Since 1974, financial institutions across the U.S. have utilized a payment system known as Automated Clearing House network (ACH). According to the National Automated Clearing House Association (NACHA), this network was originally the result of a collaboration between several ACH associations. Since its introduction, the ACH network has been at the center of many transactions.
The common consumer may not realize the importance of this payment system. NACHA said this system is at the heart of the American commerce, as an approximate $40 trillion is moved through it every year. This amount is comparable to 23 billion transactions.
If you've recently paid a utility bill electronically or received a direct deposit from your employer, these are types of transactions occurring under ACH. While NACHA has strived to provide a secure method for financial transactions, there are still some risks involved. As a result, risk management is essential when it comes to ACH. Stricter regulations and oversight were enacted following the financial collapse of 2008.
Risk management policies should help protect all participants by stabilizing areas such as liquidity, asset quality and credit. However, it's understandable if banks, businesses and individuals feel a little lost glancing over the NACHA Originating Rules and the necessary obligations and requirements. Luckily, there are five areas any and all businesses should keep in mind when it comes to ACH risk management:
Return thresholds and volume
Within the ACH network there are various types of returns. Payments may be returned for any number of reasons, such as insufficient funds, invalid account numbers or defunct accounts. In the past, ACH returns were a normal exception. Not anymore, as banks and businesses have to adhere by limits on the type of return.
Debit and credit underwriting
The underwriting process typically involves banks evaluating the risk exposure from originating ACH transactions. Ideally, banks and businesses will have enough funds to cover funding and return risk.
Banks are constantly going through the underwriting system, as this is part of the loan process. The lender is simply being extra cautious to ensure the borrower can pay back the loan. For example, underwriting is a common occurrence during the mortgage process, as banks will typically call employers to see if borrowers are employed, according to Bankrate. The Consumer Financial Protection Bureau enacted these rules following the economic downturn as a better way to protect borrowers.
Extra due diligence for third parties
Third parties are able to process ACH transactions on the side of financial institutions, merchants and clients, and they have certain obligations as a result. However, according to ACH Third Party rules, if you're a third-party, your exact obligations will depend on the services you provide. As a result, you'll have to take even stronger care when it comes to ACH processing and sending ACH payments.
Regular audit checks
Audits are highly important with regards to ACH payments. Ideally, you should have an annual audit completed by an outside auditor or conducted internally. The purpose of these inspections is to make sure banks and businesses are in adherence to ACH rules and other internal matters.
Auditing is essential for banks and businesses of every size. This process helps identify any issues, such as financial misstatement, as well as potential fraud. Without regular checks, a company's internal effectiveness may drastically decline.
"Audits are highly important when it comes ACH payments."
All aspects of cybersecurity
Security breaches have become common news in recent months and years. Several banks and large retailers have had their security bypassed by cybercriminals. Businesses, banks and third-party vendors have to take a proactive approach when it comes to security and develop a strong cybercrime prevention program.
Security is even more vital when ACH transactions are accounted for. Customers value their personal information, and the last call they want to receive is one that informs them of compromised private data.
Risk management is all about identifying points of uncertainty. The financial collapse of 2008 shed light on poor risk management practices. With the rise of cybercrime, identifying potential threats to financial transactions is paramount, especially when it comes to ACH. It's widespread use makes it a popular target for criminals, and a few key areas can help banks, businesses and outside vendors identify potential ACH risks.
For more information about smart ways to manage your finances, contact Landmark Bank.
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