An Automated Clearing House (ACH) return is the equivalent of a bounced check. An ACH return occurs when a registrant provides bank information in order to make a payment; however, the payment is returned by the bank for one of many reasons, the most common of which include:
- Insufficient funds
- A stop payment
- Incorrect account information
To back up a little, ACH payments or eChecks are a form of electronic payment that enables merchants and consumers to send funds between one another. ACH payments are regulated by the National Automated Clearing House Association (NACHA), which handles the administration and governance of the ACH network. NACHA is also responsible for the set of rules to be followed anytime an ACH payment fails, otherwise known as an ACH return.
As an example, let’s consider the case of a consumer that wants to use ACH to pay a utility bill each month. This requires the utility company (the Originator) to authorize its merchant bank (the Originating Depository Financial Institution or “ODFI”) to initiate an ACH debit from the customer’s bank account. The data for this debit entry is sent through an ACH Operator (usually the Federal Reserve Bank) as part of a batch transfer, usually at the end of the day.
In the meantime, the ODFI will debit the end customer’s account and credit the Originator’s account, basically creating a hold for the account. The ACH transaction is then sent from the clearinghouse or Federal Reserve Bank to the Receiving Depository Financial Institution (RDFI), or customer’s bank. Upon receipt of the ACH file, the RDFI will note a debit on the customer’s account for the specified amount of money. It’s important to note that no actual money has changed hands up until this point. Settlement for a debit transaction like this typically occurs within one business day once all the banks have resolved at transactions via settlement.
Understanding an ACH Returns
Successful ACH debit transactions can usually be settled within one business day, but ACH payments that are unsuccessful or rejected will spur an ACH return. An ACH return entry can be initiated by the RDFI in order to notify the ODFI that the entry is a return based on an alphanumeric code. In some cases it may be due to lack of sufficient funds (R01), but there are nearly 80 different reasons why an ACH payment may be rejected. Upon rejection, the original entry is returned, usually within two business days. In a few cases (like Return Reason Codes R07 and R10 where the consumer is disputing or revoking authorization), it may take up to two months or 60 calendar days after the transaction was originated to process an ACH return
One common misconception is that upon ACH transactions being funded, the money is already in possession of the recipient. The truth is, the ACH return process could take up to two months and the funding of the transaction is a temporary grant from the ACH operator. In the case of a return where the bank holding the account under which the request was placed cannot provide the money, the ACH operator may demand that the funds be returned.
Recourse for ACH Returns
Fortunately, there are options for merchants who experience ACH returns. NACHA allows for returns to be reinitiated by the ODFI in certain circumstances. These include:
- ACH returns coded R01-Insufficient Funds or R09-Uncollected Funds can be re-initiated up to two additional times in order to collect funds
- ACH returns coded R08-Account holder has stopped payment on this single transaction where reinitiation has been authorized by the Receiver
- ACH returns where the ODFI has corrected the reason for the return
In these cases, reinitiated entries must follow these rules:
- Entry has to be reinitiated within 180 days of the original effective date
- Entry has up to a total of three entries or two additional times to be reinitiated
- Entry has to contain identical information within the Company Name files, Company ID files, and Amount files
Preventing ACH Returns
In an ideal world, merchants could avoid ACH returns altogether. Unfortunately, ACH payments are not without risk. Anytime a consumer purchases a product or service and pays through ACH, there is a chance that the bank account has insufficient funds (not unlike what happens with a paper check) to cover the purchase. This gives consumers ample room to perpetrate fraud and take possession of the goods before the ACH return goes through.
Fortunately, merchants do have some tools to leverage against this type of fraud and other ACH returns. IP address-based filtering can stop the processing of ACH transactions that originate from a high-risk location. Identity-based verification is another tool that can run a customer’s information against blacklists that contain the contact and personal data of potential fraudsters. Accounts that match the data on a blacklist can trigger an automatic decline for the transaction, reducing the possibility of an ACH return. Merchants may also choose to delay delivery of products or services until after the payment has cleared; however, this is not a silver bullet against unauthorized returns later on down the road.
Check verification services can also be beneficial for merchants who want to avoid ACH returns. Since ACH transactions are technically electronic checks, a verification service can run comparisons on the check writer’s personal and bank data to blacklists and also check the status of their accounts.
Interested in learning more about how Payliance can help you avoid and lower ACH returns?
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