Overview of the eCheck system
eChecks are handled through the Automated Clearing House” (or ACH) system. ACH is used as a financial system in the United States and as an alternative to the credit card rails systems. According to ACH governing body, NACHA (National Automated Clearing House Association), in 2020, ACH payments increased by 8.2%, and the dollar worth increased by 10.8%. In the third quarter of 2021, ACH volumes were up by 7.7%, with payments up over 13%, totaling $18.1 trillion. The reach of ACH is also increasing. NACHA has worked with the Office of Foreign Assets Control (OFAC) to develop a standardized format that enables international money transfers: as such, eChecks are thriving in a highly competitive payments landscape…but why?
An eCheck is a type of electronic funds transfer (EFT) that uses the ACH rails to propagate the transaction. The ACH has a fundamental competitive edge over the credit card system: eChecks typically incur lower costs than credit card transactions. This makes eChecks the preferred payment method for large transaction items such as mortgage payments, recurring billing, etc. In other words, the differentiator for eChecks choice is in the payment type.
The moving sands of payments
eChecks: security and liability
However, any payment system is a potential target for increasingly sophisticated cybercriminals and fraudsters. The Financial Ombudsman Service recorded a 66% increase in the first quarter of the 2021/22 financial year in general financial scams. Fraud can also affect eChecks, and as their use increases, it is likely that fraudsters will follow the money. To mitigate fraud, the eCheck system has certain measures in place. These measures are handled either intrinsically within the ACH system or by using third-party measures such as account validation/AML checks.
Digital signatures: each transaction is digitally signed using digital certificates. This ensures the integrity and is non-reputability of the transaction. Digitally signing a transaction also helps to prevent eCheck duplication. The security of digital signatures is inherently tied to the next layer of security of eChecks:
Authentication: the party that submits the payment information must be authenticated/verified before the transaction is allowed.
Encryption: eCheck transaction data is encrypted before passing through the networks.
Digital certificates/tokenization: underpin the encrypted transfer of data, tokenization of data, and digital signatures used in an eCheck transaction
Pre-notification: a merchant should check that a customer has a valid bank account during the customer setup process.
Verification/validation: third party account validation tools are the suggested method to add this important function as the ACH network does not have an equivalent account verification system to the one used by the card networks.
On March 19th, 2021, NACHA introduced the WEB Debit Account Validation Rule. This rule was brought in to help with concerns over the potential for fraud across the ACH network. The rule requires that an account is validated the first time it is used to make an online payment. Any entity using an eCheck payment method will also be affected by this rule. NACHA specifies”
“ACH Originators of WEB debit entries are required to use a “commercially reasonable fraudulent transaction detection system” to screen WEB debits for fraud.”
Survival of the fittest payment system
In evolutionary theory, the ‘survival of the fittest’ describes how an individual that is well-adapted to a particular environment can thrive and go on to reproduce more than less well-adapted individuals. This tenet of evolution is analogous to the payments system environment. There are many ‘habitats’ within the payments environment that determine the best type of payment method. eChecks may seem in many ways,’ old school’, but they are popular under certain environmental conditions. In other words, eChecks are best adapted to certain types of payments.
The payment options across the globe are in continuous competition with each other. The payment system that survives this competition will do so because they offer the optimal mix of low transaction costs, convenience, speed, a great customer experience, and security. eChecks that use anti-fraud and AML technology to bolster security offer this ideal mix for recurring payments such as rent, subscriptions, car leases, and similar. Changes in the suitability and accessibility of credit card rails and the opening of international payments via ACH will also create opportunities for eChecks in the payments arena. Because of meeting these various expectations, eChecks will likely continue to thrive.
Learn more about Eastnets' robust, real-time and multi-channel fraud prevention solution.
Contact us today for a free demo.