ACH payments are electronic money transfers between U.S. banks, available to businesses and individuals under the supervision of the National Automated Clearing House Association (NACHA).
When an ACH payment cannot be completed, the sender of an ACH request receives an ACH return.
In this guide, we’re going to explain the concept of ACH returns, the codes they come with, and what to do if you receive an ACH return.
What Are ACH Returns?
ACH returns are online payment transactions that cannot be completed, due to inaccurate payment information or non-existent or inadequate authorization. There are two parties in every ACH return process:
- An originator (Originating Depository Financial Institution – ODFI);
- A receiver (Receiving Depository Financial Institution – RDFI).
The originator sends an ACH payment request and the receiver, who either accepts it or rejects it. If the receiver rejects the ACH payment, they send an ACH return to the originator via the relevant ACH platform.
Notifications about returns are sent to originators in the form of ACH return codes.
Learn about the differences between ODFI and RDFI in our article ODFI vs. RDFI: Definitions and Differences.
What Are the Common ACH Codes and What Do They Mean?
Every ACH return comes with a certain return code, which consists of the letter R and a two-figure number. Each of these codes has a different reason for the return.
Note: Each return code has a return time frame, a period during which the client may dispute the ACH return in question.
These are some of the most common ACH return codes:
- R01 – Insufficient Funds. The available assets don’t suffice to cover the debit entry. The return time frame is two banking days.
- R02 – Account Closed. The account that needs to be debited or credited via an ACH payment has been closed either by the client or the RDFI. The return time frame is two banking days.
- R03 – No Account/Unable to Locate Account. The R03 ACH return code means that the account intended for ACH payment either doesn’t exist, or that its owner is not the one from the debit entry. The return time frame is two banking days.
- R04 – Invalid Account Number Structure. There’s something wrong either with the client’s bank account number or the number hasn’t passed validation. The return time frame is two banking days.
- R05 – Unauthorized Debit to a Consumer Account. The Receiver hasn’t authorized the originator to request money transfer from their bank account. The transaction has been blocked. The originator needs to ask the Receiver to allow the transfer, or to submit a new bank account number to complete the transaction. The return time frame is 60 banking days.
Note: Learn what ACH reversals are and how they differ from ACH returns.
What Happens if an ACH Payment Is Returned?
ACH returns occur due to numerous reasons. For instance, when the originator isn’t authorized to debit the client’s account with an ACH payment or when the recipient doesn’t have enough funds, an ACH return is initiated. The same happens when the originator provides inaccurate data.
Let’s say that a merchant wants to debit a client’s account to get paid for the services provided to the client.
- In line with the merchant’s request, their bank sends a request for an ACH debit from the client’s account. The relevant ACH network receives the ACH payment request.
- The next step is that the merchant’s bank debits the client’s account and credits the merchant’s account with the amount of money expressed in the ACH payment request.
- After that, the ACH network sends that ACH transaction to the client’s bank. Once they receive the ACH form and when all the necessary conditions are met, it debits the client’s account with the requested amount. Until this moment, the money has been on the client’s account all the time.
If the client’s bank notifies the ACH network that the transaction cannot be completed, the money remains on the client’s account.
Reinitiating ACH Payments
Depending on the reason for the ACH return, the originator may reinitiate the payment request. Upon receiving an ACH return, it’s possible to reinitiate the ACH payment under codes R01 (Insufficient Funds) and R09 (Uncollected Funds) up to two times within 180 days from the original entry date.
An ACH return under code R09 (Stop Payment) or any related to an unauthorized entry can be reinitiated when the Originator receives the authorization necessary to reinitiate the ACH payment.
In all other cases, when the issue that led to an ACH return is eliminated, originators can make a new payment but not reinitiate the declined one.
Note: Learn more about ACH payments by referring to our article ACH vs. Wire Transfer Comparison.
What Is an ACH Return Fee?
When the ODFI receives an ACH return from the RDFI, they apply procedures that may incur additional costs for them. They may charge the originator with ACH return fees to cover the expenses.
If the originator and the person/entity whose account has been debited don’t have an agreement on ACH payments, the originator’s ODFI needs to pay the fee. These costs are then forwarded to the originator.
The RDFI can charge the receiver with ACH return fees, as well. If the client has authorized the originator to make a payment request, but they haven’t transferred enough funds to their account, their bank can charge them with a fee.
How Long Does It Take for an ACH Payment to Return?
For the following ACH return codes, the return period is sixty banking days:
- R05 – Unauthorized Debit to a Consumer Account.
- R07 – Authorization Revoked.
- R10 – Customer Advises Not Authorized, Improper, Ineligible, or Part of an Incomplete Transaction.
- R11 – Customer Advises Entry Not in Accordance with the Terms of the Authorization
For ACH returns under other return codes, the return time frame is two banking days.
How to Prevent ACH Returns?
Preventing ACH returns increases the speed at which business transactions are conducted. If organizations and individuals repeatedly have issues with their ACH payments, they have to wait to be paid. As a result, they can’t cover their accounts payable on time, which puts their cash flow at risk.
The NACHA has different return ratios and thresholds for different return types. The return rate threshold for unauthorized debit entries (return codes R05, R07, R10, R29, and R51) is 0.5%.
For ACH returns resulting from administrative or account data errors (R02, R03, and R04), the return rate level is 3.0%.
Prevent ACH returns by adhering to the following guidelines:
- Double-check payment data. When you’re filling out your ACH form, double-check all the payment data with the client (the bank account number, the routing number, and other information).
- Inform the other party. Tell the other party when you’re going to send the ACH form in advance so that they can transfer enough money to their account.
- Get the authorization. For some ACH payments, the originator needs to be authorized by the client to debit their account. Get that authorization before sending an ACH payment request.
- Choose a reliable merchant. Reliable payment processing companies conduct various security checks for ACH payments. If a request has been sent from a suspicious location or if the originator is on a list of potential fraudsters, the ACH network will reject the request without sending an ACH return.
If you want to speed up the ACH transfer, learn more about same-day ACH payments.
Conclusion
ACH returns and return codes are valuable because they inform all interested parties about errors in the payment procedure.
When the originator and the client resolve the issues addressed in the return, the originator can relaunch the same payment request or demand a new one. Once the ACH network verifies that all the conditions are fulfilled, the new ACH payment is successfully completed.