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How Clients Can Mitigate Risk from Fraud with Automated Incoming ACH Screening

November 9, 2023

Thus far in our special blog series on Automated Clearing House (ACH) payments, we’ve given an overview of the ACH system and its rapid growth in recent years, as well as detailed how ACH payment providers can differentiate themselves from the competition by reducing transaction processing times to offer customers faster funds transfers.

Now, we’ll turn our attention to the risk mitigation aspect of ACH that providers can optimize to gain a compelling competitive advantage in relation to protecting against fast-growing electronic payments fraud. 

Increase ACH fraud defenses–and save big–with automated screening.

A few effective ways to stop ACH fraud is to ensure the name associated with the account receiving the deposit matches the name contained in the incoming ACH transaction; the amount of the transaction meets a pre-set limit for the account and the sender for federal benefits and high-risk deposits is from a known source. For financial institutions, however, manually reviewing every transaction to verify a name, amount or sender match is a time-consuming, resource-dependent and often error-prone process. 

The solution? Automation. 

“Tools that automate the transaction screening process can effectively mitigate any ACH fraud including tax refund fraud attempts,” noted Anu Iyer, Sr. Product Manager for Galileo Financial Technologies. “What’s more, automating this process offers financial institutions significant operation cost and efficiency savings while ensuring genuine transactions aren’t unnecessarily delayed or returned due to criteria failures.” 

Galileo’s payment screening tool for incoming ACH credits is an example of one such automation-based fraud defense. It works by first identifying incoming ACH credit transactions. Identified transactions are then automatically inspected for various pre-configured screening criteria. 

For example, determine whether the name associated with the transaction matches the name under which the receiving account is registered in the Galileo system. “If name-matching is a success, the transaction is processed as normal and subsequently validated against additional controls, such as amount threshold and load-limit checks,” said Iyer. “On the other hand, any refunds that contain a mismatch can be flagged for manual review, whether in-house by the financial institution itself, or by Galileo’s anti-fraud operations team.”

Click here for 6 tips to jumpstart fraud prevention. 

ACH Tax refunds -A popular target for fraud.

Fraud involving tax refunds sent as direct deposits via the ACH network has surged to a particularly notable degree. As of early March 2023, the IRS had identified nearly 1.1 million potentially fraudulent tax returns for the 2023 tax year, comprising refunds worth a total of about $6.3 billion.  

Tax refund scams typically involve a fraudster using someone else’s personal information to file a fraudulent tax return claiming a refund, then directing the refund to be directly deposited via ACH into an account controlled by a scammer or an accomplice. The individual whose information was stolen often only discovers the tax refund fraud when they later file their own legitimate return and discover the refund has already been paid out. 

Beyond the obvious potential harm to individuals targeted by tax refund fraud, financial institutions face significant compliance and regulatory risks stemming from not having adequate fraud mitigation defenses in place to identify and stop fraudulent refund deposits from entering accounts held at those institutions. 

By leveraging automation, Galileo’s API-based payment screening tool combines the best of both worlds, ensuring that no ACH credit transaction with mismatched names slips through the cracks, while also greatly reducing the burden on the client’s operations teams, who only need to manually review the incoming ACH tax refund transactions that have mismatches, rather than all refund ACH transfers. 

“That improved efficiency can help reduce operating cost significantly... clients can then deploy those saved funds more effectively elsewhere to help grow their business and achieve institutional goals while resting assured that their risk mitigation processes remain robust.”  
Anu Iyer
Sr. Product Manager

Now that we’ve explored how payment providers can differentiate their offerings by providing faster ACH transactions, and how clients can more efficiently mitigate fraud by leveraging automated screening, stay tuned for the final edition in this blog series, in which we’ll discuss the third key aspect of a successful ACH program: control. 

Related: How to Fight Payments Fraud while Preserving a Positive UX

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