ACH (Automated Clearing House) payments involve the electronic transfer of funds between bank accounts, and billions of ACH payments are transferred each year. Bank account verification confirms that the accounts involved are authorised by the appropriate owners. It verifies the identity of the account holder and protects against identity theft and financial fraud.

For businesses, bank account verification also reduces payment delays and time spent fixing transaction errors, improving financial operations and cash flow.

This guide will discuss what businesses need to know about account verification for ACH payments: how it works, why it's helpful, and how to implement it.

What's in this article?

• What are ACH payments?
  
• How do ACH payments work?
  
• How bank account verification for ACH payments works
  
• Best practices for the bank account ACH verification process
  
• Common challenges in bank account verification
  
• How bank account verification prevents fraud
  
• How Stripe Payments can help
  

What are ACH payments?

ACH payments are electronic payments that move funds directly between bank accounts. These payments are processed through the ACH network, a centralised system that processes transactions in the United States and is managed by Nacha. Businesses and individuals use ACH payments for a variety of financial transactions including direct deposit of payroll, automatic mortgage and bill payments, and business-to-business transactions.

How do ACH payments work?

ACH payments facilitate the electronic movement of money between bank accounts across the ACH network. Here's how the process typically works:

Transaction initiation

The payer (an individual or business) authorises an ACH debit or credit transaction. This authorisation can be in the form of a signed document, an online payment agreement, or a verbal agreement, depending on the nature of the transaction. The payer provides the payee with their bank account and routing number to set up the transaction.

Batching

The organisation that receives the authorisation, such as an employer or billing company, sends the payment instructions to their bank, known as the Originating Depository Financial Institution (ODFI). The ODFI submits batches of multiple transactions at predetermined times throughout the day.

Processing

The ODFI sends the batches of transactions to one of the central clearing facilities, also called ACH operators (either the Federal Reserve or The Clearing House). The ACH operator sorts the transactions and routes them to the Receiving Depository Financial Institution (RDFI).

The RDFI carries out the transaction instructions. If it's an ACH credit transaction, the RDFI deposits money into the receiver's account. For an ACH debit, the RDFI withdraws funds from the payer's account.

Settlement

Funds are settled between the ODFI and RDFI through their accounts with the ACH operators, completing the financial transaction. Typically, the entire process from initiation to settlement takes one to three business days.

Notification and reporting

Both parties receive notifications from their respective banks about the transaction. These notifications might be in the form of a bank statement or an electronic alert, depending on the settings chosen by the account holder. Detailed records are kept by both banks for reconciliation and auditing purposes.

How bank account verification for ACH payments works

Bank account verification ensures that ACH payments are sent to the correct account and minimises the risk of fraud or errors. Here's how it usually works.

Collect account information

First, collect the necessary bank account information from the customer or account holder. This usually includes account number, routing number, account holder name, and account type. Account types typically include current or savings accounts, which determines how the payment is processed and may impact eligibility for ACH transactions.

Verify account ownership

There are several methods to verify bank account ownership and the accuracy of account information. The most suitable verification method depends on various factors, including the urgency of the verification process, security concerns, cost, and customer preference.

• Micro-deposits: This is the most common method of account verification. Two small deposits (usually under $1 each) are made to the account. The account holder is asked to confirm the exact amounts of these deposits, typically through an online portal or by phone. Micro-deposits typically take a few days to complete but are the most cost-effective. They're often used for verifying accounts before enabling recurring payments such as subscriptions or installment billing.

• Instant account verification (IAV): This real-time method uses third-party services to verify the account by asking the account holder to provide their online banking credentials. The service then confirms the account's validity and ownership. This is the fastest verification option, but some customers might be hesitant to share their online banking credentials.

• Trial deposits: This method functions similarly to micro-deposits, but makes deposits of slightly larger amounts. It verifies bank account ownership by requiring the customer to confirm the exact deposit amounts, ensuring the correct account is linked before initiating ACH payments.

• Knowledge-based authentication (KBA): The account holder is asked to answer questions about their financial history or personal information that only the true owner would know.

• Manual verification: In some cases, account information can be verified manually by contacting the bank directly or comparing it to a voided cheque. This method is considered less secure than IAV or micro-deposit verification.

Activate verified account

Once the provided information is verified, the bank account is deemed valid for ACH transactions. This means that the account holder can now send or receive ACH payments.

Monitor accounts for suspicious activity

Many financial institutions and payment processors also continuously monitor bank accounts to detect any suspicious activity or changes in account status.

Best practices for the bank account ACH verification process

Bank account verification reduces fraud, prevents errors, and ensures that funds are properly transferred between accounts. Here are best practices that institutions and businesses should implement to optimise the bank account ACH verification process.

