If you send ACH payments as a form of electronic money transfers, you might experience a return code every now and then. Return codes are a way of signaling that an error has occurred in the process of completing a financial transaction. It could also signal that ACH fraud has been committed.
In order to allow for seamless ACH processing, you need to find a way to minimize ACH return codes.
Managing return codes can be annoying. However, there are some best practices to consider so that the process occurs smoothly.
What happens if an ACH payment is returned?
An ACH payment might be returned for a number of reasons. This might happen when there are insufficient funds in the checking account being debited. Or, it might also occur if an account is no longer active. So what exactly is happening when an ACH payment is being returned?
When an ACH entry request is sent, the Originating Bank (the Originating Depository Financial Institution) is submitting the banking information of both parties involved with the transaction.
This information is then sent through the ACH Network, which includes the Clearing House and the National Automated Clearing House Association (NACHA), so the information to be verified as accurate.
If for some reason the ACH payment is returned, it might mean that any part of the information provided is inaccurate. Additionally, it might also suggest that the payment is being submitted as a fraudulent transaction.
When an ACH payment is returned, the Receiving Depository Financial Institution (RDFI) will get the return code. This is not the bank that submitted the transaction and is usually involved in facilitating the completion of the ACH process.
Once an RDFI receives a return code, they must notify the ODFI. The ODFI will have to inform the Originator, the person who set up the transaction request, that the payment cannot be completed for whatever reason.
Then, the Originator can set out to rectify the situation. This might involve contacting the intended recipient. Regardless, the ODFIs and RDFIs are not required for rectifying the situation. Instead, they must simply inform the Originator of the return codes and their meaning.
Understanding ACH return codes
ACH returns are, for the most part, similar from bank to bank. This is so all people involved in an ACH transaction are familiar with the process and all the possible reasons for a return.
The current cash reserve balance is not sufficient to cover the value of the debit entry. Deposit the appropriate amount of funds to resolve this return code. The transaction can be attempted two more times within 180 days of the original authorization date.
ACH Return Code R02 – Account Closed
The account in question was previously active but has been closed due to the actions of the receiving depository financial institution (RDFI) or the consumer. Contact the consumer to obtain different bank account information. You could also potentially withhold providing the goods or services that were agreed upon until payment has been settled.
ACH Return Code R03 – No Account/Unable to Locate Account
The account number structure (format) is valid and it passes a digital validation check. However, the account number does not correspond with the individual identified in the return entry. Or, the account number is not designated as an open account. To resolve this, you’ll need to contact the consumer to confirm the account number, routing number, transit name, and the name on the bank account. If the new information provided does not match what was initially entered, make the changes, and submit a new request.
ACH Return Code R04 – Invalid Account Number
The account number structure is not valid and the entry may either contain an incorrect number of digits or fail the check digital validation. To resolve this, contact the customer to obtain the correct bank account number. Then, submit another request with the corrected account number.
ACH Return Code R05 – Unauthorized Debit to Consumer Account Using Corporate SEC Code
An ACH debit was sent to a consumer account and the receiving account did not authorize the debit entry. To resolve this, contact the consumer and let them know that the debit was unauthorized in order to figure out why the transaction did not process.
ACH Return Code R06 – Returned per ODFI’s Request
The ACH entry was returned by the originating depository financial institution (ODFI) and let the RDFI know. A return of this sort could be because the ACH entry was an erroneous entry or the credit entry originator did not have the authorization of the originator. To resolve this, the RDFI should agree to return the entry and indemnify the RDFI in accordance with the guidelines.
ACH Return Code R07 – Authorization Revoked by Customer
The receiver who originally authorized the entry has revoked or withdrawn authorization for a given transaction. To resolve this, begin by suspending any recurring payments that exist with this bank account. Then, contact the consumer to resolve the issue around authorization. This might involve asking if the consumer wishes to continue a recurring payment, or it may involve seeking collections support. A different bank account can also be suggested if the bank account was changed or is faulty. If the same bank account is used, then the consumer will most likely need to call their bank to remove the block that is restricting transactions.
