For financial services companies processing high volumes of consumer and business payments, manual verification of accounts is not possible. With the increased speed of the electronic payments clearing house system, financial services processors have to work quickly to prevent fraud and maintain the integrity of the network. NACHA compliant account verification services can help them do it.
Modern Approach to Account Verification
At one time, it was common for banks to confirm account information over the phone. The holder of a check could call the financial institution to verify the account and ensure there were sufficient funds to cover the amount. Increasingly, however, privacy concerns have led to greater restrictions on what information banks release to non-authorized parties.
In addition, paper checks are no longer the primary means by which money changes hands in the U.S. Electronic payments between banks make up the majority of transactions. Manually verifying these accounts with a phone call is time-consuming and no longer feasible.
Role of NACHA in Payment Verification
NACHA governs the Automated Clearing House (ACH) Network, which facilitates electronic payments in the U.S. Electronic payments are typically sent in batches and cleared twice daily on the ACH, finalizing the movement of funds from one account to another for a wide range of purposes.
NACHA is nonprofit, paid for by financial institutions. Part of NACHA’s role is to establish guidelines and mandatory rules for ACH payments. The NACHA Operating Rules make the system secure and reliable for banks and consumers who depend on its efficiency.
NACHA publishes materials specific to payment originators. In other words, financial services processors that are sending payments to other accounts in the network, to emphasize the importance of account verification.
Consequences for Non-Compliance With NACHA Rules
NACHA enforces its rules through a penalty system of warnings and fines. Those with knowledge of a potential violation are encouraged to report a rules violation through the NACHA website, after which an investigation of the potential offense follows.
This means that financial services processors who fail to comply with NACHA rules, such as by originating an electronic payment without first verifying the account, can take a financial hit in the form of a fine. They will also have to endure the significant bureaucratic process of an investigation.
Financial Services Benefit from Account Verification Services
Account verification services have a number of benefits. They do not constitute as significant a privacy violation as calling a bank once did. Going through the process electronically results in expedited verification, keeping customers and banks happy. Importantly, it also demonstrates a financial services company’s compliance with NACHA rules, preventing a rules violation.
Types of Account Verification
Historically and in the present day, there have been a number of different ways financial services processors check on the validity of a payment request. Bank account verification is one such way, but it is only one of several methods:
Negative check database: This is a listing of individuals who have written bad checks in the past. While still in use, it can put a negative light on the consumer-bank relationship, as such a database may contain errors and go back many years.
Account history database: This verifies whether the account in question has a positive or negative history, such as whether checks have been bounced on the account. It is particularly useful for businesses since in those cases personnel may change over time and account history instead of individual history is more relevant.
Account current status verification: This verifies the current status of an account as of the present business day. While it does not guarantee a payment will clear, it is effective at identifying closed, inactive or otherwise problematic accounts.
Merchant funds verification: This is the largely outdated practice of verifying fund availability before the payment is processed. Due to privacy concerns, it has become largely obsolete.
Routing number verification: This is an excellent way to identify fraudulent payment information, as the routing number presented is double-checked to confirm it corresponds with a specific bank and branch location.
Helping Financial Services Achieve NACHA Compliance
The ACH Network has vastly improved the speed of funds transfer and timelines for payments to clear. However, NACHA has placed additional burdens of how to verify a valid bank account on financial services processors in order to maintain the network’s security. Routing number verification services provided by Lyons Commercial Data can prevent a fraudulent payment from entering the system, reducing the potential for loss of funds and the imposition of NACHA fines.
See original article on Lyons Commercial Data.
