How ACH Reversal Rules Work

Payment Processing
When considering different ways of transferring money, many businesses are drawn to ACH payments for their convenience and reliability. While these direct payments are great in most circumstances, every now and then a situation arises where there’s a dispute over an ACH payment. The rules surrounding ACH reversals can be quite confusing, and it’s helpful to understand how these payments work when exploring who can reverse them and under what circumstances.

What are ACH Payments?

Often referred to as “direct payments,” ACH payments transfer money from one bank account to another bank account electronically, without having to utilize intermediary mechanisms like paper checks, credit cards, or wire transfers. The process takes place over a financial network known as the Automated Clearing House (ACH), which connects banks across the United States to one another. Regulated by a nonpartisan organization known as NACHA (National Automated Clearing House Association), ACH payments are used by tens of millions of people every year. In 2019 alone, there were 24.7 billion ACH transactions for a total value of $55.8 trillion, more than twice the value of the US GDP. Most people use ACH payments when their employer transfers their paycheck directly into their bank account using direct deposit or when they schedule an online or automatic payment directly from their checking or savings account. While they typically take several business days to process, ACH payments are also much more affordable than faster alternatives like wire transfers. Depending upon the processor, an ACH payment could charge a flat rate between $.25 and $.75 per transaction or a flat percentage fee between .5 percent and one percent per transaction. The system operates through a series of credits (“pushes”) and debits (“pulls”). In the former, transactions are initiated by the payer, and money is “pushed” from their account to the receiving party’s account. This is the method utilized in direct deposits, where money is being credited to an employee. When the transaction is initiated by the receiver, money is “pulled” from the payer’s account. In both instances, the transfer is facilitated behind the scenes by the bank initiating the transfer (the Originating Depository Financial Institution [ODFI]) and the bank receiving that request (the Receiving Depository Financial Institution [RDFI]). Communicating over the ACH network, the banks verify that the money involved is available for transfer and then issue a series of credits and debits to ensure that it can be transferred appropriately and quickly.

Can ACH Payments be Cancelled or Returned?

Yes and no. The terminology surrounding ACH payments can be somewhat confusing, so it’s important to understand the rules governing transactions gone awry. Strictly speaking, a transaction cannot be canceled once it has been submitted and processed. However, there are two ways in which the transaction itself can be undone after the fact. The distinction comes down to who is initiating the request.

ACH Returns

A return is initiated by the RDFI and is best understood as a rejected payment. Although there are many reasons why this might happen (about 70 distinct return codes), the most common causes of a return include:
  • Insufficient Funds: The payer’s available balance does not cover the debited amount.
  • Payment Stopped: The payer has requested a stop to payments to a specific ACH debit entry.
  • Incorrect Information: The account debited is either invalid, closed, or does not exist.
Upon rejection, an ACH payment is usually returned within two business days. In some cases, ACH returns occur due to unauthorized debits or authorized debits that have been revoked by the customer. In both cases, a written statement is needed to and processing for these returns can take up to 60 calendar days. This process is distinct from a chargeback, and the terms should not be used interchangeably. A chargeback involves disputed charges on credit and debit cards. Although they can affect underlying bank accounts, these charges don’t involve the ACH network.

ACH Reversals

A reversal is initiated by the ODFI and is best understood as an erroneous charge. There are three reasons why an ACH reversal might be requested.
  • Wrong Payment Amount: The wrong dollar amount was debited/credited.
  • Incorrect Information: The wrong account was debited/credited.
  • Duplicate Transaction: An account was debited/credited more than once.
Critically, reversals must be initiated by the originator, not the recipient. That means if someone was incorrectly charged an ACH payment, they must contact the person or company who charged them. Reversals should be initiated within 24 hours of the error’s discovery and within five days of the original transaction.

ACH Fraud

Because ACH payments don’t involve credit cards, they are not subject to PCI DSS compliance guidelines. NACHA does require all parties to put controls in place to safeguard sensitive financial data. Banking information involving account and routing numbers must be encrypted, and processes should be put in place to verify customer identity. NACHA provides extensive resources to help organizations develop their risk management protocols. When a fraudulent ACHE transaction occurs, it typically falls to the ODFI to resolve the issue. In most cases, the payer must work through their bank or payment processor to contact the originator, sort out the problem, and arrange for a reversal. Since this process can be rather cumbersome, some businesses place a block on their account that requires them to authorize each ACH transaction.

Streamline Your ACH Payments with the Right Payment Processing Solution

Having the right payment processing solution can help your business facilitate ACH payments through an easy-to-use merchant gateway. Whether you’re using direct transactions to pay your employees or collect payments from your customers, ACH payments can streamline your business and cut down on billing-related paperwork. Transcend Pay’s all-in-one merchant gateway solution can help you get started whether you’re a low-risk or high-risk business. Our no-reserve, no hidden fees payment processing system leverages our diverse banking network to help you keep more of your revenue to grow your business. To find out how much you could be saving with Transcend Pay’s merchant processing, contact us today for a no-strings-attached quote. 2021-Guide-to-Lending-Blog