The Dangers of Managing ACH Transactions In-House

If your business is using Automated Clearing House (ACH) transactions to pay more of its suppliers, you are not alone. Some 1.7 billion B2B transactions were made via ACH in the third quarter of 2023, a 9.6 percent increase from a year earlier, per NACHA, which governs the ACH Network.

From streamlined processes and lower costs to improved tracking and easier reconciliation, paying suppliers via ACH offers businesses tremendous operations efficiencies over paper checks.

But managing ACH transactions in-house also carries significant risk. This article reveals the dangers of managing ACH transactions in-house and shows how partnering with a trusted third-party can mitigate a buyer’s risk of payment fraud and compliance issues.

How do ACH B2B Payments Work?

ACH payments – transactions that electronically move funds between bank accounts in the United States – have become an increasingly popular way for businesses of all sizes to pay suppliers.

The process starts when a sender (or originator) creates an ACH file containing the recipient’s name, bank account number, transaction amount, purpose of the payment, and other necessary transaction information. The sender’s bank or financial institution then reviews the ACH file to ensure that it complies with ACH rules and regulations. Authorized files are then submitted to the ACH Network, which acts as an intermediary that processes and routes the transaction data to the recipient’s bank.

The ACH Network routes the transaction data to the recipient’s bank, which processes the ACH file and credits the recipient’s account with the specified amount. The recipient’s bank notifies the supplier of the incoming funds.  The ACH Network also facilitates the settlement of funds between the originating and receiving banks or financial institutions. Once the transaction is complete, the supplier can access the funds as soon as the same business day, depending on the type of transaction.

These streamlined processes have made ACH payments a popular way to pay U.S. suppliers.

Dangers in Managing ACH Payments In-House

The operations benefits of paying suppliers using ACH transactions are clear. But managing ACH transactions in-house also creates significant challenges for businesses.

• Security risk. Buyers that manage ACH payments in-house must collect and store banking details for suppliers. The smallest gap in how this sensitive financial information is handled can leave a business vulnerable to data theft and cyberattacks, resulting in financial losses and reputational damage.  For instance, there is the risk of internal fraud or theft by staff who have access to banking information. What’s more, buyers must authenticate the ownership of bank account details, to ensure that they don’t fall victim to Business Email Compromise (BEC) attacks, account takeovers, vendor impersonation, and other email-based schemes. No wonder that 25 percent of accounts payable leaders surveyed by the Institute of Finance and Management (IOFM) identify high risk of fraud as their department’s biggest challenge.
• Compliance headaches. Buyers that manage ACH payments in-house are responsible for complying with various laws and regulations governing how ACH transactions are managed.  Running afoul of these complex and seemingly ever-changing regulations can result in fines as high as $500,000 per month, reputational damage, and suspension from the ACH Network.          
• Inefficiencies. Collecting, authenticating, and managing supplier banking details can be a big burden for businesses, especially those with limited staff. Inefficiencies in how ACH payments are handled can divert staff from higher-order activities and result in delayed payments, reconciliation issues, and missed opportunities to streamline operations.
• Erroneous payments. A lack of expertise in managing ACH payments can lead to costly mistakes that waste staff time on rework, strain supplier relationships, delay the financial close, impair decision-making, and increase the possibility of fraudulent payments. 
• Operations issues. Without the right expertise, it can be hard for AP departments that manage ACH payments in-house to scale their operations to support business growth. Some departments become too dependent on individuals with the knowledge of how ACH works. And in-house ACH solutions may lack redundancy if financial operations are disrupted.

These are some of the reasons that more AP departments partner with Fintechs and other third-party solutions providers to collect and store banking details and manage ACH transactions on their behalf.

How Using a Third-Party Overcomes ACH Challenges

Using a Fintech or other third-party solutions provider overcomes the dangers of collecting and storing banking details and processing ACH transactions in-house in several ways.

• Ironclad security. The solutions provided by Fintechs and other third parties incorporate user permissions, data encryption, authorization protocols, audit logging and other controls to safeguard payments and sensitive financial information. The measures provided by third parties are typically more advanced than what a company can implement and are more frequently updated. Third parties may even employ tools verifying bank account ownership and Application Programming Interfaces (APIs) for securely integrating with a buyer’s ERP.
• Real-time reporting. The solutions provided by Fintechs and other third parties typically provide real-time visibility into the status of transactions, so users can track ACH payments and easily investigate irregularities. Automatic syncing of payment information with a buyer’s ERP or accounting software also helps uncover suspicious activity more quickly.
• Fraud monitoring. Fintechs and other third parties use artificial intelligence (AI)-powered software and dedicated teams of accounts payable experts to identify anomalous payments, before they are processed. AI-powered technology can analyze a buyer’s historical payment data to identify unusually large transactions from a particular supplier or an atypical number of invoices from a supplier.  Flagged transactions can be accepted, reviewed, or rejected.
• Compliance expertise. Fintechs and other third parties are experts in complying with regulations for processing ACH payments and managing bank account details. Leveraging a third party’s compliance know-how reduces the possibility of inadvertent violations.
• White glove support. Leading Fintechs offer dedicated customer support teams to help onboard suppliers, resolve payment issues, and manage changes to bank account details.

By partnering with a Fintech or other third party, buyers can overcome the dangers of managing ACH in-house and mitigate risk, enhance service, and accelerate their payback on electronic payments.

Paying suppliers via ACH offers big benefits over checks. But the dangers of collecting and storing banking details and managing ACH payments in-house can make it difficult for buyers to achieve the full benefits of digital payments.  By partnering with a Fintech or other third-party ACH provider, buyers can streamline their operations, reduce their risk, and enhance service to suppliers.