ACH Reversal

An ACH reversal occurs when a previously initiated ACH (Automated Clearing House) payment is canceled or corrected after it has been submitted. Reversals are typically triggered due to errors such as incorrect payment amounts, wrong account numbers, or duplicate transactions. 

They follow strict rules set by the National Automated Clearing House Association (NACHA) to ensure accuracy and protect both the sender and the receiver. 

What Is an ACH Reversal

An ACH reversal is a process used to cancel or correct an ACH (Automated Clearing House) payment that has already been submitted for processing. It typically occurs when a transaction contains an error, such as sending funds to the wrong account, entering the incorrect payment amount, or accidentally initiating a duplicate payment. 

Under NACHA (National Automated Clearing House Association) rules, reversals are permitted only in specific situations and must follow strict guidelines to protect the integrity of the payment system. A reversal must be initiated promptly, usually within five business days of the original transaction's settlement date. 

Common examples that may require a reversal include payroll mistakes, customer billing errors, or data entry issues. Not all ACH payments can be reversed, and once a payment is successfully processed without error, a standard reversal is no longer an option. 

In such cases, the sender must work directly with the recipient to recover the funds. Proper handling of ACH reversals helps businesses and financial institutions minimize financial risks and maintain accurate transaction records.

The Origin of ACH Reversals

The origin of ACH reversals is closely tied to the development of the ACH network itself, which was established in the early 1970s to improve the efficiency of electronic payments in the United States. 

As businesses and financial institutions began to rely heavily on ACH transactions for payroll, bill payments, and direct deposits, the need for a formal mechanism to correct errors became clear. To address this, the National Automated Clearing House Association (NACHA) established a set of operating rules, including specific procedures for reversing transactions that contained mistakes. 

ACH reversals were designed to ensure that errors such as incorrect payment amounts, wrong account numbers, or duplicate entries could be quickly corrected without compromising the trust and stability of the electronic payment system. 

Over time, these rules have been refined to balance the need for flexibility in fixing errors with the need to protect account holders from unauthorized or unexpected changes to their accounts.

What Information Is Needed to Submit an ACH Reversal

To submit an ACH reversal, specific and accurate information is required to ensure the correction is processed properly and in compliance with NACHA operating rules. The party initiating the reversal must gather and provide details from the original transaction, along with a valid reason for requesting the reversal. Proper documentation and adherence to timing requirements are critical for a successful submission.

The following information is typically needed to submit an ACH reversal:

• Original Transaction Details:
  
  • Settlement date of the original ACH payment
  • Amount of the original transaction
  • ACH trace number (unique identifier for the transaction)
• Sender and Receiver Information:
  
  • Name of the originator (person or business that sent the payment)
  • Originator’s account number and bank routing number
  • Name of the receiver (person or business that received the payment)
  • Receiver’s account number and bank routing number
• Reason for Reversal:
  
  • A clear explanation that meets NACHA’s accepted reversal reasons, such as:
    
    • Duplicate transaction
    • Incorrect dollar amount
    • Incorrect account number
    • Incorrect receiver
• Corrected Entry (if applicable):
  
  • If a corrected transaction needs to be resubmitted, the corrected data should be prepared separately following NACHA file standards.
• Timeliness of Request:
  
  • Reversals generally must be initiated within five business days of the original settlement date.
  • Delays beyond this window may require alternative resolution methods, such as direct recovery negotiations with the receiver.
• Authorization and Supporting Documentation:
  
  • Some financial institutions may require internal authorization forms or supporting documents that explain the error and confirm the legitimacy of the reversal.

Submitting a complete and properly documented reversal request minimizes delays and ensures that both the sending and receiving banks can process the correction efficiently.

Example of ACH Reversal

Suppose an employer processes payroll through the ACH network and accidentally sends an employee $5,000 instead of the correct amount of $500 due to a data entry error. After reviewing the payroll records the next day, the employer notices the mistake even though the funds have already been deposited into the employee’s account.

To correct the error, the employer contacts their bank to initiate an ACH reversal. The bank requires specific details, including:

• The original transaction’s trace number
• The settlement date of the payment
• The names and account numbers of the sender and receiver
• The exact reason for the reversal (incorrect dollar amount)

The reversal request is submitted within the five-business-day window set by NACHA rules. Once processed, the $5,000 is retrieved from the employee’s account. After the reversal is completed, the employer sends a new ACH transaction to deposit the correct $500 salary.