What is ACH Chargeback Defense?
Table of Contents
- What Is an ACH Payment?
- What Is an ACH Return Dispute?
- How Should Merchants Handle ACH Returns?
- How Do You Fight Fraudulent ACH Returns?
- How Can Merchants Prevent ACH Returns?
- Preventing Chargebacks Wherever You Find Them
- Can Customers Dispute ACH Payments?
- What Merchants Are Most Affected by ACH Disputes?
- How Long Does an ACH Return Take?
In recent years, there's been an explosion in the variety of different payment methods accepted by e-commerce merchants. Most of these are brand new options that take advantage of new ideas and new technology. However, there's also one decades-old payment method that seems to be making a bit of a comeback: ACH.
ACH payments have a number of advantages over credit cards. They typically have lower processing fees and there's no expiration date to worry about if you're processing recurring payments. There are some downsides as well, however, and one of them will already by familiar to you. Just like credit cards, ACH payments have chargebacks.
While they're not covered under the Fair Credit Billing Act like credit cards are, ACH transactions can still be reversed through their own version of a chargeback. What do merchants need to know about ACH payments, reversals, and how to avoid them?
What Is an ACH Payment?
There are several different types of ACH transactions, each of which can be identified by a three-letter code. Merchants will commonly use the following three:
- PPD (prearranged payment and deposits, often used for pre-authorized recurring billings)
- TEL (telephone-initiated entry, otherwise known as check-by-phone)
- WEB (web-initiated entry, widely used in eCommerce)
Most people have used the ACH system, whether they realize it or not. Receiving paychecks via direct deposit and paying bills by entering your bank account information are the two most common ways ACH transfers are used. ACH payments are also the financial backbone supporting many popular peer-to-peer payment apps like Venmo and CashApp.
While they have advantages over credit card payments, such as lower fees and the lack of an expiration date, ACH payments also carry certain risks.
Since ACH transfers weren't originally designed for modern e-commerce, they have fewer anti-fraud measures in place than credit cards.
Whereas an online credit card payment usually requires a CVV and a billing address in addition to the card number and expiration date, an ACH transfer only requires the account and routing number. Because of this, customers should only use ACH payments with merchants they trust.
In addition, ACH payments are slow, and there's no guarantee of payment when receiving an ACH transfer. If the customer doesn't have the funds in their account, the transfer may be rejected days after the purchase was made.
What Is an ACH Return Dispute?
The ACH network has close to 70 different return codes that can cause a previous transaction to be reversed, transferring the money back from the receiving financial institution to the originating financial institution.
The good news for merchants, however, is that banks are much more strict about the reasons for reversing an ACH payment than they are a credit card charge. While customers can get a credit card chargeback by claiming they never received what they ordered or the product was damaged, ACH payments will only be reversed if there was a problem with the payment itself. A problem with the product or service the customer purchased doesn't qualify.
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?
An organization called the National Automated Clearing House Association (NACHA) is the governing body that sets the rules and standards for the ACH network, and they don't provide any means for a merchant to argue that an ACH return was illegitimate.
On the other hand, the fact that ACH returns can't be reversed means that banks are far more hesitant to grant them in the first place. An unsupported claim of fraud often won't be enough to convince a bank to file a return. That's good news for merchants who frequently deal with friendly fraud.
That doesn't mean ACH transfers are completely immune to friendly fraud, however. Customers can still dispute a transaction under false pretenses, even if they might have to be a bit more specific. So, if friendly fraud still exists with ACH payments, what can merchants do about it?
How Do You Fight Fraudulent ACH Returns?
Contact Your Customer
When a dispute arises, your best option is to try contacting the customer directly. Oftentimes, solving customer issues over the phone or email will enable them to call their bank and cancel the dispute. There’s no easier or more effective way to resolve a dispute, and it’s often beneficial to repair relationships with unhappy customers, too.
This can be a very effective approach to use with customers who didn't intend to engage in friendly fraud, but who thought disputing the transaction was their only option. 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 the merchant no choice but to seek out other ways to protect themselves. Merchants who contact their customers to resolve ACH disputes report that they succeed in recovering up to 25% of their lost revenue.
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%.
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. In order to minimize your upfront legal costs, 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.
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 Prevent ACH Returns?
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.
Transparency and Accessibility
Customers often file disputes because they feel like the product or service didn’t meet their expectations, or because 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 them. Set realistic expectations about your products and services — don’t make promises you can't keep. Make it easy for customers to reach you by phone and email and respond to them as quickly as you can. These basic steps can eliminate many potential disputes.
Fraud is the second most common reason for ACH returns. Since banks are handling ACH transfers themselves, these transactions are typically analyzed more carefully than credit card payments, and banks are more likely to contact the customer to confirm the transfer was intentional. Unfortunately, savvy fraudsters still have ways of making transactions that will fly under the radar.
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.
A frustratingly frequent occurrence is a dispute triggered by the simple fact that the customer doesn’t recognize the name they see on their account statement. This is actually the third leading cause of disputes.
It is the merchant’s responsibility to ensure that their customers can recognize their business from the information provided in the billing descriptor.
If your business is registered under a different name than your storefront, you need to talk to your 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!
Preventing Chargebacks Wherever You Find Them
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 from 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.