ACH Chargeback Defense
Customers appreciate a wide range of payment options, and many merchants now accept ACH payments. They can be especially useful for recurring billings, since credit card information must be updated whenever cards expire or get assigned new numbers. They’re often less costly to process than credit card transactions. For both merchants and customers, ACH can be a way to avoid some of the problems with credit cards, but not all of them: ACH transactions are subject to their own form of chargebacks. What do merchants need to know about ACH chargebacks and how to avoid them?
Automated clearing house (ACH) payments are handled by an electronic network made up of participating financial institutions. ACH transactions are direct deposit payments from one bank account to another—effectively payment by check without any paperwork. There are several different types of ACH transactions, which are identified by a three-letter code. Merchants will commonly use the following three:
- PPD (prearranged payment and deposits, often used for preauthorized recurring billings)
- TEL (telephone-initiated entry, otherwise known as check-by-phone)
- WEB (web-initiated entry, widely used in ecommerce)
The ACH network also has close to 70 different return codes that cause a previous transaction to be reversed, transferring the money back from the receiving financial institution to the originating financial institution. These codes are used when a customer disputes a transaction for a valid reason, such as improper authorization, or when the transaction is processed on a different date or for a different amount than the customer agreed to.
Depending on the ACH type, a customer may have up to 90 days from the processing date to dispute a transaction, and some banks will allow their customers as many as 120 days. You won’t find them referred to as “chargebacks” in any official documentation—that term is closely associated with the credit card industry, so you’re more likely to see them called “ACH returns.”
How Should Merchants Handle ACH Returns?
Disputes appear to be a common and growing trend for merchants who accept ACH transactions. One significant—and unfortunate—difference between credit card chargebacks and ACH returns is that merchants do not have anything like a chargeback representment or arbitration process when it comes to ACH. An organization called the National Automated Clearing House Association (NACHA) is the governing body that sets the rules and standards for the ACH network, but they do not provide protection for merchants dealing with disputed ACH transactions.
What about friendly fraud? This can exist in ACH spaces as well, any time a customer disputes a transaction under false pretenses. There are a few ways merchants can fight back against ACH disputes that can be identified as friendly fraud. In these cases, the customer will have used their true identity to engage in the transaction with the merchant. In true fraud cases, where a customer has used stolen payment credentials to make a transaction, it’s not advisable to fight the chargeback—the person disputing the charge has been legitimately victimized, and it can take considerable time, money, and resources to track down the fraudster. It’s almost never worth the merchant’s time to investigate individual fraud incidents to this extent.
Here are three options we recommend for fighting friendly fraud ACH returns:
1. Contact Your Customer
When a dispute arises, your best defense is to try contacting the customer directly. Oftentimes, solving customer issues over the phone or email will enable then to call their bank and cancel the dispute. There’s no easier or more effective way to resolve a dispute, and it’s always beneficial to repair relationships with unhappy customers, too. This can be a very effective approach with customers who did not intend to engage in friendly fraud but thought disputing was their only recourse.
It’s much less effective against customers who are engaging in friendly fraud on purpose. These customers will often refuse to answer calls or respond to emails, leaving them no choice but to seek out other ways to protect themselves.
Merchants who pursued this option reported that they have succeeded in recovering up to 25% of their lost revenue.
2. Hire an Attorney
Depending on the state your fraudster is located in, you might be able to hire a legal attorney to represent your company. This might involve nothing more than writing a simple warning letter, leading to the fraudster calling your attorney to resolve the dispute. Friendly fraudsters rarely anticipate that the company they’re stealing from will pursue legal remedies, and many will back down as soon as they see that you’re taking their fraud seriously.
Merchants who pursued this option reported a recovery rate of up to 31%.
3. File a Lawsuit
Sometimes, a letter just isn’t enough. Depending on the size of the transaction and the laws in the state where the fraudster lives, you might be able to file a case in small claims court or file a debt collection lawsuit to claim your money. We suggest working with a law firm that can work on a full contingency model, where you pay a percentage of the revenue they are able to recover for you, or a hybrid model where you still pay some initial fees, in order to minimize your upfront legal costs.
You may also want to look for a law firm that has locations in multiple states, so you can use that same firm for different friendly fraud cases instead of having to find a new attorney in each state.
Merchants who pursued this option reported a recovery rate of up to 42%.
How Can Merchants Reduce their ACH Returns?
While merchants may have some options for going after ACH friendly fraud, the best thing they can do is implement best practices to reduce ACH returns and chargebacks across the board. While ACH returns don’t have the same fees as credit card chargebacks, and they don’t impact your credit card chargeback rate, ACH returns still take away your hard-earned revenue and can impact your relationship with the payment processor who handles your ACH transactions.
The following practices will help eliminate some of the common reasons customers have for disputing transactions. They work for both ACH returns and credit card chargebacks, and tend to lead to higher rates of customer satisfaction as well.
1. Transparency and Accessibility
Again and again, customers file disputes because they feel like the product or service didn’t meet their expectations, or they weren’t familiar with the terms of sale prior to making their purchase. This is one of the most frequently-encountered justifications for ACH disputes.
Sometimes, the customer would be happy to work things out with the merchant—if they could. When merchants make it difficult for customers to get a hold of a live customer service representative, or they don’t answer their emails in a timely fashion, customers tend to give up and call their bank to file a dispute.
Display your terms of sale upfront, where customers can easily find it. Set realistic expectations about your products and services—don’t make promises your company can’t uphold. Make it easy for customers to reach you by phone and email and respond to them as quickly as you can. Do these things, and you can eliminate many potential disputes.
2. Minimize Fraud
Fraud is the second most common reason for ACH returns. Checking account information can’t be cloned or captured in the same easy ways that credit card payment credentials can, so one of the more common forms of ACH fraud is Account Takeover fraud, where the fraudster cracks the password to a customer account with stored ACH information and uses it to make purchases.
Third-party tools like Sift can help reduce the risk associated with Account Takeover fraud and other true fraud transactions. If you’re working with a chargeback management company, they can give you advice about which tools would be the most effective for your situation, and can help you integrate them into your existing payment and CRM systems.
3. Brand Recognition
A frustratingly frequent occurrence is a dispute triggered by the simple fact that the customer can’t recognize or remember the name of the business, product, or service they engaged with. This is actually the third leading cause of disputes. It often starts with the customer seeing the transaction on their bank statement under an unfamiliar name or brand. They assume it’s fraud and call their bank immediately.
It is the merchant’s responsibility to ensure that their customers can recognize their business from the information provided in the transaction descriptor. If your business is registered under a different name than your storefront, you need to talk to your ACH processor to make sure your customers see a descriptor that won’t confuse them. You should also include your phone number and website, if possible, so customers can contact you directly if they don’t recall the transaction.
Before processing a recurring billing transaction, send out a reminder via text or whatever platform the customer has requested—even if they remember your company, they might have forgotten what they signed up for!
ACH transactions can provide your customers with a convenient way to pay, but they also open up yet another front in the war against disputes and chargebacks. Fortunately, you won’t have to build new defenses with the ground up.
ACH returns are an entirely different beast than credit card chargebacks, and yet the methods of prevention are virtually identical. Merchants who are already implementing thorough, data-driven chargeback defense strategies will find that these are equally applicable in most cases. However, it’s always worth taking the time to analyze the data to see if your ACH returns have the same root causes as your credit card chargebacks.