What’s Your Risk with the Growing Use of ACH Payments?

Abstract:     
The financial services community and the business press have given increased attention to the significant shift in the balance between paper-based and electronic retail payments. Declining paper-check usage, growing reliance on credit cards, and the rapid expansion of debit cards are all well-known aspects of the rise of electronic payments. Less focus has been placed on automated clearing house (ACH) transactions, but the growth in the use of this form of electronic payment and, more significantly, changes both in the nature of such payments and in the participants who make up the ACH system, warrant scrutiny.

Historically, ACH payments have been pre-authorized arrangements between payers and payees, commonly in a sustained and systematically recurring manner (for example, automatic deposit of payroll and the pre-authorized monthly payment of an insurance premium). More recently, new applications have emerged — known collectively as “electronic checks” or “e-checks” — most of which, unlike traditional ACH payments, are not pre-authorized, and some of which are also characterized by the lack of an established relationship between the payer and the payee. Related to the transformation of the ACH network from one used primarily for recurring payments to a more general-purpose payments network is the role that third parties play in processing many of these new “e-check” payments. Frequently, these third-party processors stand between the bank and the merchant originating the payment, which can complicate customer due diligence by banks.

With this in mind, the aim of this paper is to describe the changing ACH landscape, and to consider the degree to which this growth and change have heightened one risk issue in particular: the susceptibility of ACH payments to fraud.

Number of Pages in PDF File: 25

Keywords: ACH, Payment System, Consumer Payment Choices, Debit Cards, Credit Cards

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