Check fraud right now is rampant. With all the shiny things out there like real time payments and Venmo, bad guys are like, hey look, no one's looking at checks.

Welcome to Focus, a podcast dedicated to the business of higher education. I'm your host, Heather Richmond, and we will be exploring the challenges and opportunities facing today's higher learning institutions. In this episode, I spoke with Brad Smith, senior director of industry engagement, and advocacy for Nacha to learn more about ACH and the benefits of this payment method for higher education. Hi, Brad, thanks so much for joining me today. I'm super excited to chat with you.

I'm excited too, I really appreciate being here. Thank you for having me.

Absolutely. Well, you know, we're here to talk about what's new with ACH payments. But before we do that, can you provide just an overview of your background and role at Nacha?

Of course, sure. I've been in payments for 25 years, which I don't often like to admit, but I have. I've worked in bank operations, ACH training and education at a regional payment association. I did digital and payment strategy at a big bank. And now IÕve been at Nacha for about five years. And I work with different industries, like higher education, colleges, universities, and explaining to them the benefits of using ACH or more ACH for their different payments.

Makes a lot of sense. And yeah, you definitely have the background to be a good educator. So speaking of education, let's go back to the basics. Let's start with what is ACH? And how does it work?

I've been doing this like I said, 25 years, and my family still asks me like, what is it that you really do? So you know, if you know nothing about ACH, and we're on an elevator, I had 30 seconds to tell you. So you get paid by direct deposit. You know what the ACH network is, that's an ACH payment. If you pay a bill online using your bank account number, that's ACH. If you get your tax refund by the federal government or the state government, that's probably ACH as well. If your mortgage, student loan, car payment, all that stuff comes directly out of your accounts, that's most likely ACH too.

Okay. And for merchants, it's a much more cost effective payment method, isn't it?

Definitely. Yeah. The fees that you're charged with other payment types are usually significantly higher. ACH tends to be a low cost, reliable, secure payment method.

That's why so many people want to use it and want to know how to use that, right? All those examples that you just gave. So let's talk about where the lay of the land is, when it comes to ACH. And again, you obviously just talked about several examples of where it's commonly used, but if you want to think a little bit about the growth and how are we seeing ACH continue to evolve?

Yeah, it's a rapidly growing modern payments network. We are going to celebrate our 50th year next year, so it's not new, but it's been able to remain relevant and remain modern. You know, often we read payments articles that referenced the ACH network as being a legacy payments network. It really isn't. The last five or 10 years, we've had all these cool payments, like Venmo, and Square Cash and all that kind of stuff. You know, the payments are still only made, like in an app like that by card, ACH or real time payment. So all the shiny, cool things that are out there, it can only be an ACH card, or maybe real time payment now. So the ACH network isn't going away. In 2022, there were 30 billion transactions. There were $76.7 trillion that went through the network in 2022. One of the newer additions, I guess it's really not new anymore. I guess it's like five or six years old by this point. But the same day ACH had saw a 44% growth in business to business payments in 2022. And then first quarter of this year, first quarter this year versus the first quarter last year, we saw a 94% growth, just in same day ACH.

Wow. Would you say maybe just people's brains shifted during the pandemic and how do I get funds delivered in a different way or faster way? Obviously, same day. We all want everything same day.

Yeah, the pandemic made a lot of businesses realize that they can survive without checks. ThereÕs still billions of checks that are being written. But when people had to stay in their homes, or work from home, I should say, they realized that there are other ways to make a payment. I mean, they do it at home. Sure you pay your electric bill and you go online and do that, why can't we do that as a business. And if you want to pay it fast use same day. So we've seen a huge growth in just business to business payments over the last three years, give or take.

And even I think about the consumer side that it's interesting that you say it used to be you had to have your check. And you had to give a little visual and say these numbers are your routing numbers. And these numbers are your account number. But now with online banking, I can just show and it says I could click the button in my bank at least and it shows me my ACH and routing, or my routing for ACH.

Absolutely, it is much easier, right? You don't need to depend on your checkbook. And I think the younger generation still has bank accounts. But I don't know if they can find their checkbook.

Right, but they go the mobile app, that's where I discovered it, you go to your mobile, and you say show me the account information, boom.

Right, and our phone is always with us.

So speaking of younger people and students then, how about higher education? How are you seeing ACH, being widely used with colleges and universities? You are obviously doing some education there.

Well, we just finished some research. So we have a little bit of good data for that. But the short answer is, the universities are using it for staff payroll, business to business payments, so either receiving payments from vendors, or paying their vendors. And of course, there's an opportunity for tuition. So I think that they're using it. Some of the smaller payments, they're not using ACH, but it's being used, especially for payroll and the other types.

And so, you think about, for colleges and universities, how they're using ACH and more on your research findings in terms of like, obviously, payroll, but when you think about tuition or more those big ticket dollars, is that kind of where you're seeing a majority of folks using it?

