Providing a product or service to a customer and then not receiving payment for what you supplied isn’t a pleasant experience for any business owner. Even worse is when there’s an additional charge on top of it. Now you’re out the product, payment, and you’re in the hole by around 30 bucks more.
The above scenario plays out every day in the form of a credit card dispute. In this article, we’re going to talk about handling their close cousin, ACH disputes, which are different from credit card disputes.
The basics of an ACH dispute
ACH stands for Automated Clearing House and is an electronic banking network used for direct deposit and electronic bill payment. It’s a payment method that allows merchants to debit a customer’s bank account.
Before a merchant can debit someone’s bank account, it must have approval from the account owner and be in compliance with the ACH network. Failure to do so can result in an ACH dispute and ultimately a chargeback.
The ACH network allows up to 60 days for a consumer to file a dispute and two days for a business to file. The protection of consumers against unauthorized bank account debits is federally regulated under the Electronic Fund Transfer Act, which banks must follow.
For businesses involved in an ACH dispute, some merchants and banks will immediately credit the customer’s account. The merchant will incur a fee, called a chargeback. For businesses, it’s important to understand what leads up to such a dispute.
Main reasons an ACH dispute occurs
There are three main reasons that someone may dispute an ACH transaction:
- The customer never authorized the transaction or the authorization was revoked.
- The amount debited from the account was not the authorized amount.
- The customer agreed to an authorized date but the account was debited before that date.
The best defense in avoiding ACH disputes is to prevent them. With a little planning, you can decrease your chances of getting involved in a dispute.
Preventing ACH disputes
Unrecognized Business Name - If a customer doesn’t recognize a transaction, he/she can dispute it. You might say that isn’t the business’ fault. Maybe it isn’t, but if the business can do something to avoid this scenario in the first place, shouldn’t it? Let’s look at an example.
A customer buys a small-ticket item from ABC Car Components. He/she pays through an ACH transaction. It’s a Saturday morning, so the transaction may not show up in the account until Monday or Tuesday. The customer has a busy weekend and forgets all about the purchase. On Monday, the customer sees a transaction for $15 from “A* CC.” The customer has no idea who this is and files a dispute.
Bank statements, like credit card statements, only allow for shortened names. The merchant chose one that is a little cryptic. If the merchant would have instead chosen something closer to its actual name, like “ABC CC,” that probably would have decreased the chance of getting a chargeback. If you aren’t able to come up with anything close to the spelling of your business name, communicate to the customer under what name the charge will come.
Recurring Billing - Another dispute scenario that can be prevented happens with recurring billing. Here’s an example: A company has two services for which customers can pay monthly or biannually. A customer decides to pay for the biannual service and receives a discount. Four months in, the customer loses interest in the service and abandons it. Two months later, after the customer has forgotten all about the service, he/she sees a debit from an unrecognized company and files a dispute.
How could the company have prevented this dispute? By sending out an email a few days before the biannual billing. The customer could have then emailed or called the company to cancel the service. That little bit of effort by the merchant can pay off in spades by avoiding chargebacks.
Maintain A Good Relationship - good communication with customers can also help avoid chargebacks. If customers trust you, instead of going directly to their bank and filing a dispute, they may simply come to you. If you and the customer are able to resolve the issue, you can avoid a dispute and chargeback.
Always let customers know they can go to you for questions. Provide easy-to-find points of contact, such as an email and a phone number in your emails, on your website, business cards, and printed materials. This little bit of effort can save you a lot of money and time.
ACH agreement guidelines
ACH transactions require that the customer agrees before any billing can take place. In addition to ACH debit authorization, clear terms, and an explicit cancellation/refund policy, the agreement should capture certain information about the customer:
- Phone Number
- Last four digits of the account number
Also, send a receipt after each purchase. The above can vary by ACH processor. The main point is that you follow the processor’s guidelines exactly.
Avoiding ACH disputes is not difficult but it does take some planning. Be aware that even the best planning may not avoid a dispute in the end. A company putting forth the effort will certainly lower its probability of getting into an ACH dispute.