Top 5 Mistakes to Avoid in ACH Processing: Failing to Secure Proper Authorization

When it comes to ACH (Automated Clearing House) processing, securing proper authorization is one of the most critical steps—and one of the most common mistakes banks and businesses make. Failing to obtain and retain proper authorization can lead to costly returns, compliance violations, and even legal penalties. Yet, many organizations still overlook the importance of this crucial step.

In this first installment of our "Top 5 Mistakes to Avoid in ACH Processing" blog series, we’ll explore the pitfalls of failing to secure proper authorization for ACH transactions and provide actionable advice on how to ensure your bank remains compliant and protected.

Why Securing Proper Authorization Matters

In ACH processing, every transaction must be properly authorized by the account holder before it is initiated. The National Automated Clearing House Association (NACHA) sets strict rules about how authorization must be obtained and stored. Whether it’s a one-time payment or recurring debit, failing to follow these rules can result in unauthorized returns, hefty fines, and a damaged reputation for your bank.

Here’s why securing proper authorization is essential:

1. Prevents Unauthorized Transactions

   Proper authorization ensures that the transaction has the account holder's consent, reducing the risk of disputes and unauthorized returns.

   
   

2. Reduces Compliance Risk

   NACHA rules require that proof of authorization be retained for at least two years after a transaction. Failing to do so can lead to compliance violations and potential penalties.

   
   

3. Enhances Client Trust

   Securing proper authorization builds trust with your clients by ensuring that their payments are handled securely and with transparency.

Common Mistakes When Securing Authorization

1. Incomplete or Missing Authorizations

   One of the most common mistakes is failing to collect complete authorization details. This can happen when authorization is given verbally, but the bank or business doesn’t follow up with written confirmation or recorded consent.

   
   

2. Not Retaining Authorization Records

   NACHA requires businesses to retain proof of authorization for two years. Many organizations either misplace or fail to properly store these records, leaving them exposed in case of a dispute or audit.

   
   

3. Using Incorrect Authorization Formats

   Different types of ACH transactions require different formats for authorization. For example, recurring payments require written authorization, while a one-time phone transaction can be authorized verbally. Failing to follow the correct format can result in compliance issues.

How to Avoid These Authorization Mistakes

1. Obtain Written Authorizations for Recurring Payments

   For recurring ACH debits, NACHA requires written authorization from the account holder. This can be done electronically (e.g., through an online form) or on paper. Always ensure that the authorization clearly outlines the terms of the transaction, including the frequency and amount of payments.

   
   

2. Record Verbal Authorizations for One-Time Payments

   When authorizing a one-time ACH debit over the phone, NACHA allows for verbal authorization. However, the business must record the conversation or provide written confirmation to the account holder before the transaction is initiated. Make sure to follow up with an email or letter confirming the payment terms.

   
   

3. Store Authorizations Securely

   Retaining authorization records for two years is a NACHA requirement, but how those records are stored is just as important. Implement secure storage systems—whether digital or physical—so that authorizations can be easily retrieved in case of an audit or dispute. Consider using encrypted digital solutions to enhance data security.

   
   

4. Implement a Robust Authorization Workflow

To ensure compliance, your bank should have a clear workflow in place for obtaining and storing authorizations. Automate as much of the process as possible, from generating authorization forms to storing and tracking the records. By using automated workflows, your team can ensure that nothing slips through the cracks.

How PlatformNext Can Help

Securing proper authorization doesn’t have to be a manual or cumbersome process. PlatformNext simplifies ACH processing by automating key aspects of authorization management. With PlatformNext, you can:

• Automatically generate authorization forms

  for recurring payments, ensuring that the correct format is used every time.

  
  

• Track and store authorizations securely

  with easy retrieval for audits and disputes.

  
  

• Automate follow-up communications

  for verbal authorizations, helping your bank stay compliant with NACHA’s rules.

By leveraging PlatformNext, your bank can avoid the common pitfalls of failing to secure proper authorization and ensure that every ACH transaction is compliant, secure, and efficient.

Stay Compliant and Secure Authorization with Confidence

Securing proper authorization is the foundation of ACH compliance and a critical step in preventing unauthorized transactions and disputes. By following best practices and leveraging automation tools like PlatformNext, your bank can avoid the costly mistake of failing to secure proper authorization.

Stay tuned for the next post in our "Top 5 Mistakes to Avoid in ACH Processing" series, where we’ll dive into the importance of adhering to ACH return deadlines.