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What is an ACH Return and how to handle them

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Ryleigh Stangness | November 24, 2022

“Learn the basics of ACH return codes and why you might have received one. In this blog, we discuss the reasons for ACH returns and what to do if your transfer is not processed.”
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    We've all been there. You send out an invoice, and you wait patiently for your money to come in. But then, a few days (or weeks) later, you get a notification that the ACH payment has been returned. What gives?

    Luckily, there are a few common reasons why this happens - and we'll go over them here (You can find a full list of ACH return codes linked in this article as well.) So next time it happens to you, you'll know what to do. P.S. We also throw in some helpful tips on how to avoid paying extra fees.

    What is an ACH return?

    Automated Clearing House (ACH) payments are a type of electronic funds transfer (EFT) used by businesses and individuals to make payments or collect money. ACH sends and receives funds between bank accounts across a specialized network in the U.S. You can learn more about ACH payments and how they work here.

    ACH return codes are numerical codes that explain why an ACH payment has been returned unpaid.

    The most common reasons for ACH return codes are insufficient funds, invalid account numbers, uncollected funds, bank authorization problems, stop payment orders on file, and incorrect routing numbers. While some of these can be easily remedied, others may require further investigation. Ultimately, it is essential to understand how ACH return codes work to keep your business running smoothly.

    What happens during an ACH return?

    When a merchant facilitates an ACH payment through their virtual terminal or an invoice, they might encounter a return code.

    ACH payments are bank-to-bank transfers sent from an Originating Depository Financial Institution (ODFI) to a Receiving Depository Financial Institution (RDFI).

    “We take the Rosetta Stone out of ACH codes and simply give you an actionable error message right away so you can take steps to resolve the issue and get back to processing.”

    An ACH return occurs when ACH payments sent to a merchant cannot complete the transfer into the intended merchant account or RDFI. In this case, the merchant will receive a three-character ACH return code from the RDFI, which translates to the reason for the return.

    Essentially, ACH return codes happen when the money is being taken back or cannot be deposited into the recipient's account for some reason. This could be due to an administrative error or something more concerning, like authorization being revoked by a customer (similar to a chargeback.) Sometimes it is due to violating the rules and regulations set by the National Automated Clearing House Association (NACHA), which we will talk about later.

    Usually, these can be resolved quickly once you understand the return code. At Helcim, our merchants won't receive the actual ACH return code.

    At Helcim, we take the Rosetta Stone out of ACH codes and simply give you an actionable error message right away so you can take steps to resolve the issue and get back to processing.

    The receiving depository financial institution will send us the ACH return code. We send you a friendly email that will give you the code, a general explanation of why the payment was returned, and what to do next.

    i.e., Error R01

    In this case, your transaction status would read:

    "Your transaction was declined for insufficient funds. To process this payment, contact your customer or ask for another payment method."

    If your processor is still passing the codes onto you to decipher, don’t pull your hair out just yet. You can find a full list of ACH return codes and their meanings here.

    P.S. A return code is different than canceling an ACH payment

    In this article, we are talking about ACH return codes but if you are looking for a way to cancel your ACH payment without paying any additional fees or any fees at all, here's how:

    ACH payments can be voided as long as the batch still needs to be settled. Since ACH transactions can take a little longer than, say, a credit card transaction or e-transfer, there is more time to cancel it or void the ACH transfer (usually, batches are settled within 1-2 business days) and avoid paying any fees at all. Voids and reversals (before batch settlement) won't incur any charges, including the initial transaction fee, but with a refund (after batch settlement), the original payment processing fees for the transaction will apply.

    Some processors will charge a refund fee on top of the transaction fee, which Helcim does not.

    For example:

    Helcim merchant charges a customer with a $100 purchase, and it has a $0.75 payment processing fee. If this gets voided, that customer gets $100 back, and the merchant doesn't pay Helcim anything. However, if this gets refunded after batch settlement, the customer will still get $100, but the merchant will see a bill of $0.75 cents for that transaction on their statement.

    You can learn more about the benefits of ACH payments and how they work here.

