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Electronic funds transfer risks: ACH risk issues and control procedures

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Electronic Data Interchange is the most prevalent method that financial institutions use to transfer funds. In the U.S., an estimated $500 billion is transferred among financial institutions daily. While affording convenience and speed, Electronic Funds Transfer (EFT) also involves potentially serious security problems, requiring financial institutions to take special precautions in Automated Clearing House (ACH) activities. The purposes of this article are to enumerate some risks that financial institutions face in ACH activities and describe how to minimize such risks.


The advent of information technology ushered in the paperless payment system among businesses. This paperless transfer, called Electronic Funds Transfer (EFT), is initiated by one party, passed through to the party's bank, dubbed ODFI (Originating Depository Financial Institution), and forwarded on to the Automated Clearing House (ACH) for delivery to the payee's financial institution, called RDFI (Receiving Depository Financial Institution). Thus, an EFT system is a computer-based network that enables the initiation, approval, execution and recording of payment transfers through electronic impulses and machine-sensible data-often leaving no physical audit trail. Financial institutions use three major forms of EFT's: remote banking services, retail point-of-sale services and direct deposit/preauthorized payment services. ACH's commonly call EFT's as ACH credit/debit transactions.

Despite the importance of these systems, many financial institutions fail to understand fully the potential credit risk and fraud related to ACH services. Credit risk and fraud are of particular concern during weak economic periods, when bankruptcies and business failures are more prevalent. The purposes of this article are to address the issues of EFT risks and to suggest measures to reduce exposure to such risks.

Two basic types of ACH transactions exist: ACH credits and ACH debits. ACH credit transactions transfer funds from the transaction's Originator to Receiver. Such transactions include the direct deposit of payroll, pension and annuity payments,...