Posted on April 27, 2021 by Transcend Pay
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 ReturnsA 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.
ACH ReversalsA 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.