    That said, if you are still wondering why your payment didn't go through as intended and how to fix it, we will help you understand ACH returns next.

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    What causes ACH returns?

    While ACH transfers are often preferred for their lower cost and convenience, ACH payments still have to go through the National Automated Clearing House Association (NACHA) and abide by their rules and regulations.

    NACHA, which governs the Automated Clearing House (ACH) network, has a code of operating rules and guidelines in place to ensure that merchants, payment providers, and consumers are all protected and abide by ACH rules compliance.

    Failing to do so may result in an ACH return. ACH returns or rejections are often just annoying, but they are something businesses want to avoid- sort of like credit card chargebacks. A transaction can have many reasons for not being processed, from infringement of NACHA rules and regulations to simply typing the wrong bank routing number.

    The most common reasons for an ACH return include the following:

    • Insufficient funds,
    • the account numbers and details being mistyped, such as the payee name,
    • the ODFI was unable to locate the account,
    • or, in the case of pulling funds instead of sending them, sometimes the authorization is revoked by the customer.

    Although ACH transactions are considered both secure and safe, sometimes banks will flag ACH transactions as fraudulent. This is unsurprising considering ACH debits were the payment method impacted most in 2021, second only to checks, with a staggering 37 percent of all transactions being fraudulent, according to a 2022 Payments Fraud and Control Report conducted by J.P Morgan. For honest merchants, there are still many other reasons a legitimate ACH transfer might be rejected.

    As we explained earlier, if the transaction cannot be processed, an ACH return code will be sent to explain the issue. The specific ACH returns code in your case, should provide clarity into the specific problem that was encountered. The next section focuses more on various ACH return codes and helps explain the different types of returns.

    Is there a fee for ACH returns?

    Some payment processors may charge you an ACH return fee which will show up on your monthly statement. (P.S. Make sure you are reading those for overcharges and hidden fees.) At Helcim, we don't charge an ACH return fee if there are return codes, but your processor could charge this in addition to the original transaction fee. This might be something worth asking about if you are choosing a merchant service provider and expect to be sending or receiving ACH payments.

    ACH Return Codes and how to handle them

    There are about 37 codes U.S merchants are more likely to encounter and 30 less common ones. On the other hand, Canadian merchants only have 21 codes. As we mentioned, over a third of ACH transactions are fraudulent or unauthorized, so you can imagine many more are flagged and checked. Clearly, this doesn't signify that a customer has committed fraud or isn't trusted, but it is in place to protect both merchants and customers.

    At Helcim, since ACH return codes will come up as actionable error messages with a detailed email, you will probably become familiar enough with the most common ones to know how to handle them quickly. Helcim will mediate between the originating depository financial institution and your business to quickly resolve the issue.

    Management of unfamiliar return codes or error messages can be a bit tedious, so it helps to have a payment processor who helps you make sense of them.

    What happens if I have too many ACH returns?

    ACH returns shouldn't be something to worry about or become a problem that would impact the convenience and affordability of ACH payments.

    A few ACH return codes are nothing to worry about, but it is good to be aware that NACHA enforces a cap on specific return codes in order to maintain compliance with their set of operating rules and guidelines. Violations of these caps may result in formal warnings or fines.

    As a general rule, make sure that at least 85% of your bimonthly transactions are going through without return codes, and less than 1% of those are unauthorized.

    Final Thoughts

    ACH return codes don't have to be a mystery or a giant stress; they are simply the bank's way of telling you what went wrong with a particular transaction. The best way to avoid return codes is by verifying your customer's banking information before submitting an ACH payment request. If your payment is rejected, don't worry – most return codes can be easily remedied so that you can resubmit the payment and get paid quickly.

    Suppose you're not already using ACH transfers. In that case, you may also want to look into how ACH can help your business by providing direct deposits for employees or making it easier for customers to pay their invoices. And, if your processor is still making you look up ACH return codes, consider switching to a processor that takes the guesswork out and waives the return fees. Contact us today to learn more about how ACH can help your business. Our team would be happy to answer any questions and help get started with using ACH for payments.

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