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October 01, 2012

Summer Is Gone, but ACH Fraud Remains

As the official summer came to an end this past Saturday, there was a noticeable change in the Atlanta weather that this runner was thrilled to greet. The heat and humidity of the past three months was replaced by cool and much drier air. Much like weather that changes with the seasons, the payments industry is continually evolving. Looking back through payments news over the summer, the industry experienced some shifts, most notably around mobile payments and digital wallets. However, at least one constant in payments grabbed the headlines yet again—a payments scam that could eventually lead to payments fraud.

In late June and early July, news broke of a scam that claimed President Obama or the federal government would help consumers pay their bills. In exchange for providing the scammers with personal data, such as social security number and bank routing and account numbers, consumers were given routing and account numbers to use to pay their bills. Interestingly, this scam went viral not because of scammers' actions, but through social media outlets as consumers caught up in the scam spread the word about “free money.” The routing numbers used in the scam actually turned out to be legitimate routing numbers of financial institutions—but the account numbers were invalid.

Ultimately, this scam negatively affected all involved: consumers, billers, originating depository financial institutions (ODFIs), and receiving depository financial institutions (RDFIs). Consumers' bills went unpaid, and some were saddled with late fees by their billers who had not received payments on time. ODFIs and RDFIs were left with thousands of returned items. Deborah Shaw, a managing director with NACHA, recently shared with us at the forum several procedures and policies for both ODFIs and RDFIs to consider in light of this scam:

  • ODFIs should review files for unusual patterns such as a high number of repeated routing and account number combinations.
  • ODFIs need to educate their business customers on the importance of communicating to consumers that ACH debit payments can be returned.
  • RDFIs should not delay the processing of returns, especially when there is a high volume of them. For most ACH debits, NACHA has a two-day deadline for returning the item back to the ODFI if the RDFI wants to use the ACH system for the return.
  • RDFIs must implement a methodology of monitoring returns so they can detect developing patterns.
  • RDFIs should develop a contingency plan for return volumes that significantly exceed their normal return volumes.

In addition to Deborah's suggestion, we believe that RDFIs should evaluate their systems to ensure that they can handle larger-than-normal return volumes. A large number of RDFIs still rely on manually keying returns; we suggest that these institutions consider developing an automated return process in light of these emerging risks. Further, RDFIs need to ensure that they are well-capitalized or able to access funds should they face a large debit from high return volumes and are unable to quickly return the items.

The seasons will continue to change and blow in new weather, the payments industry will continue to progress, and fraud will without a doubt continue to find its way into the ACH system. And while this fraud will evolve alongside the evolving payments industry, financial institutions can take steps to mitigate the business and financial impact of fraud by proactively instituting policies and procedures to quickly identify and return fraudulent transactions.

Douglas A. KingBy Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

October 1, 2012 in ACH, consumer fraud, risk management | Permalink

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