Yeah, so tuition definitely, that's one of the biggest payments that any family is going to make in a year. So I think they want to make sure that it's a secure method and low cost to the school. So I think that's one. But you know, there's still an opportunity to get rid of checks. I think ACH is still used for some of those larger payments, as opposed to smaller payments.

Absolutely. Well, you and I are both in the industry. So of course, we hear the word ACH. And we know what that means. And you're probably like me sometimes and get asked, do you take that via ACH? Can I have a direct deposit? And some people are going, what are you talking about? So there's definitely an education component to it. How are you seeing higher education institutions educating their students about using ACH for payment methods? Are they communicating the benefits? 

Yeah, the schools haven't really done that. You know, but that's where we come in, to help them with the education. I think most of the students are probably using cards and Venmo and whatnot for like their smaller on campus payments. So if they're at Shake Shack on campus, or if they're at the bookstore, those kinds of easy payments, I think are not really built for ACH, so to speak. So there's not much education on that. We are going to come up with a suite of tools to help higher education, educate the students and the parents. And we'll probably come out with that sometime early next year. It's something to do the education for us and then messaging that they could give to the parents and the students and their vendors as to why ACH is a good option.

And I think that the key that you just hit on too is from the security standpoint, so thinking about students specifically, what are the behaviors of the younger generation using ACH? What are they thinking about it?

Yeah, our research didn't necessarily reach that specifically or go after that. But we did research about a year ago, focusing specifically on that 22 to 34 age group, which really gets like college juniors and seniors. And 97% of those workers have a bank account, and 88% of those that got a W-2 use direct deposit. So I think that's much different, which is encouraging for ACH, but I think it's much different than what we expected. Because they're like, oh, younger kids don't like bank accounts and stuff like that. So they're using, you know, SoFi, and other things like that, which really aren't banks, necessarily, I mean, they are banks, but not in the traditional way that you and I think of the big banks. So, they still find the value in ACH, especially direct deposit.

Right, and a lot of those convenient person to person payment options, at the end of the day, it's connected to a bank account. So whether you realize you have a bank account or not, when you're doing Venmo or something, it's tying into your bank account on the back end. 

When you cash that out, when you transfer to bank, it's an ACH. Same thing with Zelle. Some of them like Zelle, use real time payments for some of that as well. But yeah, like I said it's hard ACH, real time payments really happening when you're using the app. 

So let's talk a little bit about kind of NachaÕs role in really defining how merchants use ACH.

Yeah, so we have a robust set of rules that lay out the foundation for that. But these merchants, which are ACH originators, in ACH language, have to enter into an origination agreement with a bank or credit union or third-party processor, like you guys. So the rules are the foundation for every one of those payments. And they define the roles and the responsibilities for financial institutions, and establish clear guidelines for each of the network participants. So an ACH originator is one of those participants in a merchant. So if folks listening to this want to see some of the rules, they are laid out on one of our web pages, its www.nacha.org/rules/new  so they can see the new ones. But if they want to see all of them, they can purchase online access to the rules, and you can find that on our website as well.

And you have to have rules, because anytime there's a payment method, there's always bad guys.

Exactly. There's no doubt.

So speaking of those bad guys, what fraud or risk attempts have you seen the most when it comes to ACH?

Yeah, I don't think ACH is a whole lot different than other payment types. I think what we're seeing is the trend now is the vendor impersonation. Where, as an example, you work in an accounts payable department at a school, and I call you up pretending to be from Acme paper. And I'm like, hi, this is Brad from Acme paper, we need to change the account number that you pay us to. Because the school buys a ton of paper. And then, you're like, okay Brad, let's change that. And then the next time you pay them that goes to my account not to the Acme paper account. Now we have a problem. So the schools and everyone, any business needs to have some sort of database that has a list of the people who only that person that can change the account number. Okay, did they email you using a known email address? Did they call you using a known phone number? So I think that's one of the more recent fraud things that we've seen anything that has any social engineering aspect to it, clicking the link in an email or a text, whatever it you have to really be diligent and be smart about who you're talking to, and what you're clicking.

We've all been trained, those of us in the business. And I was just talking actually, on the way here today, to some folks on my team, and we were talking about getting our reimbursement for an expense and we're all hesitant now. Are they really telling me I'm getting a refund back or getting my expense back? I'm not going to open anything anymore.

No, it is a little scary. It really is.

So let's talk a little bit more about that in terms of how Nacha really helps merchants address that risk and fraud component.

Yeah, that's always front of mind for us, like having the strict rules, then also having a risk framework. So we have two sections of the rules, there's the rules themselves, which is all legalese. And written like you would expect, like anything formal and legal like that. And the second part of the book is the operating guidelines. And that's more of a narrative in like in English as to how to apply those rules. So these have always had a risk lens to them. Because if you can't depend on the network, no one's going to use the network. So if it's fraught with fraud, no one's going to want to use it. So we actually came out with a new risk framework and updated risk framework class, to give guidance to financial institutions and merchants. And that can be found on our website as well. We have the new rule for ACH validation. So if you're doing a web transaction, you're paying a bill online, instead of keying in your routing number and account number, now the business you're paying, is going to use a service like Plaid, where you log into your bank account, log into your online banking, and this way, the account number isn't exchanged, no one is seeing the routing number and account number. So it makes for a much more secure, dependable transaction for both the consumer and for the business.

