Say your business is moving money electronically through the ACH Network but the standard transfer time of four to five business days is not fast enough for you and your customers. Faster electronic payments will allow your business to enhance the experience of your offering.
At Dwolla, we can propose various solutions using different features of the Dwolla Platform that will support your business’ needs, (e.g. Same Day ACH, Next Day ACH) but first we need to explain more about risk and subsequent assessment.
Risk? What risk?
As we’ve discussed in blogs and resources, every transaction at Dwolla comes in two parts: a debit and credit. You’ve read the piece we published on how faster payments work, so let’s talk more about the risk.
When discussing the risk associated with an ACH transaction, you have to understand three things:
For the sake of time, let’s assume you understand all of these items. If you don’t, this blog can help.
So then, what’s the risk with faster transactions?
First, speeding up a transaction doesn’t speed up the return code timeline. Some of the most common return codes still take up to two banking days to post back to Dwolla’s financial institution partner. We automate the return process and automatically notify your business once a return code is issued.
So let’s say money has moved from a sender’s external funding source to a receiver’s external funding source using next day debit and same day credit. The receiver could collect their funds the next day or the day after the payment was initiated, congrats!
What happens when a return code, let’s say R01 (insufficient funds), comes back on the sender’s account on the third day?
Based on the ACH rules, the sender’s bank and Dwolla’s financial institution partner manage the return between them, so that:
- The sender’s bank credits funds back to the sender.
- Because the return originated within your application’s ecosystem, you, Dwolla’s client, must resolve the negative balance within your ecosystem.
Consider what happens when you can’t pull funds back from the receiver to resolve the negative balance. The scenario here is fire and brimstone: the sender fraudulently sent $10,000 and the receiver took it and closed their bank account. The sender also closed their bank account. Now the sender and the receiver have made off, literally, like bandits.
Bottom line? Faster payments are great but they do create risk and your business should be aware of its responsibility for any losses.
Managing Risk While Offering Faster Payments
So what can be done to manage this risk? Since Dwolla clients are responsible for the payment risk associated with their applications, Dwolla reviews the financial health of your company along with the transactional health of previous ACH payments that your business may have with other providers. If you don’t have that history or if your history doesn’t depict your platform as a low-risk business related to payments, then we may ask to review your financial health through your most recent bank statement or current year balance sheet.
Is it possible to manage the risk related to ACH payments? Yes.
In addition to having a solid fraud monitoring and know your customer (KYC) program, the first thing we suggest is starting with standard ACH transactions. We can also help by implementing specific send limits for your platform.
If your users only ever send $500 or less, then it doesn’t make sense to set a sending limit above that. You can also limit your users’ ability to utilize faster payments programmatically. For example, you can build a rule into your software that the user must complete ten successful standard-speed transactions before they have access to faster payment speeds.
Finally, you can utilize a balance check feature to make sure you are avoiding the most common return code—insufficient funds (R01).
Is there a surefire way to avoid returns, fraud and negative balances? No, but we can discuss best practices with you to create comfort for your business and for Dwolla.