Implement strong security measures

• Encrypt all data transmissions using secure protocols such as SSL/TLS.

• Apply multifactor authentication (MFA) for users accessing the verification system.

• Regularly update security protocols and software to defend against new threats.

Maintain compliance and data privacy

• Adhere to regulatory standards such as the Electronic Fund Transfer Act (EFTA) and Regulation E, which govern ACH transactions.

• Develop and enforce policies for the storage, handling, and disposal of sensitive customer information, aligning with local data protection laws.

Regularly update and test verification processes

• Periodically review and test the verification process to identify and mitigate any vulnerabilities.

• Stay updated on changes in banking regulations and technologies that could impact ACH verification practices.

• Conduct regular audits and risk assessments to check that the verification process is secure and effective.

Teach customers and users how it works

• Provide clear instructions and support for customers on how to securely complete the verification process.

• Educate customers about the importance of protecting their banking information and recognising phishing attempts or fraudulent activities.

Use advanced analytical tools

• Implement fraud detection systems that use AI and behavioural analytics to identify unusual transaction patterns that might indicate fraudulent activity.

• Use predictive analytics to assess the risk level of transactions based on historical data and customer profiles.

Improve user experience

• Design the verification process to be as user-friendly as possible to reduce errors and customer frustration.

• Provide multiple options for verification to accommodate different user preferences and capabilities.

Common challenges in bank account verification

Bank account verification involves several common risks and challenges for businesses. Businesses must design verification systems that meet regulatory requirements, manage fraud and security risks, and create a user-friendly experience. Here are some common challenges businesses encounter in the account verification process.

• Fraud risk: Verification processes must protect against fraudulent actors using stolen or fake bank account details to set up payments or extract money.

• Data security: Verification processes must comply with stringent data protection regulations such as the California Consumer Privacy Act (CCPA) in California.

• Customer experience: Verification processes must balance security with a good user experience. Multistep verification processes can be cumbersome for customers, and some will abandon the verification process if it's overly complex or time-consuming.

• Technical integration: Businesses must ensure that their existing financial systems and workflows can handle various verification methods and that they're compatible with other third-party services involved in the verification process.

• Regulatory compliance: Different countries and regions have varying regulations governing electronic payments and the protection of personal financial information. Verification processes must comply with all relevant regulations.

• Error handling: Verification processes must be equipped with error handling systems to address issues such as incorrect account details or failed transactions. These errors can delay transactions and affect business operations if not resolved swiftly.

• Cost: Between fees for third-party verification services and indirect costs related to data security and compliance, implementing account verification processes can be costly.

• Scalability: As a business grows, its verification processes need to scale accordingly while maintaining accuracy and compliance.

How bank account verification prevents fraud

One of the most important purposes of bank account verification is preventing payment fraud. Here's how account verification can stop fraud before it occurs.

• Identity verification: Bank account verification is a first line of defence in confirming the identity of the person or entity initiating the transaction. By confirming that the account details match the identity provided by the user, businesses can reduce the risk of identity theft in which fraudulent actors attempt to use stolen identities to illicitly access or move funds.

• Transaction monitoring: Once an account is verified, it's easier to monitor transactions from that account on an ongoing basis. Anomalies or unusual transaction patterns can be flagged for further investigation, which can detect and prevent fraudulent activities early.

• Compliance: Bank account verification helps financial institutions comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations, which help prevent fraudulent activity.

• Account takeovers: Effective verification can prevent account takeovers, where fraudulent actors gain control of a legitimate user's bank account and make unauthorised transactions. By verifying the legitimacy of changes to account details or unusual login attempts, businesses can prevent these types of fraud.

How Stripe Payments can help

Stripe Payments enables businesses to set up and accept 100+ payment methods, including ACH Direct Debit and ACH Credit Transfers. It provides a unified, global payments solution that helps any business – from scaling startups to global enterprises – accept payments online, in person, and around the world.

Stripe Payments can help you:

• Optimise your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs and Link, Stripe's digital wallet.
  
• Make verification easy: Instantly verify ACH Direct Debits or send micro-deposits to verify customers' bank account details within two business days.
  
• Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multicurrency management with cross-border payment options, available in 195 countries across 135+ currencies.
  
• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalise interactions, reward loyalty, and grow revenue.
  

• Improve payments performance: Increase revenue with a range of customisable, easy-to-configure payment tools, including no code fraud protection and advanced capabilities to improve authorisation rates.

• Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% uptime and industry-leading reliability.

Learn more about how Stripe Payments can power your online and in-person payments, or get started today.