By Melody Lashmar - Merchants want to be able to offer their consumers the ability to pay with their preferred payment method but this desire has to be balanced with the practical aspect of the most relevant payment methods for the consumers and only offering those payment methods that do not open the merchant up to unnecessary vulnerabilities. One of the biggest aspects of accepting payments from consumers is validating that the payment instrument is legitimate and that consumer has the right to use it because from a purely technical transmission aspect, most payment methods are straight forward.
NACHA recently published a survey to explore the various methods they believe to be common methods of bank account validation for transactions running through their network. They provided some definitions and methods as reiterated below:
An Account Validation Service is a service wherein a business or financial institution can validate the accuracy of various elements of the account information received from a consumer or business, and the ability of that account to receive electronic payments.
There are five primary models currently used to validate account information:
Micro-deposit or Trial-deposit Method: The account number and the routing and transit number are validated by sending micro-deposits to the account. These credits are for random amounts, usually between two cents and one dollar, and the customer confirms that they have received the deposit and verifies the amount. In some cases, a micro-deposit and withdrawal verification process is used to confirm that funds can be both deposited and withdrawn from the account.
Instant Account Validation Method: The customer provides his online banking login credentials and the organization seeking to validate the account information uses these credentials to log into the account and validate the customer’s ownership of the bank account.
Check Verification Services: Using a service’s database, and/or other proprietary solutions, businesses have the ability to validate the accuracy of the account information of a check being presented.
Debit Card Authorization Method: A debit card “authorization only” request is sent using the card number provided by the consumer to confirm that the Demand Deposit Accounts (DDA) account number provided by the consumer is attached to the card.ACH Prenotification Entry or Prenote: A Prenotification Entry is defined in the NACHA Operating Rules as a non-monetary Entry initiated by an Originator (any individual, corporation or other entity that initiates entries into the Automated Clearing House Network)to a Receiving Depository Financial Institution (RDFI) prior to the initiation of the first credit or debit entry to a Receiver’s account with the RDFI. A Prenotification notifies the RDFI that the Originator intends to initiate one or more credit or debit Entries to a Receiver’s account with that RDFI in accordance with the Receiver’s authorization.
It is truly impressive that the network is finally realizing that the current methods are insufficient and to simply penalize merchants based on a bad system is not truly solving the prob
Micro Deposits are truly a great tool to validate the bank account information. This method will ensure with the information entered that there is an account in existence. What it lacks is that banks do not check the name on that transaction so even with proper account information a consumer at your site could be using a stolen account number from any number of sources of account numbers. Further, you will not know this transaction is good for at least 2 days based on the batch nature of the network. This will delay a merchant sending the debit transaction for the purchase by 2-7 days depending on their comfort with the return rates.lem. By addressing this issue and ultimately improving the validation process, the network may in fact see an uptake in volume as those who have left the network, or never used it based on this flaw, return to the network.
Instant Account Validation is another great option, provided you can get consumers to supply you with their bank login credentials. This method, in real time, will sign into their account, and can provide the merchant with name, funds, and account number validation. The critical elements consist of the consumer being a current online banking consumer, they are willing to share their login with a merchant on the internet and their bank doesn’t change the design of their site making the engines that login, fail. With multi factor authentication and updates to sites, this method requires constant maintenance. Another weakness of this method is that even if you do this, there is no guarantee that the consumer won’t chargeback the transaction since this is not a service offered by the networks. It is great at eliminating many of the invalid transactions that you would have experienced through regular channels so, from a validation perspective, it is very good.
Check Verification services use proprietary databases. They might have 55-60% of the active bank accounts in the US in their database but the validation is real time and will eliminate some of your potential invalid transactions. Once again, this is not a service offered by the NACHA network, and as a result, offers no assurances from NACHA or the banks themselves. I would rate this an “okay” method of validation.
Prenotifications are NACHA’s method of account validation. In theory they are great. In practice they are too impractical. The reasons that prenotifications do not work is that the banks often ignore the transactions coming into them and as a result the merchant never gets a response that the account was bad. Further, the NACHA rules require that if the merchant sends a Prenotification, then the merchant can not send the sale transaction for a minimum of 6 days. In many environments, but especially online services, this waiting period will result in a much too long delay for a consumer to get what he/she is at the moment wanting to purchase. To make this method valuable to the merchants who need it, it needs to be real time with no restriction on sending the sale transaction following a prenotification.
Debit Card Authoriztion is a method that would allow for the validation of the account. Once again this is a method that is not provided by NACHA and requires that the consumer enter their debit card number and their bank account number. If they are going to enter their debit card number, then it is likely that they would simply use that as the payment method. To make this ideal, if the consumer could simply enter their debit card information, the validation occurs on the debit network in real time and then the transaction can flow through the ACH network using the debit card number. I can see this as a valid method but this would require many changes in the ACH network.
It is truly fantastic that NACHA is evaluating this current issue. The steps they make toward solving this issue will certainly be better than what is available today through the NACHA network.
