Payment Fraud Protection in an Electronic Age

By Mary Schaeffer, courtesy of CPA Insider

Whether your smaller business makes payments electronically or not, it's still vulnerable to electronic payment fraud. You need to know how to protect your business' account. From tools to best practices, here's how:

Do you think that because you pay electronically your smaller business no longer has to worry about payment fraud? Or do you believe that just because your smaller business doesn't make payments electronically, you don't have to be concerned about electronic payment fraud? The reality is, if you answered yes to either of these statements your smaller business is in for a rude awakening.

Background
Electronic fraud covers both automatic clearinghouse (ACH) credits and debits. In fact, it's the debits that can cause the problem. With the right information, it's very easy to commit electronic payment fraud. And getting that requisite information isn't difficult. Luckily, for now, crooks have not caught on and they still focus primarily on check fraud. This is not to say that electronic payment fraud doesn't occur today. It most definitely does -- just not as frequently as check fraud.

Many smaller businesses don't take the appropriate steps to protect their bank accounts because they don't make electronic payments. This is a big mistake. Everyone is vulnerable, whether they make electronic payments or not.

Protecting Your Bank Accounts
Whether you make electronic payments or not, you can use the following tools to protect your accounts:

ACH blocks are the simplest of all the products to use. They allow companies to notify their banks that ACH debits should not be allowed on certain accounts. With a block in place, no ACH debit, even one that is authorized, will be able to get through on a given account. Everyone is advised to put blocks in place on all accounts where ACH activity is not likely to be used.

An ACH filter allows businesses to give their banks a list of companies authorized to debit their accounts. The banks will then "filter" incoming debits and allow through only those that are on the list submitted earlier. This filter does not check for dollar amounts or whether the particular transaction has been authorized, only that the company doing the debiting is on the approved list.

What About Positive Pay for ACH
A robust positive pay product for the ACH environment is not universally available today, but it's on its way. The issue is complicated because some banks match the identities of those attempting to debit an account with those on the list provided by the company, and exceptions are reported to the customer to review before payment. Only authorized electronic transactions are allowed to be withdrawn from your account.

Best Practices
Managing your bank accounts in an electronic payment environment requires special consideration. If you are using ACH blocks, keep track of which accounts you have put blocks on. Otherwise, you could end up with egg on your face when a vendor is given authorization to use an ACH debit and everyone has forgotten that a block was put on the account a year or two earlier. Many companies put ACH blocks on all accounts but one, thus enabling them to accommodate a few vendors that insisted on using an ACH debit.

In Conclusion
As payment activity moves away from paper checks and regulators work to make it harder for crooks to profit from check fraud, it's only a matter of time before the fraudsters focus on the ACH world. By putting the appropriate controls in place in your small or midsize business, these thieves will need to look elsewhere for a target to defraud.