ACH returns explained
The ACH (Automated Clearing House) network processes different types of electronic transactions, including direct deposits and direct payments. If those types of ACH payments can’t be processed properly, they may result in ACH returns.
This article will explain everything your business needs to know about ACH returns, including why they happen, how they work, and how you can best handle the returns process. We’ll also include information on ACH fees and return codes.
What is an ACH return?
An ACH return is an electronic transaction that’s sent back to the original sender by the recipient's bank. This happens when the payee’s bank can’t process the transaction, whether it’s due to insufficient funds, an invalid account number, or a closed account – among other reasons.
Once the transaction’s been returned, the sender’s bank will notify the original payer and may charge a fee for the return. The sender’s bank may also try to resend the payment, or contact the payee directly in order to resolve the issue.
ACH returns are common. However, your business should still follow the best practices when handling ACH return transactions to help minimize the risk of repeat returns, and to prevent returns before they happen. We’ll explain everything further down the page.
ACH return vs reversal
ACH returns and ACH reversals are both caused by errors and are governed by NACHA (National Automated Clearing House Association). However, they follow different rules.
ACH returns are best understood as rejected payments initiated by the recipient’s bank, with a specific time frame when the return must be received, depending on the return code.
An ACH reversal is a manual request to cancel a completed transaction. The reversal must be initiated within 24 hours of finding the error, and within five days of the original transaction.
What causes ACH returns?
ACH returns are caused by transactions that can’t be processed properly. When transactions go wrong, the ACH network notifies the originating bank that it couldn’t collect funds from – or deposit funds into – the recipient’s account.
Unlike credit or debit card transactions, ACH transactions don’t happen in real time and can be returned even after the transaction appears to be finalized. When ACH returns happen, the recipient bank generates a return code and notifies the originating bank.
There are many reasons why transactions may fail to be processed – all ranging in levels of severity. For example, ACH returns can be due to an incorrect account number, or by more complicated reasons like the recipient revoking authorization for the transaction.
Common ACH return codes
There are over 80 ACH return codes, but these are the most common:
- R01: Insufficient Funds - the recipient’s account doesn’t have enough funds to cover the transaction.
- R02: Account Closed - a previously active account has been closed.
- R03: No Account/Unable to Locate Account - the recipient's account number structure is valid but doesn’t match the individual identified in entry, or the account couldn’t be found at the bank.
- R04: Invalid Account Number - the account number structure is incorrect or invalid.
- R05: Unauthorized Debit to Consumer Account Using Corporate SEC Code - an ACH debit entry that wasn’t authorized by the recipient.
- R06: Returned per ODFI's Request - the originating financial institution (ODFI) requested the return of the transaction.
- R07: Authorization Revoked by Customer - the customer who previously authorized entries has revoked the authorization for the transaction.
- R08: Payment Stopped - the recipient has requested the stop payment order for the ACH debit entry.
- R09: Uncollected Funds - there might be sufficient funds at the time, but the account doesn’t have sufficient funds to handle an account’s total debt obligations.
- R10: Customer Advises Not Authorized - the recipient has no relationship with the originating bank and has told the bank that the transaction wasn’t authorized.
These codes are there to help your business understand why the ACH was returned, which should help you to resolve the issue. The end goal is to help your business avoid repeating these failed transactions, or by preventing ACH returns before they happen.
What happens if an ACH payment is returned?
If an ACH transaction is returned, the receiving depository financial institution (RDFI) will notify the originating financial institution (ODFI) and generate a return code.
Here’s a breakdown of what happens:
- The RDFI sends a return transaction to the originating bank, indicating that the transaction wasn’t accepted.
- The ODFI sends a return code to the sender, which gives the reason for the return. If the return was caused by an incorrect accounting information, the bank may also provide a ‘notice of change’ (NOC) to the sender, updating the sender on the recipient’s new bank account details.
- The funds from the original payment are then returned to the sender's account.
- The ODFI may then charge a fee for the returned payment, depending on the bank’s policy. We’ll discuss fees in the next section.
- Once the sender has resolved the issue, whether that’s by updating the account details or ensuring the bank account still exists, they can choose to resend the payment.
- Lastly, the two banks involved in the ACH transaction will update their records to reflect the returned payment.
No two banks are truly the same, so it’s worth checking with your bank on their specific process for ACH returns. We recommend that you regularly monitor your ACH transactions to help prepare your business for ACH returns, ensuring you can resolve the issue quickly and easily.
What is an ACH return fee?
On average, ACH return fees cost $2 to $5 per return. ACH return fees are charged by the bank, and work in a similar way to bounced check fees. The sender may not always be charged by the bank, but it’s worth checking with your bank about their ACH return charge policy.
Best practices for merchants to handle ACH returns
Unlike credit card chargebacks, you can’t dispute ACH returns. However, there are some ways your business can help protect itself from recurring ACH returns, including:
- Regularly monitor ACH transactions and returns to stay informed and take action as necessary.
- Use fraud monitoring tools to help fight against unauthorized returns and nefarious users.
- When verifying bank accounts, use name returns to ensure the sender’s name matches the information you have on file, and carry out balance checks to see if there are sufficient funds in the account.
- Regularly monitor IP address usage to see if an end user is signing in from new or multiple IP addresses, which could indicate fraud.
- Establish transaction limits to minimize the risk of ACH returns caused by insufficient funds.
- Give your customers the option to cancel transactions within a set time frame, which can help prevent unintentional payments.
- Provide comprehensive onboarding for your customers to help you understand who they are and what sort of payments they’re likely to make. We recommend asking for additional documents, such as bank statements and photo IDs.
- Address the root cause of the return, whether that’s by updating the recipient's account information or ensuring that the recipient's account still exists.
- Quickly notify the customer about the return and any related fees or charges, and provide clear instructions on how to fix the issue.
- Maintain accurate records of all your ACH transactions and returns, including the reason for the return and any fees charged.
- Communicate clearly with the bank and follow up with them if there are any issues or questions related to the return.
By following these best practices, you should stand a better chance in managing and minimizing ACH returns, helping you save time and money.
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