that will reduce your risk.

Automated Clearing House (ACH) Basics‍

ACH Debits vs. ACH Credits

Fintech companies, financial institutions, and merchants use ACH debit transactions to pull money directly from customer accounts. This method offers a fast, secure and easy way to manage your payment workload. A customer initiates an electronic payment to a merchant with their account information, debit card, or credit card information. 

They provide the routing number and account information and receive an authorization code for making a transaction.

ACH credits are also not immune to fraud. Using an ACH credit instead, some fraudsters send funds from your account and ask for them to be returned minus a ‘finder’s fee’ of sorts. Others might just steal the information. 

What is ACH Fraud?

When an individual sends money using the ACH network, there is a possibility that this transaction will be illegitimate, and this is ACH fraud.

Scams generally occur when somebody has taken advantage of an account, a transaction, or a feature. In the case of ACH fraud, the sender did not intend to send the money. Or it may occur when a person has opened an unlawful account and is trying to transfer money from one fake account to another to access the funds more quickly. 

When fraudsters successfully hack a bank account or steal information, they scheme how to draw money from other people's accounts, sometimes without their knowledge. Hackers often target banks to make illegal gains. Financial institutions, banks, and fintech developers that are not serious about Know Your Customer and Know Your Business (KYC/KYB) to verify information are at risk of falling victim to bad actors.

Money Laundering

ACH fraud can play a role in money laundering, so it is vital for those working in financial services to be aware of anti-money laundering (AML) regulations. In a tactic called layering, these con artists will transfer funds to another account before scamming their victims to show that the funds are indeed from a legitimate source. This makes it hard for institutions or authorities to track the source.

Payment Fraud

ACH payment fraud occurs in payments fraud. It can be considered a faster and more secure method of transferring money than wire fraud and practices like Zelle or Venmo. ACH transfers usually take a few business days, while direct deposits are processed in a few minutes.

Since ACH payments are not instantaneous, the delay can leave financial processors vulnerable.

ACH Fraud Impact on Fintech Companies

One negative consequence of ACH fraud is a financial liability for any organization that falls victim to it. It can also impact their reputation and decrease customers' trust in them.

Financial Risk

ACH payments are an excellent option for sending and receiving money because they usually carry fewer fees. They require the bank involved to pay back anyone who is held responsible for an unauthorized charge. 

The financial liability of your institution is very high when a customer still has to make a payment by the required time. It's also essential that all ACH return payment notices are issued within two days to inform customers of any issues with their accounts.

‍There is a 60-day window in which the sending party can challenge whether the sender correctly authorized the transaction.  

Additionally, when it comes to ACH credit (where the sender is the one who initiated the transaction), it can take more than two business days to get your money back.

To use this service, an institution must be verified and have funds in its receiving account. The ACH debit guideline is a process to recover funds from a transaction that was not authorized.

Reputational Risk

FIs shouldn't take ACH fraud lightly. They should put measures in place to minimize their risk. Besides, negative customer reviews and poor customer service can lead to a much worse outcome with legal consequences.

If a fintech business falls victim to an ACH fraud attack, other institutions might flag transactions going to and from that fintech company as requiring additional oversight. This affects customer experience negatively and lowers customer satisfaction. 

There are also Nacha rules that must be followed. 

An organization that has a disproportionate number of returns will be going against Nacha rules. Breaking a rule would jeopardize your company's ability to do business effectively. 

How to Protect Your Fintech Company Against ACH Fraud

There are ways of defending your fintech business against ACH fraud that will protect your reputation and your funds and help build your business. 

Fintech developers should consider the following:

The Sender or Receiver of the Funds

It is essential to note the receiver or sender of any funds that go through your business. It is important to review account information, full names, and receiving or sending financial institutions to determine the transaction's legitimacy and risk level.

‍Your Customer

Your customer's behavior should be noted, including any irregularities in their typical banking behavior and whether they have been indicated as high-risk or low-risk. One of the best ways to determine this is by looking at a bank account's age. Accounts less than a month old are at higher risk than those that have existed for years.

In addition, computer accesses that seem out of place are a significant indicator. An important thing to do is to learn how customers may be using your app and use that behavior to inform other responses to behavior. 

‍Their Relationship

Another critical aspect of the equation is understanding the relationship between the sender and receiver. You should avoid someone without an online presence if they haven't provided a good personal history.

Threat levels can be easily identified by the relationship between a client and an agent. AI tools are also available to help identify lower-risk cases that would otherwise be difficult to do. ACH transfer transactions regularly occurring over the past three years are considered low-risk.

The Transaction

To be safe, many organizations start with the first line of defense by implementing controls and standard operating procedures monitored at the transaction level. Make sure you have the answers to these questions before you perform a transaction:

  • Is the transaction of a high value?
  • Is there anything about this transaction that makes it abnormal for this company or this account? 
  • Do the transactions in the account show a high-risk pattern?

Once the risks of a transaction have been determined, an organization can then try to determine what it means to its customers. 

The ACH transfer is a payment method that the company doesn't have to collect information at the transaction time. 

Sila for ACH Fraud Prevention

The use of payment API can help to keep ACH fraud under control. ACH fraud is rising, but businesses are taking control by implementing proper measures and controls.

Your company already has a lot on its plate, so using API to catch fraud can help ensure that you have more time to focus on other areas. 

AI fraud detection through API integration from Sila is effective because it uncovers fraudulent behavior by analyzing patterns and data points that humans can't interpret in real-time. Platforms like Sila allow for identifying and investigating ACH fraud red flags.