How to assess ACH risk and reduce returns
There are a number of tactics companies can use to assess ACH risk and prevent returns:
Timing holds correctly
Getting hold timing right is key to reducing returns. An ACH hold happens when a transaction is pending, but funds are not yet available to use because the transaction hasn’t been fully cleared yet.
If a company or partner bank times holds correctly, they won’t have to pay any insufficient funds (NSF) returns out of pocket. This is because the funds stay in the company or partner bank’s control while the payment is settling and can be used to cover the return. Note that this method prevents losses but does not prevent NSF returns from happening, which means that the organization could still exceed Nacha return rate thresholds and receive fees for the returns.
Holistic risk assessment
ACH is just one part of the risk to your company, so working with other departments can help mitigate risk across the organization. While every payment method’s risk considerations are unique, other teams’ learnings can often be applied to ACH.
As Shahar Ronen, anti-fraud expert and Product Manager at Plaid, explains, “ACH risk needs to be a part of your existing overall risk strategy. Enlist other teams, like onboarding or card risk, to see what patterns they’ve found. That will give you a good baseline for how users are supposed to behave and what a risky user is like to begin with.”
Part of this is holistically understanding transaction risk, from return patterns to device signal analysis. Plaid Signal uses machine learning to assess over 1,000 unique risk factors and deliver customer-initiated and bank-initiated return risk scores.
With this information, you can add dynamic protection measures to defend your business. For instance, you can release funds immediately for low-risk transactions, but institute identity verification or account balance checks for higher-risk ones. This way, you’re neither adding unnecessary roadblocks for safe transactions nor leaving the gate wide open for risky ones.
Gradual rollout
If your organization is new to ACH, consider a partial rollout instead of making it available to all customers on day one. This will help limit the amount of returns you get upfront. As Ronen puts it, “It’s not uncommon for companies to see high losses at the beginning of an ACH program while they figure things out. Having some limited data, like a gradual rollout, will help you contain these losses.”
For example, you may consider only offering ACH payments for transactions below a certain amount. Or you may only offer it to customers who are part of a loyalty program. This way, only a small portion of your customer base has access to the payment method, and you can identify and work out issues with a smaller group, rather than risk losing more money with your entire customer base.
Try dynamic payment rail routing
Payment rails are the infrastructure behind money movement and every payment type has its own rail with benefits and downsides. Many companies already employ a multi-rail strategy, meaning they accept payments using multiple methods, which can help satisfy customer preferences. Dynamic payment routing goes one step further by helping companies optimize the payment flow to mitigate risk, save on fees, increase completion rates, and more.
Routing payments dynamically means using data about the transaction to determine the best payment rail. For example, if a customer does not have sufficient balance in their bank account, a card can be used as a fallback, preventing an insufficient funds return.
That said, companies should bear in mind that the user’s overall trustworthiness, and not just their trust in a specific payment method, should be taken into account. As Ronen puts it, “You can charge a card to avoid an ACH return but get hit with a chargeback because the user is a fraudster. Make sure that if you don’t feel good about one payment source, you feel good about the other.”
As more payment rails emerge, dynamic payment routing will likely become more commonplace.
