Automated Clearing House transfers, or ACH payments, are one of the most convenient and secure options for businesses as they offer a variety of options for payment collection. ACH payments are beneficial for recurring payments such as gym memberships, school fees, etc. They are also great for those involving large sums, as in the case of law firms and other professional services. Although credit and debit card transactions are among the most commonly used payment methods, ACH payment is becoming more popular every year.
Businesses need to know the basics of ACH payments, including what happens if ACH transfers are returned.
ACH payment process
Before knowing what happens when ACH payments are returned, it is vital to learn the basics of an ACH payment. ACH payments are electronic money transfer regulated by the NACHA (National Automated Clearing House Association). ACH payments use bank routing numbers and account information for transferring funds between banks. These transactions usually take one to three business days to process, and the costs are lower than paying via credit or debit cards or wire transfers.
ACH network is used for various transactions such as direct deposit, regular or recurring bill payments, high-value transactions, business-to-supplier transactions, and so on.
Although the vast majority of ACH transactions are processed without any problems, it triggers a return if your transaction cannot be completed. To clearly understand ACH returns, it’s essential to understand who the involved parties are and how they interact with each other throughout the process.
An ACH transaction needs an originator and a receiver often referred to as the Originating Depository Financial Institution (ODFI) and the Receiving Depository Financial Institution (RDFI). When the ODFI sends a request to an RDFI for an ACH transaction, it is either accepted or rejected. If the request is rejected, the receiver sends an ACH return to the originator citing a reason code describing the cause for rejection. This process is carried out with the ACH operator processing the transactions between the ODFI and the RDFI.
What Causes ACH Returns?
ACH returns or ACH rejects happen when the transaction cannot process as intended. Additionally, as the ACH transactions aren’t processed in real-time like a credit or debit card authorization, they can be returned or rejected later, even when the transaction is assumed complete.
Subsequently, if a return happens, the ACH operator issues an ACH return code explaining the issue, and the RDFI alerts the ODFI with a three-digit return code. In case a transaction triggers an ACH return, you needn’t worry. There are several reasons for the failure to process a transaction. It could be something as simple as entering the wrong account number or more severe as removing fund transfer authorization.
Whatever the reason, you can resolve the issues by getting in touch with the customer or by contacting the financial institution. The best way to find out how to fix an ACH return is to look at the code and find the reason for the return.
Meaning of the ACH Return codes
Every ACH return code starts with an “R” followed by a double-digit number. Even though there are around 85 return reason codes for ACH transactions, the following ten return codes are the most common ones:
- R01: insufficient funds in the account
- R02: bank account closed
- R03: no account or unable to locate the account
- R04: invalid account number structure
- R05: unauthorized debit (consumer using a Corporate SEC Code)
- R06: ODFI requested a return
- R07: customer revoked authorization (transaction disputed by the account holder)
- R08: payment stopped (stop payment)
- R09: uncollected funds
- R10: originator not known and or not authorized to Debit Receiver’s Account
The codes R05 and R07 are only applicable for consumer accounts and might take up to 60 calendar days to resolve. Almost all the other return codes take approximately two banking days to resolve. But you should remember that the ODFI and RDFI handle the resolution of ACH returns as regulated by NACHA. As these codes evolve, there are various rules for how the ODFI and RDFI must handle the return according to the return code.
Standard Entry Class or SEC codes are mandatory for ACH payments and are used to specify the type of transaction. NACHA governs SEC codes, and any ACH transaction without proper SEC code classification will result in a return. There are several SEC codes, and you can use more than one to describe the transaction.
ACH Return Fee
Like a transaction processing fee, ACH returns also attract additional fees. Although the fees vary, they are between $2 and $5 per return and are usually passed on to the consumer.
Disputing ACH Returns
ACH returns can be disputed if the transaction was misrouted, was a duplicate entry, had incorrect information, wasn’t returned within the correct time frame as stipulated by NACHA, or was in case of unintended credit to the receiver during the reversal. Returns that meet the above criteria should be sent within five banking days from the return settlement date. RDFI can still contest them at this point, where the dispute is resolved outside the ACH network.
ACH payments have experienced tremendous growth recently with the growing popularity of virtual payments and merchants seeking less expensive methods to process transactions offering convenient solutions to customers. A clear understanding of the process and the recourse available in case of rejection is vital to setting up ACH payment. Check out these resources if you want detailed insights into monitoring and support for payment hubs, unified communications ecosystems, and contact centers.