ACH Warning

ACH Warning: a reader asks…

I use auto-pay for a lot of things these days, such as utility bills, insurance, and quarterly estimated tax payments. Sometimes that’s using my credit card, and on some I see the option for setting up payment via “ACH”. I understand this is a direct, bank-to-bank transfer of funds and would allow me to avoid credit card surcharges. Is there any downside to using ACH?

Actually, yes, there is a significant risk to giving anyone authorization to debit your bank account using ACH. Once anyone (e.g., a 3rd party) has an ACH auto-payment authorization from you, they can present a payment request to your bank, and your bank must pay it. Even if you rescind your authorization with whoever you gave it to, the 3rd party can ignore it and continue presenting payment requests to your bank. For example, if you have an insurance policy and have set up automatic payment via ACH, you can still be charged the premium even if you’ve canceled the policy (this actually happened to a reader).

When you authorize an ACH, you do so with the 3rd party, not with your bank. The 3rd party then presents that to your bank, which authorizes them to debit your account from that point forward. When you rescind an ACH authorization, you also do so with the 3rd party, not your bank. That 3rd party has no obligation to present this rescission to your bank, and unscrupulous 3rd parties can continue to present payment requests, which your bank must honor.

The safer way to make online auto-payments is to use either your credit card or your bank’s bill pay utility (if they offer one). Credit cards have a lot of consumer protections built into the law to prevent fraudulent use. Since your bank’s bill payment utility is under your direct control, you can cancel auto-payments at any time.

With a credit card, you will still set up the auto-payment through the 3rd party. If you wish to cancel the auto-payment, you still have to go through the 3rd party’s procedure (generally, you set this up and cancel it using your online account with the 3rd party). Using your bank’s bill pay utility, you do that with your bank (generally online, either through the bank’s website or an app on your smartphone/tablet).

Both of these methods are pretty safe to use. If you do not do any online banking or payments, you may be able to visit your bank in person and set up automatic bill payments. Just check first and be sure to bring your utility or other invoice that includes the company name and address, as well as your account number.

If the 3rd party only offers auto-pay via ACH, I recommend you continue making payments manually. ACH is just too risky for consumers (in my opinion). There are good banking regulations, specifically Regulation E (Electronic Funds Transfer Act) and the NACHA Operating Rules, but the dispute process is more onerous than disputing a credit card transaction. My example above is based on an actual event: a reader’s bank account was drained by the insurance company, even though they’d both rescinded the ACH authorization and canceled the policy in writing after a huge premium increase. The reader had to go to their bank and register a dispute, which took quite a bit of time before the funds were restored to their account.

With a credit card, a quick phone call is all it takes to dispute a transaction, and the charge is immediately reversed. That usually also involves canceling the credit card (and issuing you a replacement with a different number). Last bit of advice, you should keep a record of all your auto-payment accounts, so that if you do change credit cards you can update the auto-pay instructions (e.g., payment method). Oh, and I’m not pushing or advocating for setting up auto-payment of any of your bills, that’s a personal decision for each one of us to make.