Automated Clearing House (ACH) Return | B2B Finance Glossary
What Is An Automated Clearing House (ACH) Return?
An Automated Clearing House (ACH) return, also known as an ACH reject, is initiated when the ACH transaction cannot go through as intended. However, it’s important to note that most ACH payments go through without issue.
ACH stands for Automated Clearing House: the official electronic network that initiates payments from one bank account to another. It connects over 10,000 banks and financial institutions in the US. ACH payments are run by the National Automated Clearing House Association (NACHA) and include different payment categories such as direct deposits, peer-to-peer payments, bill payments initiated by e-commerce platforms, and ACH payments initiated by paper checks.
Every ACH transaction involves an Originating Depository Financial Institution (ODFI) and the Receiving Depository Financial Institution (RDFI). An ODFI is a financial institution that operates as the interface between the ACH network or Federal Reserve and the transaction’s originator (the party that created the ACH transaction in the first place). Essentially, the ODFI is the entity that helps initiate the original transaction. The RDFI is a financial institution receiving entries (another name for payments or payment requests) directly or indirectly from its ACH operator (the Federal Reserve or the ACH network). These entries are either in the form of debit entries or credit entries. RDFIs must accept all entries to their customers’ accounts to comply with NACHA’s rules regarding ACH operations.
In an ACH transaction, the ODFI will send an ACH request to the RDFI, which will either be accepted or rejected. If the ACH request is denied, the receiver sends an ACH return to the originator with a specific code that signifies the reason for the issue. This process is conducted with the ACH operator that processes all ODFI and RDFI transactions.
What Causes ACH Returns?
ACH returns are a result of transactions that cannot be processed as they were intended. ACH payments do not process like credit or debit card payments in real-time, so they will not be rejected on the spot. Instead, if they are rejected, a three-digit ACH return code that explains the cause of the issue is created, and the RDFI notifies the ODFI with this code.
What Causes An ACH Return?
When an ACH return occurs, it should not necessarily be a cause for alarm; a transaction fails for many reasons. Essentially, an ACH return is similar to a bounced check and can be caused by the following:
- Insufficient funds
- Incorrect account information
- Revoked authorization for the transfer
- Stop payments
No matter the cause of the ACH return, the issue can be solved by communicating with your customer and your financial institution. Plus, your ACH return code will help you better understand the underlying cause of the return.
What Do The Different ACH Return Codes Mean?
Every ACH return code is structured like this: first, there is a letter “R” followed by a two-digit number. In total, there are 85 return codes for ACH transactions, but here are the ten most common:
- R01: there are insufficient funds in the account trying to make the transaction
- R02: The bank account sending the funds is closed
- R03: There is no account, or the account is unable to be located
- R04: There is an invalid account number structure
- R05: There is an unauthorized debit (this is caused by a consumer using a Corporate SEC Code)
- R06: The ODFI requested the return
- R07: The customer revoked authorization for the transaction (in other words, the transaction is disputed by the account holder)
- R08: The payment was stopped (also known as a stop payment)
- R09: There are uncollected funds
- R10: The originator is not known or not authorized to debit the receiver’s account
Are There Any Regulations Around ACH Returns?
Specific regulations and standards governed by NACHA must be adhered to in the face of ACH returns.
For example, businesses processing ACH transactions must keep the overall return rate below 15% to stay compliant. However, administrative returns – denoted by return codes R02, R03, and R04 – must always be below 3%. Additionally, unauthorized returns (categorized by return codes R05, R07, R10, R29, and R51) must stay below 0.5%. NACHA calculates these percentages by observing the preceding 60 days on a rolling basis.
Are There Fees Involved With ACH Returns?
Similar to transaction processing fees associated with ACH payments, there are also added fees tied to ACH returns. The fees vary but usually cost between two and five dollars per return. These fees are usually passed onto the customer, just as a bounced check would require the customer who wrote the check to pay the incurred fee.