Automated Clearing House (ACH) payments are one of the easiest ways to receive money as an eCommerce merchant or vendor. But without the right payment verification and fraud detection measures in place, failed transactions can cause a lot of frustration.
What is an ACH return? An ACH return happens when a bank returns an electronic funds transfer (EFT) to the originating institution. ACH returns can happen for lots of reasons, including insufficient funds, closed accounts, invalid customer details, or stop payment orders.
An ACH return is not the same as an ACH cancellation. A return is initiated by the receiving bank while a cancellation is initiated by the customer.
In this article, we’ll go over the most common causes of ACH returns and how you can avoid them. We will also answer all your compliance-related questions as an online merchant or small business concerned about accepting payments through ACH.
Table of Contents
What causes ACH returns?
An ACH return typically occurs when the receiving bank rejects a transaction due to a lack of funds or invalid details. Here are the most common causes of ACH returns:
1. Insufficient funds in the customer’s account
When a customer tries to make a payment, the originating bank will check to make sure the customer has enough funds in their account to cover it. If the customer does not have the necessary funds, the payment will be rejected and a return will be issued.
2. Invalid account number or other details
If the account number, routing number, or bank credentials entered by the customer don’t match what’s on record, a return may be issued.
3. Transaction limits imposed by the bank
If the payment amount exceeds the maximum limit imposed by the sending or receiving banks, an ACH return will be issued.
4. Blocked, frozen, and closed bank accounts
If your customer’s bank account is blocked, frozen, or closed during the transaction, a return may be issued by the receiving institution.
5. Duplicate transactions in the receiver’s account
When the receiving bank notices a duplicate transaction that’s similar to a recently made payment, it may issue a return to the sender’s account. Duplicate transactions happen when the customer makes multiple attempts to pay for a transaction.
6. Bank holidays and server-related issues
ACH returns often occur if there’s a bank holiday on the date of the transaction or if the banks involved are having server or system-related issues while the transaction takes place.
7. Disputed payments and stop payment orders
After a customer initiates an ACH transaction, they still have time to revoke authorization. Your bank may initiate an ACH return when that occurs.
What are ACH return fees?
Just like banking transaction fees, the banks involved in an ACH transaction may charge a fee for the failed transaction. The fee amount usually ranges between $2 and $5, and is paid by the customer.
ACH return timelines for merchants
ACH returns usually take 1-2 business days to be processed and up to 5 business days to complete. Cases that require further investigation could take up to 60 business days to process.
Steps to take once you receive an ACH return notification
When an ACH return occurs, you’ll typically receive a notification from your bank through email or text. Here are the steps you should take once you receive an ACH return notification from your financial institution:
Step 1: Review the return notification
The return notification should contains details about the transaction and why it was rejected. Review it to determine the reason behind the ACH transaction so you can avoid it in the future.
If no additional information is included in the notification, you can contact your bank to identify the reason.
Step 2: Contact the originating customer
Once you’ve figured out the reason behind the return, contact the customer who initiated the transaction to resolve the issue.
Depending on the reason for the ACH return, the customer may need to take additional steps to make sure that the payment is processed once reinitiated.
Step 3: Reinitiate the transaction
Ask the customer to reinitiate the transaction from their end once the issue is resolved.
Depending on the bank and the reason for the rejection, the customer may be required to authorize the transaction again under a new ACH file.
Step 4: Monitor the return status
Keep an eye out for another return notification in case the ACH payment is rejected again.
If the transaction keeps getting rejected, there may be a problem with the sender’s account that has remained unresolved.
Reach out to the customer if that happens and make sure they take the necessary steps so that subsequent returns can be avoided.
Step 5: Record the return notification
Make sure to keep a record of the original return notification in case a dispute arises in the future.
You should always keep a record of your ACH returns in case there’s a bank dispute or you’re asked to pay return fees associated with the transaction.
Should you be worried about ACH returns?
Generally speaking, a few returns a month shouldn’t be anything to worry about, as almost every business has to deal with them at some point. However, a large volume of ACH returns may cause your business to be flagged by the National Automated Clearing House Association (NACHA), the governing body that oversees the ACH network.
NACHA may sometimes issue a formal warning or even impose fines for repeat offenders who have too many ACH returns per business period. That’s why it’s better to keep an eye on return notifications and make sure that you have the necessary measures in place to prevent transaction failures.
