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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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May 18, 2015


A Presumption of Innocence

Presumption of innocence is a principle that goes all the way back to Roman law. This concept means that if reasonable doubt remains after the accuser presents his or her proof, then the accused must be acquitted. In the payments ecosystem, the guilty is defined as the party that the account holder or cardholder has not authorized to conduct a transaction on that account or card. According to the 2013 triennial Federal Reserve Payments Study, the estimated number of unauthorized ACH transactions in 2012 reached a total of $1.2 billion.

With dollar stakes so high, reaching a guilty verdict when fraud has been committed is important. What is the best due process to identify the guilty while ensuring the preservation of the rights of the accused?

In 2009, NACHA members passed a rule change requiring financial institutions (FI) to keep the percentage rate of unauthorized transaction returns below 1 percent per originating company. If an originating company reaches the unauthorized return threshold, NACHA will contact the originating FI to investigate and resolve any potential issues that can lead to rules violations and fines. Some of the reasons an ACH transaction can be returned unauthorized include the following: the entry amount is different than the amount that was authorized, the debit was processed earlier than authorized, the transaction was fraudulent, the transaction sender is unrecognized, the check conversion was done improperly, or a previous authorization has already been revoked. Unauthorized transactions can even be a result of the receiving party committing the fraud, by reporting the transaction as unauthorized but still in receipt of goods and services. The rule change set an expectation that FIs would monitor unauthorized returns received for each originating company name over a two-month period.

Monitoring for unauthorized activity unveils a number of payment issues, but there are more opportunities to identify the guilty. The ACH operator provides unauthorized return rate data, representing returns coded properly with NACHA’s unauthorized return reason codes (R05, R07, R10, R29 or R51). If a disputed transaction is improperly coded or returned with a different code, the transaction would not factor into current unauthorized return monitoring. Regulation E provides consumer protections that require FIs to provide error resolution beyond the NACHA return deadlines and therefore such disputed transactions will also fall outside unauthorized monitoring, unless the FI manually adjusts return counts. Additionally, unauthorized transactions are sometimes quickly returned under the codes for "insufficient funds, "invalid account" or "unable to locate an account." These codes should also be monitored in order to uncover guilty originators.

Effective September 18, 2015, a new NACHA rule will lower the unauthorized transaction return rate to half a percent. In addition two new thresholds will be introduced to monitor other return reason codes that can unveil guilty originators while improving overall network quality. Thresholds are meant to provide a red-flag approach to return monitoring. However, return rates over or near the threshold should trigger investigation and due process before a final verdict is rendered.

By Jessica J. Trundley, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

May 18, 2015 in regulations | Permalink

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