What is the verification process for ACH payments?

ACH payments are a secure, reliable way for your business to send or receive funds. That’s at least in part thanks to ACH verification.  

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ACH verification is crucial in preventing payment failures, fraud, and compliance risks. Verifying a bank account’s validity and authorization before processing transactions helps your business avoid financial losses and disputes.

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Let’s look at the most effective ACH verification methods, how they work, and why they’re essential for secure and seamless payments.

What are ACH payments?

Automated Clearing House (ACH) payments are electronic bank-to-bank transfers processed through the ACH network, managed by the National Automated Clearing House Association (Nacha). These payments are batch-processed and usually take one to three business days.

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You might use ACH transactions to:

• Pay employees via direct deposit
• Settle vendor invoices
• Charge customers for subscriptions or recurring payments
• Collect invoice payments

ACH payments are cost-effective, automated, and ideal for high-volume transactions. But you risk payment failures and fraud if you don't verify bank accounts beforehand.

What is ACH verification?

Why verification matters

When you collect bank account details from a customer, vendor, or employee, verification ensures that:

• The account belongs to the person or business providing the details, preventing unauthorized transactions and identity fraud
• The account is open and capable of sending or receiving ACH payments to avoid failed payments

Different methods of ACH verification

It’s important to understand the four most commonly used methods of ACH verification because each has its pros and cons. Understanding them will help you make decisions like which ACH verification methods to avoid if you’re in a hurry or which to choose if you need to verify account ownership. 

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Let’s break them down:

1. ACH prenotification entry

A prenotification (prenote) is a zero-dollar transaction sent to a bank to confirm that the provided account details are correct before initiating actual payments. 

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As the originator, you send a prenote to the recipient’s bank, which then verifies the account and routing number. If no issues are reported within a set period, the account is assumed to be valid and ready for transactions.

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Let’s look at the pros and cons of using ACH prenotification entries for ACH verification:

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If the bank doesn’t respond to ACH prenotification entries, you’ll need to try another ACH verification method. You’ll also need to be confident of account ownership or verify it in another way of using this method. 

2. Micro-deposit verification

Micro-deposit verification involves sending small test deposits, usually between $0.01 and $1, to the vendor’s bank account to verify ownership. 

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Once the deposits are made, the vendor checks their bank statement and confirms the exact amounts received. If the reported amounts match the sent deposits, the account is successfully verified and approved for ACH transactions.

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Let’s look at the pros and cons of using micro-deposit verification for ACH verification:

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Micro-deposit verification can be a good ACH verification method since it verifies not only account validity but ownership as well. But it’s not the best choice for time-sensitive transactions. 

3. Account validation services

Account validation services are third-party services that verify bank account details by checking them against large databases of financial institutions. 

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When you send a verification request, the service cross-references the provided account details with its database. It then returns a response confirming the account's validity, status, and, in some cases, ownership.

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Let’s look at the pros and cons of using account validation services for ACH verification: 

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The accuracy and real-time verification can make account validation services a good ACH verification method for time-sensitive transactions. They generally cover major US banks but may not be an option with smaller banks or credit unions. 

4. Instant linked account verification

With instant linked account verification, your vendors can log into their online bank accounts to verify their information. 

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Vendors enter their banking credentials using a secure third-party interface. Once those credentials are authenticated, you’ll receive verified bank details instantly, confirming the account’s validity and ownership without delays or manual input.

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Let’s look at the pros and cons of using instant linked account verification for ACH verification:

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Instant linked account verification can be a good ACH verification method for timely transactions. You’ll need to confirm that your vendor’s bank supports it and may want to compare the cost with account validation services. 

The step-by-step ACH verification process

We’ve covered the four main types of ACH verification so you’ll be able to decide when to use each. Now let’s look at how to perform ACH verification. It’s a simple process when you break it down into these six steps:

Step 1: Get vendor authorization

Obtain authorization from your vendor through a signed written agreement or an electronic ACH authorization form. This confirms consent for ACH transactions and access to their bank account.

Step 2: Collect bank account details

Gather your vendor’s name, bank routing number, and account number. Accurate details prevent processing delays and transaction failures.

Step 3: Validate account information

Ensure that the routing and account numbers follow standard formats to detect errors early. Verify account ownership using micro-deposits or instant linked account verification methods for additional security.

Step 4: Conduct final validation checks

Use fraud detection algorithms or accounts payable (AP) software with fraud protection capabilities to analyze transaction patterns and flag suspicious activity. Check for sufficient funds to prevent failed transactions.

Step 5: Process the transaction

Submit the ACH entry to your bank (the Originating Depository Financial institution, or ODFI), which sends it to an ACH operator. The operator routes it to the recipient’s bank (the Receiving Depository Financial Institution, or RDFI) for ACH debit or credit processing.

Step 6: Monitor transactions and maintain records

Track transaction details, verification statuses, and discrepancies. Keeping records ensures compliance and helps resolve disputes efficiently.

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Why businesses should verify new bank accounts

Here’s why ACH verification of all new vendor bank accounts is essential for your businesses:

• Prevent fraud: Fraudsters often use fake or stolen bank account details to initiate unauthorized transactions. Verifying accounts helps your AP team confirm that the provided details are valid, reducing the risk of fraud-related losses. 
• Reduce errors: Incorrect account details can lead to failed transactions or payments sent to the wrong recipient. Verifying account information before processing payments minimizes these risks.
• Build vendor trust: Your suppliers want assurance that their financial data is secure. Verifying their bank accounts shows that your business prioritizes security and accuracy. 
• Save costs: Failed transactions, chargebacks, and indemnity claims can be expensive. Verification helps you catch potential issues before they become costly disputes. 
• Ensure regulatory compliance: Many industries must comply with anti-money laundering (AML) and know-your-customer (KYC) regulations, which require businesses to verify bank account ownership. 

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As ACH transactions continue to grow in volume, fraudsters are finding new ways to exploit weak verification systems. Regularly updating your verification processes and integrating automation tools can further enhance security and protect your finances while saving your business time and money.

Automate all your payments with Ramp

By understanding ACH verification, you can ensure your business’s ACH payments are secure and run smoothly. And to streamline your entire AP process, using AP automation software like Ramp gives you complete visibility into the status of all your payments, including those ACH transfers, for better cash flow management. 

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Your team can stop manually entering information and start downloading and scanning everything from invoices to receipts and purchase orders. And Ramp’s automated 2-way and 3-way matching and streamlined, automated approval workflows mean hours of reclaimed time your team can spend on other initiatives. 

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Discover all the ways Ramp Bill Pay can save your team time and money.