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ACH payments (short for Automated Clearing House payments) are a type of electronic funds transfer that do not require checks, debit cards, or credit cards. All you need to execute an ACH payment is a bank account. If you have ever set up automatic payments with a utility, you’ve experienced an ACH payment. In short, ACH payments do not involve the card networks.
The ACH system is the largest and oldest payment system in the United States, and it’s the primary payment method that government agencies use. Because it is a highly secure payment method with strict regulations, there are also tough rules governing ACH disputes. That said, there are still ways for consumers to cancel or dispute ACH payments, and since ACH payments are typically used for larger transactions, it’s very important for business owners to understand the rules governing them. There are also specific steps that your business can take to prevent ACH disputes.
Understanding ACH Payments as a Business Owner
The Difference Between ACH Payments and Credit Card Payments
ACH payments are different from credit card payments. The simplest way to understand the difference is through these three different questions:
- What promises are being made?
- How long will it take to process the payment?
- What kinds of fees are being charged?
What promises are being made?
ACH Payments
An ACH payment is more like a request for funds. Your merchant bank account requests the agreed-upon funds from the customer’s bank account. There is no guarantee that the request for funds will be approved. An ACH fund transfer can be rejected for several reasons including a closed bank account or insufficient funds.
Credit Card Payments
Meanwhile, a credit card payment does not directly come from the customer’s bank account. The request for funds is sent through the credit card network (e.g., Visa, Mastercard) and the credit card network covers the payment. The cardholder is then responsible for making payments in accordance with their agreement with their bank.
How long will it take to process the payment?
ACH Payments
It takes about 1 to 3 business days for an ACH payment to be available, although there are some financial institutions that provide same-day ACH payments.
Credit Card Payments
While the money from a credit card payment can also take 1 to 3 days to be available in a merchants’ account, the fact that the credit card network authorizes and covers the payment provides the illusion, from a customers’ point of view, that the purchase is instantaneous. This is why it’s important for merchants to understand how to manage chargeback disputes. Credit card payments are important for growth, especially if your unit prices are low, but they can also lead to disputes and chargeback fees.
What kinds of fees are being charged?
ACH Payments
ACH transactions have low fees.
Credit Card Payments
Credit card networks charge higher fees.
The growing use of ACH in B2B and subscription-based models
Subscription-based businesses have exploded in popularity. And as more people turn to entrepreneurship, B2B businesses have grown as well. This is because ACH payments offer business owners in these spaces specific benefits, including:
- Lower processing fees
- Reduction of involuntary churn
- Tighter security compared to credit cards
An overview of ACH disputes
What are ACH disputes? In the ChargebackStop blog, we talk a lot about credit card disputes and chargebacks, because they are a massive issue for business owners. That said, ACH disputes are just as important to understand.
The difference between ACH disputes and chargebacks
The quick answer is that it’s easier for a customer to file a chargeback than it is for them to file an ACH dispute. A chargeback can be filed for a wide variety of reasons, ranging from legitimate fraud to a customer pretending they didn’t receive their product. An ACH dispute, on the other hand, has a narrow set of criteria. For instance, an ACH dispute usually needs to be with the payment method in order to be legitimate. Examples include executing an ACH for the wrong amount or proving that a transaction was unauthorized.
What are the most common reasons for ACH disputes?
The most common reasons for ACH disputes are:
- Duplicate transactions
- Early debits
- Fraud
- Incorrect account information
- Incorrect amount
- Insufficient funds
- Revoked authorization
- Unauthorized transaction
Is it possible to dispute ACH transactions?
It is possible to dispute ACH transactions, however, the process differs from chargebacks. Firstly, while banks and credit card networks manage credit card payment disputes, NACA (the National Automated Clearinghouse Association) manages ACH transactions and disputes. Their rules differ from the rules of credit card networks.
The rules and timeframes for ACH disputes
The ACH disputes process is relatively straightforward, but they are stricter. ACH disputes have shorter dispute time frames. This differs for businesses and consumers. Businesses have to file a Written Statement of Unauthorized Debit (WSUD) within 24 hours of the transaction while consumers have 60 days.
What is the difference between consumer-initiated disputes and business-initiated ACH disputes?
How do ACH disputes work?
A business owner or a customer can file an ACH dispute. For the purposes of this article, we’re going to focus on what it means when a customer files an ACH dispute against your business.
Suppose you use the ACH network to receive money from your customers. If money is taken from a customer’s account, they may claim that they never authorized this transaction and report it to their bank. This is what’s known as an ACH dispute. If you lose the ACH dispute, the funds are pulled from your bank account, which is a distressing experience for business owners. If you win the dispute, you keep your money.
Winning or losing ACH disputes is not just about dollars and cents. It also impacts your relationship with your bank. If you win ACH disputes, this signals to your bank that you are a trustworthy merchant. If you routinely lose ACH disputes, then you might get flagged as a suspicious vendor and have your payments delayed while the bank reviews your transactions.
A step-by-step process for resolving ACH disputes
An ACH dispute involves 3 key players:
- Originating Depository Financial Institution (ODFI): This is the bank that is requesting the payment. If you’re a business owner managing a dispute against your business, whenever you hear ODFI just think, “my bank”.
- Receiving Depository Financial Institution (RDFI): This is the bank that is sending the payment.
- NACHA: This is the organization that manages ACH payments and disputes.
Understanding these players – and where your business fits – makes it easier to understand the ACH disputes process.
First, your customer files a dispute with their bank (the RDFI). The customer’s bank then contacts your bank (the ODFI). At this point, you’re required to provide proof that this was a legitimate transaction. The types of proof you can provide include:
- Signed authorization or contract
- Confirmation of the agreed-upon payment amount
- A script of the telephone conversation with the verbal authorization
- A screenshot of the language that was presented on your website when customers agreed to the authorization
- Proof of delivery or service completion
- Proof of previous ACH payments for the same amount that were processed without issue
The customer’s bank (RDFI) will then review the evidence you’ve provided, compare it to NACHA’s rules and make a decision.
If you win the dispute, the case is closed and you keep the money. If you lose the dispute, the money is returned to the customer’s account and you may incur a fee.
What are some strategies for preventing ACH disputes?
The best way to deal with ACH disputes is to not have to deal with them at all. Here are some strategies your business can implement to prevent them.
Implement strong authorization processes
Obtain explicit authorization that you can debit a specific amount on a specific date. You can refer to this template of a pre-authorized debit authorization form from NACHA.
Provide clear communication about recurring payments and terms
Put your specific terms and conditions in writing. It should be clear how much money is coming out of the customer’s account, how often, for how long, and whether there are any potential additional fees. This should be part of the documents that your customer signs.
Verify account information
Double check that you have the correct account information. If you have the correct information, you may provide the service to the customer, debit their account, and then have the payment returned because it was taken from the wrong bank account. It’s a good idea to ask for a void check that includes all of the customer’s information.
Use fraud detection tools to identify unauthorized ACH transactions
Invest in fraud detection tools to help you stay on top of unauthorized ACH transactions.
An all-in-one payment disputes management tool can help you grow your business with confidence
Managing all of your disputes in one platform is the best way to go. Whether they are ACH disputes or credit card disputes, managing everything in one chargeback management platform can help you respond to disputes in a timely manner and gather the most compelling evidence needed to win your case.
To learn more, book a call with a member of the ChargebackStop team here to learn more.
