Automated Clearing House (ACH) takes a more significant portion of the payments pie today than it did in the past. Credit card platforms such as Visa and Mastercard have approved payments on their platforms forever. Still, now many merchants and payment processors are starting to use the ACH system to process a specific payment type.
Merchant account providers have started to incorporate the ACH network to transfer funds overnight to process transactions for same-day or next-day funding types. Furthermore, ACH is the preferred payment medium for recurring revenue or subscription-type transactions.
Finally, ACH is a much more economical medium of transferring funds and processing transactions while also being considered more secure by some industry followers. Since ACH is gaining traction in the payment industry, it’s all the more in the merchants’ best interest to understand this payment form better. Merchants should understand what ACH is and some helpful terminology.
More specifically, there is an option for merchants to ‘reverse’ and ACH transaction before it is completed. It would help when they may need to do that, what are the requirements and processes of ACH reversals and how they differ from returns.
What is ACH?
ACH (Automated Clearing House) is a mechanism to transfer funds that banks have used for some time to price transactions within the US. The payments involved are often low in value and usually recurring, such as payroll. ACH is self-regulated by NACHA, formerly known as National Automated Clearing House Association. NACHA sets operating and security protocols for ACH transactions.
ACH transactions can be used by individuals, businesses, or government bodies for payments or direct deposit transactions.
ACH transactions are processed in batches at different intervals in the day. It is one of the fast ways to make payments with new standards currently being drafted to make them even faster, to the level of real-time.
Some helpful terminology regarding ACH
ODFI – Originating Depository Financial Institution – The financial institution, a bank, a merchant processor, an ACH API, or a payment gateway that starts an ACH transaction for the originator.
RDFI – Receiving Depository Financial Institution – The financial entity which receives the request to either credit or debit funds in ACH transactions. This can also be done by a bank, a merchant processor, an ACH API, or a payment gateway.
ACH Operator – Two overseeing bodies control and operate the ACH network. First is The Federal Reserve Banks’ Automated Clearing House (FedACH), a government body. The other is a private company, the Electronic Payments Network (EPN).
What is an ACH reversal, and why would you need it?
As a merchant would request an ACH payment process, one that is already on record as a recurring event, there may be times when it is required to reverse it. It’s important not to confuse ACH reversals with ACH returns. ACH returns are when an ACH payment cannot be processed due to some error and is returned with a three-digit code denoting the mistake. An ACH reversal is a
ACH reversals are stopping, undoing, or canceling an ACH payment request. There are many reasons why a merchants would need to do this, and there are requirements for them. Thankfully, unlike almost instantaneous wire transfers, merchants have the option of ACH reversals as they aren’t as immediate.
ACH payments may take a couple of days to process. The ODFI has different times to clear funds in batches at three intervals during the day. So when ACH funds clear depends on the following;
- When the request is initially made
- When the OFDI processes its batch
- When ACH network operators sort debits and credit in their system and route them
- When the RFDI receiving the request processes its batch
- When the receiving bank posts the payments into the merchant’s account
This timeline is important because, in this lengthy timeline, the merchant has the opportunity to reverse the ACH if they need to.
The requirements of ACH reversals
There are three grounds on which ACH reversals can be made. The reversal is requested by the ODFI and requires one of the following reasons:
- Incorrect payment amount – the amount debited or credited was incorrect
- Wrong information – the account debited or credit was incorrect
- Double payment – the payment was a duplicate transaction made erroneously
The ACH Reversal Process
How the ACH reversal takes place depends on how it was initiated. ACH reversals have to be undertaken by the originator. So if a customer was charged incorrectly, the customer has to reach out to the company that initiated that ACH. They should do this soon as possible, ideally within 24 hours of discovering the charge or within five days of the charge initiation.
Suppose the customer paid a bill via a recurring transaction. In that case, the customer should reach out to the biller for reversal of charges if the biller has the customer’s details on auto-ACH. However, suppose the customer initiates the payment through their systems or bank. In that case, they should contact their bank for the ACH reversal. The customer should reach out to the bank as soon as possible with the biller’s name and the transaction amount.
ACH has grown to become a larger piece of the payments industry. It can be considered the growing section of payments given that it has overtaken this piece of the pie even as the payments have grown tremendously as consumer spending behavior shifts to cashless. This growth has been facilitated by ACH being easier to use, more cost-effective, and considered by many to be more secure. This trend will further amplify as NACHA introduces speedier protocols to process ACH payments.
Given these trends, merchants need to quickly understand what ACH is and their options for ACH reversals. It would help to understand what ACH reversals are and aren’t and what impact they can have on merchants’ cash flows.