How to prevent ACH payment fraud

If you’ve ever transferred money from one bank to another, you’ve probably heard of the Automated Clearing House (ACH) network. While ACH offers unparalleled convenience for both individuals and businesses by facilitating seamless, efficient, and cost-effective electronic money transfers, dangers are more common than you may think — according to J.P. Morgan, ACH payment fraud remains a core risk for businesses.¹

Common types of ACH payment fraud include:

• Data breaches. Criminal organizations infiltrate a business’s systems to access sensitive information such as bank account details and personal data, which they then use to conduct unauthorized transactions or identity theft. These breaches often occur through hacking, malware, or exploiting network vulnerabilities.
• Insider threats. Employees or contractors with access to company systems and data can misuse their privileges to conduct fraudulent activities, including unauthorized ACH transfers.
• Kiting. The delay in processing ACH transactions can be exploited to make use of non-existent funds. Kiting involves creating a false balance in bank accounts by rapidly transferring funds between accounts at different banks.
• Check fraud. Given how easy it is to alter or forge a check, checks are, unsurprisingly, the payment method most often targeted by fraudsters, with 63% of organizations reporting that they have encountered check-related fraudulent activities.² That said, three-quarters of these organizations say they have no plans to discontinue using this paper-based payment method, highlighting the challenges in transitioning to more secure payment alternatives.
• ACH debit card fraud. Fraudsters gain unauthorized access to debit card information and perform transactions without the cardholder's consent. This can occur through skimming devices at ATMs or point-of-sale terminals, or through breached online accounts.
• Spear phishing scams. Targeted phishing attacks deceive specific individuals within an organization into providing sensitive information or transferring funds to fraudulent accounts. These scams are typically conducted through personalized emails that mimic legitimate sources.

What are the risks of ACH fraud?

There are significant consequences to ACH payment fraud, especially for small businesses that may not have the means to implement large-scale fraud-detection measures. Any loss of revenue due to fraudulent payments can be harmful, as can the damage to a business’s reputation following a data breach.

That’s why recognizing warning signs and suspicious activity is so important — and why your business needs to be aligned with a provider of ACH protection, such as PayPal Seller Protection.

What are common ACH fraud schemes?

ACH fraud schemes involve deceptive tactics aimed at gaining unauthorized access to financial information or assets. One common scheme is an account takeover, where the fraudster gains access to a person's bank account through stolen login credentials. Once inside, they can initiate unauthorized ACH transfers, draining funds from the account swiftly without the victim's immediate knowledge.

Fake invoices are also a frequent tool in ACH fraud. Here, businesses receive invoice requests for products or services that were never ordered or delivered. Unsuspecting employees might pay these invoices without verifying the details, leading to financial losses.

Another common method is phishing scams, where fraudsters send emails or messages that appear to be from a legitimate source. These messages typically encourage recipients to provide sensitive information like bank account details, which are then used for fraudulent transactions.

Learn more about phishing and spoofing crimes.

What are ACH fraud prevention best practices?

There are several fraud prevention best practices small businesses can put in place to help reduce the risks of a fraudulent ACH transfer. These include:

• Implementing multi-factor authentication for transactions. By requiring more than one form of verification before granting access to a system or approving transactions, multi-factor authentication (MFA) reduces the risk of unauthorized access caused by stolen credentials. The extra layer of verification could be something the user knows (a password), something the user has (a security token), or something unique to the user, like biometric verification (a fingerprint or face ID). Although the fraudster can hack or steal credentials to try to get into a bank account, they likely will not have means to this added layer of protection and their attempts will be thwarted.

• Using secure payment gateways and encryption protocols. Secure payment gateways ensure that all transaction data is transmitted securely between the customer and the merchant. Encryption protocols such as SSL/TLS encrypt financial data during transmission, protecting it from interception by hackers. Regularly updating these protocols and ensuring they meet industry standards can help businesses maintain a high level of security.

• Educating employees on ACH fraud awareness. Making sure employees are aware of the latest fraud tactics and preventive measures can act as the first line of defense against ACH fraud.

ACH payment security measures

Nobody wants to be the victim of financial fraud. Take these measures to protect your business against ACH payment scams:

• Verify customer identities and bank account details. Implementing rigorous verification processes for new and existing customers can help prevent fraud. Consider tools like identity verification services, which check the customer's personal information against public and private databases, and validating bank account details before processing transactions.

• Set transaction limits and thresholds. Establishing limits on the amount that can be transferred in a single transaction or within a certain time period helps reduce exposure to large-scale fraud. Thresholds can be adjusted based on your business's risk assessment and the typical behavior of your customer base.

• Monitor and analyze ACH transactions. Continuously monitoring ACH transactions for unusual activity is critical. This can be done through automated fraud detection systems that flag transactions that deviate from established patterns. Regular analysis of these transactions helps refine the detection algorithms and improve preventive measures over time.

