What are the consequences of not validating transaction data?

Transaction validation involves verifying bank account details and authenticating owners using various data sources. Its purpose is to help ensure that each transaction is legitimate and accurate, helping to safeguard all the parties involved in the payment process.

Without proper transaction validation, businesses risk costly setbacks and possible compliance issues. According to a survey conducted by the Association for Financial Professionals, 80% of companies reported problems with payment fraud in 2023, and 59% of those organizations were unable to get their money back despite increased cybersecurity measures¹. Unfortunately, these sorts of attacks are also becoming harder to spot due to advances in generative AI.

Validating transactions is not only becoming increasingly essential for regulatory compliance, but also crucial for protecting businesses from operational and financial risks. However, if a business fails to validate data before a transaction is processed, what can go wrong?

The risks and consequences of not validating transactions

Recovering funds from erroneous payments can be costly and time-consuming, leading to operational disruptions and unhappy customers. The consequences can be far-reaching and include:

1. Fraud: Failing to validate transactions exposes businesses to fraud, lost revenue and reputational damage. It also increases a business’s vulnerability to bad actors and could lead to penalties for non-compliance with security standards.
2. Inefficient operations: Incorrect transaction data leads to costly manual corrections, delaying cash flow and diverting resources from productive work, thus reducing profitability and growth.
3. Reputational damage: Consistent transaction errors or fraud can harm a company’s reputation. Leading to loss of customers and difficulty acquiring new business.

One of the most straightforward but potentially disastrous consequences of failing to validate transactions is sending money to the wrong account. This can easily happen through Automated Clearing House (ACH) transfers if the account information entered is incorrect.

It’s easy to imagine an individual at a company mistakenly entering an invalid routing number when processing a vendor payment, causing the transaction to fail. While this may seem like a small error, it quickly compounds into a series of costly events. The company not only faces transaction fees, but also risks delays in vendor payments and damage to its business relationships and customer trust. In the long run, the financial impact of a single failed transaction often outweighs the cost of using a transaction validation system, which could prevent such errors from occurring in the first place.

Fraud detection and prevention are increasingly integral to compliance protocols, with evolving standards requiring robust measures to protect transactions. Validation Services from J.P. Morgan Payments provides a suite of tools, including Account and Entity Validation, and Account Confidence Scores, to help businesses effectively mitigate transaction fraud risks in today’s dynamic environment.

Validation Services from J.P. Morgan Payments can help mitigate the risks associated with transaction validation errors. These services help businesses automatically verify and validate transaction data before processing. They can help ensure that transactions are legitimate and error-free, and may reduce the risk of fraud and compliance issues.

Next Steps

Visit the Payments Developer Portal to discover more about the Validation Services API and learn how you can enhance your payment processing and operational efficiency.

1. The 2024 AFP® Payments Fraud and Control Survey Report, Association for Financial Professionals, 2024