Yeah, I know a lot of our schools ACH validation has been so instrumental because you're absolutely right. Like anybody a student, especially when they go to type in the routing and account number, invariably, there was always a number that was transposed or wasn't quite right. And they get it back and realize it was just a wrong account number. So the validation has really helped.

And one more thing, we also have a newer, the Supplemental Data security requirements. At this point, it had two phases. And we're past those two phases now. But as of like, right now, if you as a school originate $2 million or more in ACH payments, then you need to make sure that anytime that ACH data is at rest, that the account information is unreadable, deleted, masked, etc. How you go about that doesn't matter to us. Let your IT people figured out your part. But anytime that data is at rest, and this goes for you as a school, if you're storing that account information on your local school servers. If you are a third-party payment processor, anytime that data is at rest, the same requirement is there. 

And it makes a lot of sense, like you said, anytime there's a payment, there is always a risk for bad guys coming in being able to grab that information. So being able to make sure that you don't just have account numbers out there readily available for bad guys to get in is so essential. So thinking about the new validation rules are we seeing then fewer invalid transactions?

Absolutely. I think we've completely eliminated the possibility of miss typing any of those numbers. And you know, sometimes those are 16 digit account numbers. So it's pretty easy to mess that up. Using services like Plaid, and the others are really helping clean up those erroneous transactions.

Now, that makes a lot of sense. So let's talk about, again, we all want to stay compliant, and there's always new rules. And so how can merchants really keep up with and stay compliant with all the Nacha requirements, especially when there's new ones that come about? 

Sure, I think that your bank or credit union that you originate through will help you a good deal with that. I think if you use a vendor, like TouchNet, I think they also play an important role in helping these schools accept ACH transactions, in a secure way, and minimizing risk for the school and the customers and staying compliant with Nacha.

That's great. Is there anything else you'd recommend is really best practices for preventing fraud?

Be diligent, be aware of the latest fraud trends. I think, a lot of this can be managed with the universities or colleges relationship with their bank or their processor, but if they want a more up to date training, there are, I believe the number is eight regional payment associations out there that you can become a member of as a school and they have in person or online training about all the latest rules. They have risk courses and audit courses and all kinds of things. They are a tremendous resource and are built for doing that education to training. I worked for one for 16 years. I know who they are what they do.

That's great. Well, I know everybody thinks it's just so easy. You just take a payment, that should be easy. And you're worrying about all this training to make sure you're taking the one payment method the correct way. So any final advice that you have for higher ed to really maximize the benefits of offering ACH as a payment method?

Yeah, you know, looking to reduce costs and create better efficiencies, what we found in that research, is the best opportunity for those schools, is with your vendor b2b payments. Whether you're paying them or receiving them, they're still very check heavy. Check fraud right now is rampant, with all the shiny things out there, like real time payments and Venmo. Whenever bad guys are like, hey, look, no one's looking at checks, let's go do fraud with checks. The bad guys are looking for the path of least resistance. And right now that's checks and they're going back to the old school, remember Frank Abagnale, Catch Me If You Can? TheyÕre doing the old check washing. So they're stealing checks, or stealing mail because checks are being mailed, and their check washing and doing that sort of thing. So really reducing the number of checks that you receive or pay yourself, you have to look at the total costs, because ACH is a lower cost than other payment types. But if you look at checks, buying check stock, storing checks securely, check reconciliation, reissuing lost checks, stolen checks, depositing the checks, are you bringing them to the bank? Are you paying to convert them in the back office, which is a feat, postage, all those things, you have to look at the complete cost of checks, it's going to be a lot. And then compare that to what it takes for you to have the relationship with your bank or credit union, or using a processor like you guys. So look at the big picture.

Yeah, that makes a lot of sense. And it's especially if everything's really migrating to digital. And a part of that is not just for the ease and convenience, but it's also from the security standpoint. Like you said, a little thin piece of paper check, and how you could just easily go open a mailbox or the bad guys know the pattern and to be able to take that and really replicate history when it comes to fraud. That's amazing to me.

It is but they're going to where the people arenÕt looking. So now we're looking. So we'll see.

Well, Brad, thank you so much for sharing your expertise on this topic. You know, at TouchNet, security compliance is one of our core focuses and ACH is always a big part of that. So thank you so much. 

Well, thank you. This has been a lot of fun, I appreciate this and I appreciate being invited. If you guys have questions, you can find me on LinkedIn and IÕd be glad to answer questions. 

Thanks for tuning in to this episode of Focus. Don't forget to subscribe so you can stay up to date on the business of higher education. For more information, check us out at TouchNet.com.