How Merchants can Prevent ACH Returns 

Quick Hits: 

• ACH (Automatic Clearning House) payments are transactions transferred between financial institutions within the ACH network, regulated by NACHA.
• NACHA (the National Automated Clearing House Association) is the association that provides the regulatory framework for ACH payments. 
• The ODFI (Originating Depository Financial Institution) is the financial institution initiating or sending an ACH payment while the RDFI (Receiving Depository Financial Institution) is the financial institution receiving an ACH payment. 
• ACH returns happen when an ACH payment fails due to a myriad of reasons, including incorrect account numbers, closed accounts, and insufficient funds. 
• Merchants can prevent ACH returns by using ACH codes to identify problems, using account validation, and using fraud detection tools. 

ACH (Automatic Clearing House) payments use bank routing and account information to transfer payments between banks. ACH payments are regulated by NACHA (the National Automated Clearing House Association) and are widely used for recurring payments and direct deposits. ACH payments are a great tool to drive recurring revenue, but when they fail, they trigger an ACH return. In this blog, we’ll explain what an ACH return is, why they happen, and what tools you can use to ensure your recurring payments run smoothly.  

ACH Return Meaning 

ACH returns happen when a recurring payment fails to process. Because recurring payments process differently than real-time payments like credit or debit card payments, sometimes an ACH payment can be assumed successful, and then be returned or rejected.  

Most of the time ACH returns are due to simple issues like mistyped account numbers or insufficient funds. However, sometimes ACH returns happen for more concerning reasons, like lack of authorization or intentionally stopped payments. The best way to figure out why an ACH return was triggered is to find the ACH return code. 

If you’re currently trying to figure out an ACH return problem, or are interested in common ACH return reasons and their codes, we’ve compiled a helpful list below.

ACH Return Codes

ACH Return Code	ACH Return Reason
R01	Insufficient funds
R02	Bank account closed
R03	No account located
R04	Invalid account number
R05	Unauthorized consumer account debit
R06	ODFI (Originating Depository Financial Institution) requested return
R07	Authorization revoked by customer
R08	Payment stopped
R09	Uncollected funds
R010	Originator not known/authorized to receiver

Most of these issues cause an ACH return to be processed within two banking days. However, both unauthorized transactions and authorizations revoked by customers may take more time to process, up to 60 days.  

What Happens if an ACH Payment is Returned? 

So, what happens if an ACH payment is returned? Here’s an in depth look at the process whereby the originating bank and receiving bank process a failed ACH payment. 

ACH payments start when the ODFI (Originating Depository Financial Institution) sends a request for payment to the RDFI (Receiving Depository Financial Institution). If the ACH request is rejected, the ACH return is then initiated by the RDFI. The return signal will be sent to the originator along with the code that communicates the reason why the payment was rejected.  

When an ACH payment is returned, there may be an ACH return fee for the party responsible for the failure. Processing ACH returns can cost the bank, so they pass that cost onto either the originator or the customer account with an ACH return fee. Lack of authorization will often incur a fee for the originating bank, while insufficient funds will likely incur a fee for the customer account. 

Dispute ACH Returns 

While avoiding ACH returns in the first place is preferable, merchants can also dispute ACH returns they feel are illegitimate. If there is reason to dispute the return recieved from the originator, the RDFI will request that the ODFI dismiss the return.

ACH returns can only be disputed in a few specific situations, including: 

• The ACH payment failed due to incorrect information 
• The transaction was misrouted 
• There was a duplicate entry that caused the payment to fail 
• The receiver received an unintended credit during the return process 
• The ACH payment was not returned within a NACHA approved timeframe 

ACH return disputes must be sent withing 5 banking days from the return. While this may help merchants dodge an ACH return fee, or possibly recapture the payment, the best thing to do is avoid ACH returns in the first place. 

How Merchants can Avoid ACH Returns 

ACH returns not only incur fees and lose revenue for merchants but also endanger a merchant’s abilty to use ACH payments. If a merchant incurs too many ACH returns, their ability to use the ACH network can be revoked altogether. While merchants cannot resolve customer ACH issues, like insufficient funds or account detail errors, there are still steps they can take to reduce failed ACH payments. 

The best way to avoid ACH returns is to ensure your business follows NACHA best practices and remains compliant with all NACHA requirements. Particularly important for merchants looking to avoid ACH returns are NACHA’s fraud detection requirements. Many ACH returns can happen due to suspected consumer fraud, so all ecommerce and mobile transactions must use a “commercially reasonable” fraud detection system.  

Additionally, fraud prevention systems must include account validation. The originator must validate that the account is open and accepts ACH entries, which can help reduce ACH return error codes R02 and R05 ACH.

If you’re struggling with ACH returns, or NACHA compliance, we’ve written a free ebook that goes through NACHA requirements and best practices in depth. Download your copy today to learn how to optimize your ACH payments and remain within NACHA ‘s rules and guidelines.