Member Update: The Reversals Playbook

Sometimes processing ACH entries can feel a lot like that old Abbott and Costello routine, “Who’s on first?” The Originating Depository Financial Institution (ODFI) and Receiving Depository Financial Institution (RDFI) are both running on parallel paths to execute, but somehow, they trip over one another, complicate the play, and then need an umpire to clarify the call.

Take reversals as a chief example. Say an ODFI issues an erroneous debit and a reversing credit, but the RDFI returns the debit before the credit has arrived, and a snowball effect occurs, creating more work for both parties to clarify the situation. The same could happen when the opposite occurs! Reversals are tricky because they require a more manual approach to stop the chain reaction of reversal-return-dishonored returns.

Reversals typically happen when the ODFI issues an erroneous entry or there’s a duplicate file. That means an ODFI may issue a single-entry reversal, or they may reverse an entire file. When a file’s involved, there is a larger impact and larger liability at stake for all parties, but either scenario creates a convoluted situation.

The Proactive Play

So, what is the best way to proactively prepare for reversals? Every scenario is unique, and we prefer not to generalize, but in most cases, the following steps will apply:

• ODFIs: Stop a reversal before it is necessary. ODFIs need to ensure that any Originators, Third Parties, or Third-Party Senders know the rules around reversals. Make certain that Originators recognize when and how to use them and that they understand reversals are not a quick fix for a mistake. Incorporating reversals into your agreements with those parties will also give you added emphasis on the importance of this knowledge. Additionally, consider implementing controls around duplicate files so you can catch them before they are released.

• RDFIs: Return both or keep both. The simplest guide for an RDFI is to either return the entry/file and its subsequent reversal or keep the entry/file and its reversal. If you have initiated the return prior to seeing the reversal, returning the reversal will ensure that the accounts in question end at the appropriate balance. When receiving a reversal, the institution should research the account to see what was previously posted and/or returned. RDFIs must handle reversals with care to reduce the risk of unintended credits or debits.

• ODFIs and RDFIs: Train up your team. Ensuring your team knows where the Nacha Operating Rules address reversals—Article Two, Section 2.8 Reversing Files and Section 2.9 Reversing Entries—will help provide the basic framework for understanding the warranties and obligations of all ACH Network participants on this subject. You can also lean on Appendix Four when processing returns, and dishonored returns related to a reversal scenario. Given how complicated reversals can become, specialized training may be a good preparatory measure. It will help your team not only gain the necessary expertise but also an actionable understanding of how to pivot in more complicated situations. NEACH’s course, “Reversals and Your Role in Them,” helps to establish that baseline knowledge and create some confidence around these complex situations.

The Best Defense

As they say, the best defense is a good offense, and planning for how to manage reversals as outlined above solves that approach. But sometimes, you’re caught off-guard by a sneak play that no one saw coming. These scenarios happen and make things murky.

That’s when you should call NEACH. We have a team of Rules experts who can help you work through a difficult scenario and support you in limiting liability, adhering to the Rules, and identifying your best outcome.

Above all, know that reversals are challenging, confusing, and quite often, scenario-based, which is why they are one of the most frequently addressed topics on our Payments Hotline. So, give us a call when you have a question. NEACH is here for you!