Accounts Payable Articles

Accounts Payable Now & Tomorrow is a monthly publication with the most current advice from the trenches based on our reader surveys, interviews with the best practitioners, and the latest changes in all related specialty areas such as T&E, 1099s, sales and use tax, OFAC, VAT, electronic payment alternatives etc. Here is a sample article.

ACH Primer: Credits, Debits and More

With the sudden onslaught of interest in ACH from both businesses and unfortunately crooks, a review of the basics of how ACH works is in order. For without a thorough understanding of how these payment vehicles work, it is difficult for an organization to protect itself. We cannot underestimate the importance of understanding this payment tool as both users and non-users are at risk for various types of fraud if they do not take the appropriate steps. And then of course, there is the added benefit of ACH payments being a more efficient way to address invoices.

The Basics: ACH Credits

An ACH credit is a payer-initiated transaction. The payer instructs its financial institution to electronically transmit the payment through the ACH/Federal Reserve network to the payee’s bank account. Typically the funds are available the day after the transaction takes place. This eliminates all delays associated with mail and processing float.

The most common examples of this are direct deposit of payroll, where the employer is the payer and the employee the payee. One of the biggest users of this type of payment vehicle is the Federal government when it direct deposits Social Security payments. In this case the recipients are the payees. It should be noted that starting in 2013, anyone signing up to receive Social Security benefits will have to receive them electronically. The Feds are starting to get out of the paper check business.

In recent years, businesses of all sorts have started making payments using the ACH instead of paper checks or in some cases, wire transfers. Because of the connection to direct deposit, this has led some to refer to this type of payment as a ‘direct payment.’

The Basics: ACH Debits

An ACH debit is a payee-initiated transaction. The payee instructs the payer’s financial institution to electronically transmit the payment through the ACH/Federal Reserve network to the payee’s bank account. Typically the funds are available the day after the transaction takes place. These transactions are initiated using your bank transit and routing number and your bank account number. It is implied that you have given your consent but there is no formal verification process by the bank to ensure you have given your approval. There are new bank products just emerging that provide some protection against unauthorized debits.

The most common examples of the use of ACH debits is in the financial services sector. Some financial institutions granting mortgages will, with the payer’s permission, debit the payer’s bank account for the agreed amount on an agreed upon date each month. Sometimes there is a slight reduction in the mortgage rate in exchange for this arrangement. The insurance industry has also used this approach with some of its insurance products.

This payment vehicle has also migrated to the business community. Some states collect their sales and use tax using this approach. A few organizations make intercompany transfers this way. In a couple of rare instances ACH debits are negotiated as part of the terms and conditions in a sales agreement. While we never expect to see ACH debits play a prominent part in the payment world, they are a vehicle that will play a continuing role. It is critical that every professional involved with payments understand them because they are used by fraudsters in growing numbers.

Electronic Payment Fraud

Without a doubt, crooks have turned to the ACH to perpetrate some sophisticated frauds. These crimes are growing and no one is immune. The crooks involved are increasingly sophisticated and the funds they steal often unrecoverable. It is important that everyone involved with payments understand the time constraints associated with identifying fraudulent ACH transactions.

As consumers, readers have 60 days to notify their financial institutions of unauthorized ACH transactions in their personal accounts. These include both ACH debits against their accounts and unauthorized ACH credits initiated from their accounts. As indicated earlier, the crooks in this arena are very smart. However, and this is a big one, anyone other than a consumer has only 24 hours to notify their bank of an unauthorized transaction.

There is no way around this. Monthly bank reconciliations won’t cut it. Identifying a fraudulent transaction 30 days after the fact is too late. The money is gone. Therefore, we recommend daily account reconciliations. We also recommend using certain bank fraud prevention products, which will be discussed in detail in an upcoming issue of this newsletter.

Concluding Thoughts

ACH credits and debits are the payment vehicle of the future. It is imperative that we all understand how they work and what can go wrong, if they are not handled correctly. As noted above, banks are not currently verifying if ACH debits are authorized, unless certain fraud prevention products are purchased from them. And occasionally, crooks are finding ways to circumvent these controls either by developing a workaround or simply devising a new fraud. Thus it is imperative that everyone not only know how the payment vehicles work, they understand frauds currently being perpetrated and how to prevent those frauds. This is an area that is constantly changing and AP Now monitors it regularly for its readers.

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