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The adage that “the best defense is a good offense” means being proactive rather than passive can give you an advantage over your opponent—whether with your competition or in processing ACH payments. That’s right! Even when it comes to initiating ACH payments. So, what can your company do to protect itself from potential losses related to disputed ACH debit transactions? First...

Authorizations (refer to the Nacha Operating Rules, Section 2.3, for complete requirements based on the type of ACH debit your company is sending)

1. Obtain proper authorization from the account holder prior to debiting their account. You should ensure the terms of the authorization are clear and readily understandable by the account holder. This means they must know: 

• Whether they are authorizing one payment, multiple payments or recurring payments (e.g., payment made on a monthly basis), and
• How to cancel their authorization (i.e., include specific instructions on how to do so, such as submitting a request in writing or requesting cancellation via a phone call).

2. Provide a copy of the authorization, either electronic or hard copy, to the account holder.

3. Retain the original or copy of the authorization (electronic or hard copy) for your records and ensure it is securely stored. The ACH Rules require your company to keep this for two years from the termination (e.g., the account holder is no longer a client or has fulfilled their financial obligation) or revocation of the authorization. As a best practice, you may consider keeping it longer.

4. Prepare to respond to requests from your financial institution for proof of authorization. The timeframe in which it must be provided to them should be outlined within your ACH Origination Agreement. If you cannot provide proof within the prescribed timeframe or not at all, you could be required to accept the return of the payment. This means you would give the account holder back the monies collected and potentially suffer a financial loss.

You’ve followed the authorization steps and transmitted your ACH debit file to your financial institution, which sent it into the ACH Network for processing to the account holder’s account. Now what happens?

Understanding the Role of the Account Holder’s Financial Institution

The account holder’s financial institution is responsible for processing ACH payments to the account number in the ACH entry. This means if the account number exists and there are enough funds to cover the debit payment, then it will automatically be processed. And life is good! Or is it?

The account holder is responsible for reviewing their account activity and notifying their financial institution of any errors. If they notice a debit that (1) they did not authorize, (2) they had authorized but have since revoked or (3) they had authorized that was processed incorrectly, such as for the wrong amount, they should contact their institution.

If the account holder’s notification is within 60 calendar days of when the debit posted to their account, their financial institution can return the payment on their behalf. This means no investigation is required to determine if the account holder’s claim is valid or not. Instead, based on the account holder’s signed and completed Written Statement of Unauthorized Debit (WSUD), they can return the payment to your company’s financial institution. Upon receipt, your institution must accept the timely returned entry and may then charge it back to your account. Now what?

Handling Returned Payments

If you have a copy of the account holder’s authorization related to the returned payment, you must resolve the dispute directly with the account holder. In addition to having a copy of the authorization, you may ask your financial institution to request a copy of the Written Statement of Unauthorized Debit (WSUD) from the account holder’s institution.

A WSUD is a legal document instructing the account holder’s institution to return the payment. It does not relieve the account holder of any financial obligation to your organization. Therefore, you may choose to seek legal counsel to recover any losses associated with the return of the payment. Or, you could work out an alternate payment plan with the account holder. The decision is yours.

Requests for copies of WSUDs must be made within one year from receiving the returned entry. The account holder’s financial institution has ten banking days, which equates to approximately two weeks, to provide the WSUD to your financial institution.