One question we’re often asked regarding ACH risk is “What types of risks are associated with originating ACH transactions?” This is an important question for you as an originating depository financial institution (ODFI) to be able to answer, because you are responsible for settling payments originated into the ACH network using your routing transit number (RTN), regardless of which customer originates through you. The types of risk associated with originating ACH transactions fall into three basic categories:
- Operational – the risk of loss due to human error or computer mishap that may delay or alter an ACH transaction
- Credit – the risk that a party to a transaction cannot provide funds for settlement
- Fraud – the risk that a transaction may be initiated or altered in a dishonest or criminal attempt to misdirect or misappropriate funds.
Let’s examine the most fundamental of the three - credit risk - in a bit more detail.
One of an ODFI’s primary responsibilities is to control the initiation of ACH transactions into the network. This is because the ODFI assumes responsibility for all transactions initiated using its RTN. The amount of credit risk undertaken by initiating the transactions is a function of whether the transaction initiated is a credit or a debit.
With credit transactions, the originator is crediting the receiver’s account and will be debited for that amount on the settlement date. The ODFI incurs credit risk at the time the transaction is initiated until the time its customer funds the account at settlement to cover the corresponding debit. While this all takes place within a relatively short period of time, the ODFI needs to be confident the originator has the funds.
With debit transactions, the originator is debiting the receiver’s account and will be credited for the amount on the settlement date. The ODFI is susceptible to credit risk due to the possibility of returns from the time it makes funds available to the originator until the time the receiving depository financial institution (RDFI) can no longer return the debit. While most returned transactions are received within a few days, some may take considerably longer. Since receivers can have up to 61 days to return debits because they were unauthorized or the authorization was revoked or improper, the timeframe during which an ODFI might need to charge back the originator’s account can be lengthy. Again, the ODFI needs to be reasonably confident the originator will still be positioned to cover the returned debits.
The Federal Reserve Banks’ suite of FedACH Risk® Management Services and their FedEDI® Plus Service strive to provide tools to help you monitor for all three types of risk.