Know Your Customer (KYC)

Protecting Your Business from Fraud & Credit Risk

New customers are essential to grow your business, but payroll providers must also consider the risk associated with processing payroll for clients via ACH. The two greatest risks are fraud risk and credit risk.

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Fraud Risk

While there are several types of potential fraud risks, including employee fraud and spear phishing attacks, we want you to be aware of a specific threat involving signing up a new client whose intent is to defraud the payroll provider.

The client sets up direct deposit services with the payroll provider. However, the client company is not a legitimate business. The debit to the client's account is returned NSF, but not until after the monies deposited into the employee's accounts has been withdrawn. The client then disappears. To help mitigate this type of fraud risk, ask yourself these questions:

  • Is the company a new business or new customer to you and insisting on processing payroll via ACH immediately?
    • Process prenote transactions to verify the client account information provided
  • Does the company want a “special” payroll run (i.e. bonus payment)?
  • Is the company located out of your local area/area you normally do business in?
  • Did the company get your contact information from the internet?
  • Does the client only want to do business via phone?
  • Does the business only have a cell phone for contacting them and/or using a generic email address?
  • Is the company address a PO Box?
  • Does the client use payroll cards or pre-paid cards to pay a majority of the employees?
  • Do the payroll amounts seem inconsistent with the company's industry?

If you answer yes to any of the above questions, be cautious about signing up this client. Be diligent to protect your business by knowing your customer. You can use the same tools to combat this type of fraud risk as you can credit risk; require a wire or 5-day window, or write checks.

Credit Risk

While most clients will have no issues with NSFs or funding their payroll transactions, not all clients are good candidates for ACH Direct Deposit. Generally, payroll is processed on a one or two day hold from the time the file is submitted for ACH processing until the employees are credited/paid. In this scenario, the debit from your client for the amount of the payroll file hasn't actually cleared their bank. This means you may not find out about an NSF on the client's payroll until after the employees are paid. If the client does not have the funds to correct the issue, your company, the payroll provider, as the originator, is liable. Some questions you can ask to determine if a client is a good candidate for ACH direct deposit include:

  • Is the client a well established company?
  • Is the client a financially stable company?
  • What processes or policies does the client have in place to ensure funds are available for payroll?
  • Does the client have a good business history with your company?

If you determine the client is not a good candidate for ACH processing on the standard 1 or 2 day hold, here are some options for your company to still process their payroll:

  • 5 day ACH processing window
  • Wire
  • Wire drawdown (aka reverse wire)
  • Write checks until you feel more comfortable with client's ability to fund their payroll