As a rule of thumb, NACHA says that the number of ACH returns within your business should not exceed 15% of your bimonthly transaction volume. Moreover, the percentage of unauthorized debit return codes should be less than 1%.
5 tips to minimize ACH returns
Here are a few tips to keep your ACH returns within acceptable limits:
- Verify your customer’s credentials, such as account numbers and payee names, before submitting a payment with ACH.
- Establish transaction limits within your payment gateway to prevent too many failed payments from a single customer.
- Give customers the option to cancel their transactions within a set period.
- Educate your customers to conduct balance checks to ensure that they have the necessary funds to cover a transaction.
- Use fraud prevention tools to check for and flag suspicious transactions and repeat offenders.
ACH return codes
ACH return codes are alphanumeric codes that identify the reason a payment was returned. These codes are meant to make it easier for financial institutions to communicate when a transaction failure occurs. Each code consists of the letter ‘R’ followed by a two-digit number between 01 and 85.
Here are the most common ACH return codes you may encounter on your return notification:
| Return Code | Associated Reason | Account Type | Processing Time |
| R01 | Insufficient funds | Consumer or non-consumer | 2 banking days |
| R02 | Account closed | Consumer or non-consumer | 2 banking days |
| R03 | No account / unable to locate account | Consumer or non-consumer | 2 banking days |
| R04 | Invalid account number structure | Consumer or non-consumer | 2 banking days |
| R05 | Unauthorized consumer debit using corporate SEC code | Consumer | 60 calendar days |
| R06 | ODFI requested return | Consumer or non-consumer | Undefined |
| R07 | Customer revoked authorization | Consumer | 60 calendar days |
| R08 | Payment stopped | Consumer or non-consumer | 2 banking days |
| R09 | Uncollected funds | Consumer or non-consumer | 2 banking days |
| R10 | Originator not known and/or not authorized to Debit Receiver’s Account | Consumer; non-consumer for ARC, BOC, IAT, or POP. | 60 calendar days |
See Modern Treasury’s article for a complete list of ACH return codes as per NACHA.
ACH terms you should know
Below is a glossary of common terms you might come across when dealing with ACH transactions:
- Automated Clearing House (ACH): A financial network that enables banks to process electronic payments and wire transfers.
- Electronic Funds Transfer (EFT): The electronic transfer of money from one bank account to another, nationally or internationally.
- Originating Depository Financial Institution (ODFI): The financial institution that initiates an ACH payment.
- Receiving Depository Financial Institution (RDFI): The financial institution receiving the ACH payment.
- NACHA: The National Automated Clearing House Association, a governing body that oversees the ACH Network through a set of rules and regulations.
- ACH Return: A payment or transaction that’s been rejected by the receiving bank and returned to the originating institution.
- ACH Network: The network of financial institutions processing payments via ACH.
- ACH Credit: A transaction involving the addition of funds to a receiving bank from an originating bank.
- ACH Debit: A transaction involving the deduction of funds from an originating bank to a receiving bank.
- ACH Operator: A financial institution, such as a bank, that processes transactions through ACH.
Common SEC codes
An SEC (Standard Entry Class) code is not the same as an ACH return code. It’s a three-letter code that describes how a payment was authorized by the receiving merchant.
Modern Treasury has a list of some common SEC codes you might encounter.
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Frequently asked questions
1. What is an ACH return?
An ACH return is an automated process that banks and credit unions use to reject payments that have been sent via the Automated Clearing House (ACH) network.
ACH allows financial institutions to send and receive digital payments, but sometimes those payments do not go through correctly due to incorrect information or insufficient funds.
When that happens, the bank or credit union will automatically initiate a return and the payment will be reverted back to the sender.
2. What happens when an ACH is returned?
When an ACH is returned, the receiving bank will send an email or letter to the receiver and the originator of the transaction notifying them that it has been declined. The rejection will also be noted in their account activity.
Depending on the reason for return, fees may be charged to the originator by either the financial institution, the intermediary processor, or the receiving bank.
3. What causes ACH returns?
ACH returns occur for a variety of reasons:
- Insufficient funds in the customer’s account
- Invalid account number or other details
- Transaction limits imposed by the bank
- Blocked, frozen, and closed bank accounts
- Duplicate transactions in the receiver’s account
- Bank holidays and server-related issues
- Disputed payments and stop payment orders
For more information on ACH returns, check out these resources: What is an ACH Network & Best ACH Payment Processing for Small Businesses