Despite the potential vulnerabilities, conducting ACH transactions is a commonplace practice for businesses — payroll processing, vendor payments, and customer refunds are just some of the occasions when ACH transactions may be necessary. To reduce vulnerabilities in your ACH transactions, consider these tips:

• Secure network infrastructure and devices. Strengthen the security of the network and devices involved in ACH transactions by implementing firewalls, intrusion detection systems, and secure Wi-Fi networks. Ensuring that all endpoints are secured against unauthorized access is critical for safeguarding financial data.

• Update software and security patches regularly. Keeping all systems up to date with the latest software and security patches closes vulnerabilities that could be exploited by cybercriminals. Even better, set up automatic updates to ensure that these protections are always current.

• Conduct periodic risk assessments and audits. Regularly assessing the risk landscape and auditing internal controls can help you identify potential security weaknesses. These assessments should be conducted by independent auditors to ensure objectivity and should result in actionable recommendations to enhance security measures.

• Invest in employee training and awareness. Make sure your employees are familiar with signs of fraud, understand the latest phishing techniques, and know how to respond appropriately to suspicious activity. Time is of the essence when it comes to fraud, and training programs help create a vigilant team that can detect and respond to threats swiftly.

Employee training and awareness

So, what should your employee training program focus on? Here are some key training topics:

• The various types of fraud. Help your staff learn about phishing and social engineering threats so they’re equipped to detect phishing scams, which often involve manipulative tactics designed to elicit confidential information. Training should include examples of common scams and the steps to take when such a threat is suspected.

• The proper procedures for reporting potential fraud internally. When potential fraud does occur, the last thing you need is for employees to panic or feel confused about what to do next. So, create clear guidelines on how employees can report any suspicious activity. This includes who to report to, how to document the incident, and the steps that follow making a report. These protocols ensure employees can take quick action to mitigate potential damage from attempted fraud.

Internal controls

Implementing stringent internal controls is also essential for mitigating the risks associated with ACH fraud. Strengthen your small business’s defenses by taking these measures:

• Require dual approval for transactions. When two individuals are required to approve ACH transactions, particularly for large amounts, you prevent any one person from having the ability to initiate a fraudulent transfer independently.

• Restrict access. Limit access to ACH systems and bank account information strictly to employees who need it to perform their duties. Regularly update and review access permissions to ensure security.

• Implement strong password policies and multi-factor authentication. Enforce policies that require employees to change passwords frequently and use strong, complex passwords. Additionally, multi-factor authentication (MFA) should be implemented to add an extra layer of security when accessing financial systems.

What fraud detection and response measures can businesses put in place to prevent ACH payment fraud?

To properly implement these best practices, it is necessary to develop a system of fraud detection and response. This should include:

• Deploying real-time transaction monitoring systems. Real-time monitoring systems allow businesses to detect and respond to fraudulent activity as it happens. These systems analyze every transaction for signs of fraud, including checking for unusual transaction amounts or patterns and triggering alerts for transactions initiated from unfamiliar locations or new devices. The immediate insights provided by these systems enable quick action to stop fraudulent transfers before they are completed.

• Developing a response plan for suspected ACH fraud incidents. Fraud can happen even to the most well-prepared businesses. Luckily, having a well-defined response plan in place can minimize damage when suspected fraud occurs. This plan should outline specific steps to be taken the moment fraud is detected, including who within the organization should be notified, how to stop ongoing transactions, and the process for investigating the incident. It should also include procedures for communicating with affected customers to manage their concerns and maintain trust.

• Collaborating with financial institutions, such as PayPal, to resolve issues. Building strong relationships with financial institutions can significantly enhance your business's ability to deal with ACH fraud. These partnerships help ensure that when fraud is suspected, you can quickly communicate with banks or payment services like PayPal to initiate fraud investigations, reverse fraudulent transactions, and restore compromised accounts. Working closely with these institutions also helps you stay updated on the latest security measures and fraud prevention techniques.

How to stay informed about ACH fraud trends

Fraudsters and their methods are not only constantly evolving and developing, but they’re also seeking new vulnerabilities to exploit. To avoid being caught off-guard, it is essential to remain vigilant and informed about the latest fraud schemes and tactics. Regularly engaging with industry resources and news can provide new insights into emerging threats and recommended protective measures. By staying attuned to these developments, you can adapt your business’s defense strategies in real-time.

Beyond keeping up to date, it’s vital for small business owners to understand the potential impact of ACH fraud and the importance of effective prevention strategies. When it comes to fraud, it’s always better to be proactive rather than reactive. Fraudsters are becoming more sophisticated, and fraud represents one of the greatest ongoing threats to any small business. According to a 2023 Experian report, nearly 70% of businesses report that fraud losses have increased in recent years and over half of consumers feel they’re more of a fraud target than a year ago.³

By prioritizing ACH payment security, businesses can safeguard themselves more effectively, maintaining the trust of customers, suppliers, and partners. Stay one step ahead with the help of PayPal’s fraud detection technology.