What Is an ACH Reversal & How Does the Process Work?

ACH transactions are a widely utilized method for electronic money transfers between financial institutions within the Automated Clearing House (ACH) network. This system supports numerous financial activities, encompassing the direct deposit of paychecks and automated bill payments. While generally reliable, an ACH transaction may require correction through an ACH reversal. An ACH reversal undoes an erroneous or unauthorized electronic funds transfer, resolving payments processed incorrectly or without authorization.

Defining ACH Reversals and Common Scenarios

An ACH reversal is a specific transaction designed to undo a previously initiated ACH entry that was made in error. This mechanism allows the originating financial institution (ODFI) to correct mistakes by pulling back funds from a recipient’s account. It differs from an ACH return, which occurs when a transaction fails before funds are transferred, often due to issues like insufficient funds or invalid account details.

Common scenarios necessitating an ACH reversal include instances where a payment was accidentally sent multiple times, known as a duplicate entry. Another frequent reason is an incorrect amount, such as entering $100 instead of $10, or misplacing a decimal point. Payments sent to the wrong recipient due to an incorrect account number or routing number also warrant a reversal.

Unauthorized transactions, where an account holder did not permit the original debit, are also grounds for an ACH reversal. While less common for originator-initiated reversals, a legitimate stop payment order placed by an account holder on an outgoing payment before it clears can effectively lead to a transaction being undone. Insufficient funds (NSF) cause an ACH transaction to fail and result in an ACH return, not a reversal, as the funds never successfully transferred to begin with.

The Mechanics of an ACH Reversal

The Originator is the individual or entity that initiates the original ACH payment, such as a company paying its employees via direct deposit. The Originating Depository Financial Institution (ODFI) is the Originator’s bank, responsible for receiving the payment instructions and sending them into the ACH Network.

Nacha establishes and enforces rules governing the ACH Network, including conditions and timelines for reversals. The ACH Operator (e.g., Federal Reserve or The Clearing House) acts as the central hub, receiving entries from ODFIs and distributing them to the Receiving Depository Financial Institution (RDFI). The RDFI is the bank where the Receiver, the individual or entity intended to receive the original payment, holds their account.

When an error is identified, the Originator contacts their ODFI to request a reversal. The ODFI then initiates a reversal entry through the ACH Network, which is transmitted to the RDFI. The RDFI attempts to process this reversal by debiting the Receiver’s account, provided sufficient funds are available.

Nacha rules impose strict timelines for initiating reversals, generally requiring them within five banking days of the original settlement date for common error types like duplicate entries, incorrect amounts, or wrong recipients. For unauthorized entries, consumers may have up to 60 days from their bank statement date to dispute the transaction. However, a reversal is not guaranteed, especially if the funds have already been withdrawn from the Receiver’s account. Specific Nacha codes are used to categorize the reason for the reversal, providing a standardized communication method between financial institutions.

Requesting an ACH Reversal

Understanding the implications of an ACH reversal depends on whether you were the recipient of the original credit or the sender of the original debit.

If You Received an ACH Credit That Was Reversed

If an ACH credit you received is subsequently reversed, your account will be debited for that amount. This typically occurs because the original credit was erroneous. If you believe the original credit was valid and the reversal is incorrect, you should promptly contact your bank, the RDFI, to dispute the reversal. You may need to provide documentation to support your claim that the original transaction was legitimate and authorized.

If Your Outgoing ACH Payment Was Reversed

If your outgoing ACH payment is reversed, the funds you sent are returned to your account. This can happen for various reasons, including the recipient’s account having insufficient funds, the account being closed, or an invalid account number. It could also be due to the recipient’s bank refusing the transaction or the recipient disputing the debit. If your outgoing payment is reversed, your bank will notify you with a reason code indicating why the transaction failed, and you should investigate the specific reason and communicate with the intended recipient to understand the issue. Based on the cause, you may need to correct the recipient’s banking information or make alternative arrangements for payment if necessary.