The ACH world lacks the authorization component that is present in the credit card sphere. Credit cards allow merchants to authorize a sale at the time of the payment, so the merchant will know that they are definitely getting paid. A business knows that their customer has the requisite funds on their card to make their payment in real time, and the funds are reserved.
So, we can see how credit cards are validated, but how does the Bank Account Validation process work?
Businesses adopt Bank Account Validation systems in order to mitigate the risk associated with payment, without these systems your customers will most likely be required to do significant work to obtain correct or valid bank account information.
The validation process helps merchants lower their risks when accepting checks through the use of real-time verification tools, which range from negative databases and automated routing number checks to practically real-time inquiries into current account status and checking account balance inquiries.
Most third party entities that offer Bank Account Validation services include routing account number validation, negative databases, and ATM networks. The bank routing number identifies the bank the check is drawn against, and these can be browsed in real time. Negative databases exist as a history of checking account info, with many retailers contributing data to the network. Recency is an issue because the customer’s last written check at a participating retailer is the last data point. This means that data can be out of date.
ATM networks are created by banks and Credit Unions contributing data . Daily uploads on account status are made to the network, and queries to the network can provide account insight. Check verification inquiries come with an almost immediate response. These responses can tell you:
- The account is non DDA eg Home Equity checks
- The account is in an NSF status: For some businesses this is important as they do they know they have a good account
- The account # is invalid
- The account is closed
Implementing a Bank Account Validation Service can dramatically reduce bad check acceptance and the workflow problems they create.