ACH Refund Guide: How It Works, Fees, and Processing Steps

1. What Is An ACH Refund?
2. How Does An ACH Refund Work For An ACH Debit?
3. How Does An ACH Refund Work For An ACH Credit?
4. How to Initiate an ACH Refund
5. ACH Refund Process for Businesses
6. Are There Any Fees Associated with ACH Refunds?
7. ACH Refund Best Practices

Key Takeaways

• An ACH refund occurs when funds are returned to a payer via the ACH network.
• Refunds differ for ACH credit and debit transactions and follow NACHA rules.
• Refunds must be initiated within 180 days of the original transaction.
• Depending on the ACH return code, different actions or timelines may apply.
• Businesses can reduce unauthorized returns and fees with proper communication and AR automation.

As digital payments continue to dominate business transactions, understanding how refund mechanisms work is essential for finance and accounting teams. One such mechanism is the ACH refund, which plays a critical role in resolving payment errors, customer disputes, and accidental transactions. 

The Automated Clearing House (ACH) is the electronic network that initiates payments from one bank account to another, enabling electronic fund transfers between accounts. Just like any payment channel, errors can occur. Whether you're processing payroll refunds, managing overpayments, or addressing unauthorized returns, knowing how ACH refunds work ensures smoother operations and better financial control. 

In this guide, we’ll break down the refund process, the types of fees involved, and how to handle them efficiently within your organization.

What Is An ACH Refund?

An ACH refund is the return of funds to a customer or business for a purchase initiated through the ACH network. This network connects over 10,000 banks and financial institutions in the US. 

ACH transactions allow funds to be transferred between bank accounts electronically. An ACH refund occurs when a transaction needs to be reversed due to an error, duplicate payment, incorrect amount, or customer dispute.

ACH refunds can apply to both ACH credit and ACH debit transactions. ACH credits are "pushed" from the payer's bank account to the recipient, while ACH debits are "pulled" from the payer's account.

How Does An ACH Refund Work For An ACH Debit?

ACH debits are ACH payments that are “pulled” from the payer’s account and deposited into the payee’s account. The key difference between ACH credits and ACH debits is that direct deposits involve funds being pushed into an account. In contrast, direct payments (ACH debits) involve funds being pulled out of an account.

ACH debit refunds take three to seven days to process, meaning the funds will take three to seven days to return to the payer’s account.

Additionally, refunds for ACH debit payments must be initiated within 180 days from the date that the original payment was made. A refund can only be processed after the payment process is complete; if the payment fails, the total or partial refund will be canceled because the funds were never officially pulled from the payer's bank account.

How Does An ACH Refund Work For An ACH Credit?

While ACH debits “pull” payments from payers’ accounts, ACH credits “push” payments from the payers’ accounts to the payees’ accounts.

Typically, the Originating Depository Financial Institution (ODFI) has up to five business days to deliver a refund request from the requested settlement date. However, even if the ODFI requests a refund, there is no guarantee that the funds will remain there. This is because credit transactions typically settle by 8:30 a.m. EST on the second business day after the request is processed, meaning that the money might have already been made available for the recipient to spend or withdraw before the refund request goes through.

As a result, the Receiving Depository Financial Institution (RDFI) will work with the recipient to recover the funds, but they will not always succeed. 

How to Initiate an ACH Refund

Refunds for ACH transactions can be initiated by either the originating financial institution or by the receiver, depending on the transaction type. For ACH debits, businesses must submit the refund request after the transaction settles. For ACH credits, the ODFI typically initiates the process.

To request the return, NACHA will approve the request if one of the following four situations occurs:

• The payment was for an incorrect amount.
• The payment was deposited into an incorrect account.
• There was a duplicate deposit.
• An incorrect settlement date was listed.

Steps to Get an ACH Refund

1. Identify the original transaction details (amount, date, payee).
2. Determine the reason for the refund.
3. Contact your financial institution to initiate the return.
4. Monitor the process and ensure the refund is completed within the allowed timeframe.
5. Inform the customer of the refund status and expected completion time (typically 3–7 business days).

ACH Refund Process for Businesses

When an ACH refund is requested, the financial institution processes the return based on the associated ACH return code. Businesses must maintain documentation and be aware of refund timelines.

Depending on the return code, refund timelines may vary. Today, there are 85 distinct ACH return codes. Some of the most common include:

Businesses must also ensure that sufficient funds to cover the transaction are available before processing a refund. If a customer disputes a transaction and their bank initiates a return, the business could be charged an ACH return fee.

Are There Any Fees Associated with ACH Refunds?

Yes, ACH refunds may incur return fees. These ACH return fees vary by institution but generally range from $5 to $35. Fees are often applied in cases of unauthorized returns, NSF (non-sufficient funds), or administrative errors.

Reducing these fees involves minimizing transaction errors and ensuring clear communication with customers. Tools like AR automation help identify issues early and reduce refund requests.

ACH Refund Best Practices

To minimize issues related to ACH refunds and maintain operational efficiency, businesses should implement the following best practices:

• Clearly communicate refund timelines and terms to customers.
• Use AR automation to detect and correct errors early.
• Monitor ACH return codes to flag recurring issues.
• Ensure payment data accuracy to prevent refunds.
• Verify available funds before initiating any refund.

Businesses with high transaction volumes should consider integrating solutions like Paystand’s B2B payment platform to streamline ACH processing and reduce unauthorized returns and fees. Leveraging automation and real-time reporting helps businesses stay compliant and improves the customer experience.

In conclusion, ACH refunds are a critical part of managing modern digital payments. Whether you're handling refunds for overpayments, duplicate charges, or unauthorized transactions, understanding the process is vital for maintaining financial health and customer trust. By proactively monitoring transactions, using automation, and understanding ACH return codes and fees, businesses can reduce processing delays, improve customer service, and avoid costly penalties.

Adopting tools like Paystand’s AR automation can simplify refund management, minimize human error, and increase operational efficiency. Want to ensure your AR processes are future-ready? Download our free guide: The Guide to Best AR Automation Practices.