ACH Return Code R08 – Payment Stopped
The receiving has issued a “stop payment request” on a debit entry. This can be placed on more than one debit entry. To resolve this, contact the customer to work out the issues associated with the payment stop. The transaction can be re-entered once proper authorization has been obtained.
How merchants should handle ACH return codes
If a merchant is facilitating an ACH payment process, either through their eCommerce platform or through a third-party payment processor (TPPP), they will most likely receive return codes here and there. This does not necessarily mean that the customer is committing fraud or cannot be trusted.
Sometimes return codes will pop up when funds were taken out of an account unexpectedly. Therefore, if you are a merchant and you have received an ACH return code, it is your responsibility to mitigate that situation. After all, for the most part, the bank or financial institution that you are working with will not be able to process any funds in your account. Therefore, the failed ACH transfers will fall on you and your business.
If your business encounters an ACH return it is first important to understand what the options are. Usually, ACH returns are handled by the TPPP that is being used. If you are going straight from bank to bank, then as a business, you may be able to have your financial institution manage these return codes.
Since return codes can take 48 hours to process, you need to make sure that you don’t forfeit the assets that are being sold prior to this processing timeline. This is one of the reasons why a merchant who is selling a product or good might include a processing and handling fee and timeline after purchased order.
Some TPPPs do not require that the merchant handle the return codes on their own. In fact, they usually have their own process for dealing with a returned amount. Additionally, the return codes will normally be sent to the RDFI. If you are the merchant and the customer is paying for a good and they set up the payment, then they are the Originator and you must pass this info along to them.
If you are setting up the transaction, then you are the Originator and you must relay that information to the customer. When doing so, it is okay to provide the information that is listed in the return code as-is. It may also be beneficial to provide an example or explanation of what the return codes is intended to mean, that way the customer understands what happened.
In either case, as the merchant, you must reach out to the customer and let them know that a return code occurred. At that time you can also suggest ways to move forward, such as with other forms of payment or submitting a new ACH request with either the same banking information or with new banking information.
Small business guide to ACH return codes
If you are a small business and you are facilitating ACH payment processing, you must have a list of ACH return codes handy so that you can interpret what they mean. Additionally, if you are facilitating the ACH payment with an app or digital wallet, especially one that can be customized for your business’ needs, then you will want to test that process to make sure that you understand the return codes once they arrive.
When dealing with return codes, be sure to test using a sandbox so that your team is clear on the troubleshooting required when a return code occurs. If a return code is being submitted but rectifying the issue still doesn’t work, it may be a coding issue or an issue with the ACH API being used.
If you are receiving a return code and rectifying the issue does not work (through testing), then you will need to mitigate this by communicating with the customer the issue. If you are facilitating the process of ACH payment, then you might be able to receive the return code as the ODFI. But chances are the bank or TPPP being used by the customer will be the ODFI and you will have minimal interaction with the return codes.
For the most part, when there is a return, the first step is informing the customer. An ACH payment API may have this process automatically set up for you. So if a return pulls up “insufficient funds”, the customer is informed that this is the issue and the entry can be resubmitted. A lot of the time the banking information provided does not match that of the account holder information. This also does not signify that a fraudulent act is occurring, but it will require the customer to fix the information provided.
Facilitating ACH payments with Sila
ACH payments are a fast and secure way to sent money from one bank to another bank. ACH payments can be used in merchant transactions or with a TPPP in order to process an electronic payment through a digital wallet.
One of the most common ways to send an ACH payment is through a TPPP or fintech app, such as the Sila app. The Sila app is a payment processing app that allows merchants and regular users to connect to the Sila app and send money via ACH payment. This is done so through secure bank account linking.
Once connected to the app and verified, money can be sent over the cryptocurrency blockchain to another recipient. This facilitates international transaction payments even faster and more affordable than ever.
See today why Sila can propel your business forward and facilitate more seamless money transfers.