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Accepting any payment as a financial technology business or merchant presents a risk. If you’re allowing the movement of money through credit card vendors, the ACH network, or through wire transfers, you and your facilitating financial institutions must manage the risk of sending and receiving that money.
Risks can come from risky behaviors, risky personnel, improper compliance measures, and so much more. Luckily, fintech presents a set of tools to help minimize risk while enabling faster payment and less company overhead and manual intervention.
Financial automation can ease the risk factors and improve the customer experience with faster payments. Read on to learn about faster payments, risk, and financial automation.
When we think of current financial structures, as a fintech company, there is the recognition that some payment models are slower, outdated, or faster. What may surprise people new to the industry is that slowness does not always equal more security. Slower usually involves more manual processes, which can introduce human error. While it may sound more secure, it’s not necessarily more secure than faster payments facilitated by a secure money-sending code.
At Sila, we have various account-to-account payment solutions that payment processing services can tap into to take advantage of the security of fast financial payments: Same Day ACH, Next Day ACH, Real-time Payments, Instant settlement, and Push to Debit.
Faster payments can be secure, affordable, and competitive when managed properly.
While not a conclusive list, most vendors of financial services can provide fast payments (outside of credit cards) in the form of ACH payments and debit settlements. Here are definitions of the different types of fast (and secure) payments that Sila can provide.
ACH payments are electronic payments sent along the Automated Clearing House (ACH) network. This network is solely a United States-based Clearing House, supported by the Federal Reserve and ACH governing bodies (NACHA). To send money from account to account in the U.S., the money must be approved through the Clearing House and abide by numerous compliance measures.
An ACH transaction has, in the past, been notoriously slow to complete. For example, ACH payments used to take 3-5 business days (and standard ACH still does). However, now they offer the faster payment method known as Same Day ACH and Next Day ACH. These payment methods are exactly as they sound. With the Same Day ACH, the ACH debit receiver gets the payment that day, depending on the time the payment was submitted; similarly, for Next Day ACH, the receiver gets the payment the next day.
To capitalize on these fast payment methods, the financial institution and the eligible party must be trusted, pre-approved, and bear some risk.
The real-time payment (RTP) is offered by the ACH network, but they differ from ACH payments. RTP payments are sent in near real-time (as opposed to some time that day, tomorrow, or within 3 to 5 business days). You can only disburse payments RTP as credits to eligible bank accounts. The financial institution(s) sending and receiving the RTP must choose to participate in the RTP® network through an agreement with The Clearing House.
Once again, a level of risk and trust comes into play with RTP payments. The RTP network is based on a “good funds model” and is strictly a “credit push” payment system. Therefore, any participating bank will be required to have the funds available at the Federal Reserve when they want to initiate payouts.
Therefore, the payments are essentially pre-loaded, and the financial institution is reimbursed by the sender. Here is why financial institutions want to be careful who they approve for RTP payments. Banks participating in the RTP network require a certain confidence level in their account holders who transact on the network.
Similar to other payment providers, Sila offers an instant settlement feature. This instant payment feature allows certain customers to make ACH funds immediately available to end-users. Return costs are remedied via funds held in a Customer Reserve Wallet (CRW). To instantly settle, customers must be eligible and provide money in a holding account to again be reimbursed by the customer.
Sila aims to protect against instant settlement fraud and financial crime by only allowing certain customers these fast digital payments and supporting customer education around security and trust.
Push to debit is another type of fast payment which uses a debit card number to push the funds back into that account. While it is often referred to as push to card, instant funding, real-time payments, and disbursement and collections, push-to-debit is its own technology that allows funds to be transferred immediately to a consumer's bank account through their debit card.
While faster payments with ACH transactions are possible, this does not change the speed of ACH return code timelines. The most common return codes still take up to two days to post. Automating the return process and notifications to your business once a return code is issued continues to be a real value-add for scaling organizations.
So while faster payments are great, they create risk for businesses because they need to manage payment losses.
Faster payments via smart contract on the blockchain are a different story altogether. When transferring funds via blockchain, the money and contractual details are agreed upon and dispersed based on the agreement parameters.
Businesses want to provide faster, instant payments as a payment solution for improved customer experience and to solve the need. But they must handle the level of risk management to continue to operate safely on the faster payment system. They are also in charge of consumer protection.
Here are some things to consider:
Eligibility into certain fast payment features requires businesses to come up with a fraud prevention plan. This prevention plan will be created after you’ve decided the level of risk you’re comfortable with and designed the strategies you intend to use for payment risk management.
Most Sila clients will need to prioritize: good financial health, fraud monitoring, current knowledge of Know Your Customer (KYC) and Know Your Business (KYB; for B2B payments), and other best practices. Luckily, Sila can help you with some of these needs.
Simple things like limiting excessive spending and qualification periods before entering into faster payments programmatically can help this process. These rules can be built into the Sila code (and often already are).
You’ll need to stay vigilant for ACH and RTP payments as this is your clients' riskiest behavior. Not sending payments in error or exposing credentials can cause unfortunate risks. Not monitoring transactions provides the biggest risk, and there is no going back on RTP payments, so businesses need to have strong eligibility and acceptance requirements to avoid serious fraud.
Be prepared to be responsible for risk management and end-user monitoring:
With so much interest around faster payments, it's no surprise that you want to implement them. With Sila, you can rest easier knowing that much of the fraud prevention is built into our payment infrastructure through KYC and KYB.