When an Automatic Clearing House (ACH) transaction such as a direct deposit or bill payment cannot be completed, the receiving institution generates a return code and sends it back through the ACH network. ACH return codes are standardised messages that communicate the specific reason for a payment failure, whether it’s insufficient funds, a closed account, an invalid routing number, or another reason. Businesses can use these codes to correct the problem by updating account information, contacting the customer, adjusting internal processes, and more.

Nacha governs the ACH network and mandates that businesses keep their overall ACH return rates under 15%. Below, we’ll cover what causes ACH returns, their impact on businesses, ACH return fees, and best practices for handling ACH returns.

What’s in this article?

• Common causes of ACH returns
  
• How ACH returns impact businesses
  
• ACH return fees
  
• What’s the difference between an ACH return and an ACH reversal?
  
• How to manage high volumes of ACH returns
  
• Best practices for handling ACH returns
  

Common causes of ACH returns

ACH returns occur for numerous reasons, each of which are identified by specific return codes. Here are some common ACH return codes:

• Insufficient funds (R01): The account does not have sufficient funds to cover the transaction.

• Closed account (R02): The transaction led to a closed account.

• No account or unable to locate account (R03): The account number does not correspond to an existing account. This is similar to invalid account number issues but usually involves nonexistent accounts.

• Invalid account number (R04): The account number in the ACH entry is incorrect or improperly formatted.

• Unauthorised transaction (R07, R10): The account holder did not properly authorise the transaction or they have revoked authorisation.

• Stop payment order (R08): The account holder has placed a stop payment order on an ACH debit.

• Account holder deceased (R15): The account holder is deceased. Financial institutions learn of the death and typically don’t process any additional transactions.

How ACH returns affect businesses

Businesses experience these consequences and implications when ACH payments are returned:

• Increased administrative workload: When an ACH payment is returned, a business must spend time and resources to investigate the reason for the return, communicate with the customer, and try to resolve the issue.

• Delayed revenue: ACH returns directly affect a business’s cash flow by delaying receipt of funds. This can be particularly challenging for small businesses or those operating on tight margins, as it can affect their ability to cover operational expenses or pay suppliers on time.

• Additional fees: Many banks charge fees for returned ACH transactions. These fees can accumulate, especially if a business has a high volume of returns.

• Impact on customer relationships: Frequent ACH returns can strain customer relationships. Even returns due to customer error can reflect poorly on the business if not handled tactfully and efficiently.

• Reputational risks: Excessive payment issues, including ACH returns, can harm a business’s reputation. If customers see a company as unreliable at handling transactions, it could lose business and customers’ trust and loyalty.

• Increased risk of fraud: Returns due to unauthorised transactions can indicate issues with fraud. Businesses might need to reassess their security measures for collecting and storing payment information. Failure to protect against fraud can lead to further financial losses and legal complications.

• Operational disruptions: For businesses that rely on predictable cash flow such as subscription services, ACH returns can disrupt operations. For example, ACH returns might have an impact on a business’s planning and budgeting, affecting its decision-making or investing.

• Legal and compliance issues: Businesses must comply with regulations governing ACH transactions, including those related to fraud and authorisation. High rates of ACH returns might draw regulatory scrutiny, potentially leading to audits or penalties if improper practices are uncovered.

ACH return fees

ACH return fees vary depending on the bank or financial institution processing the transactions. Here’s an overview of the types of ACH return fees that businesses might face:

• Return fees: Banks often charge a return fee when an ACH transaction is returned for any reason. This compensates the bank for the administrative costs associated with handling the failed transaction.

• Non-sufficient funds (NSF) fees: If an ACH debit is returned for insufficient funds in the payer’s account, the payer’s bank might charge an NSF fee. This fee is generally higher than a standard return fee and can range from $15–$35. The business attempting to collect the payment can also impose its own NSF fee on the payer to cover its handling costs.

• Stop payment fees: If a payer requests a stop payment on an ACH transaction, their bank can charge a stop payment fee. This fee can vary widely but typically falls between $15–$35.

• Reinitiation fees: Some banks charge a fee if a business reinitiates an ACH transaction after it was returned. These fees are usually low but can add up if multiple attempts are made to collect the payment.

• Bank-specific fees: Different banks can have their own fee structures for ACH transactions and returns. These could include monthly fees for ACH services, batch processing fees, or fees for special handling or expedited processing of ACH transactions.

What’s the difference between an ACH return and an ACH reversal?

ACH returns and ACH reversals serve different purposes and follow different processes. Here’s a comparison of both processes.

ACH returns

An ACH return occurs when an ACH transaction cannot be processed and the receiving bank sends the transaction back to the originating bank. Returns adhere to Nacha rules and must be initiated within a specified time frame from the transaction’s settlement date, typically within two banking days.

ACH reversals

An ACH reversal is initiated by the originator of an ACH transaction if it finds that an error was made (e.g. wrong amount, duplicate transaction). The originator can send a reversing entry to undo the incorrect transaction. Reversals must also adhere to Nacha guidelines, which state that they must be initiated within five banking days of the original transaction date and must be for the full amount of the original transaction.

How to manage high volumes of ACH returns

Managing high volumes of ACH returns can be difficult. But with a systematic approach, businesses can mitigate the negative impacts and improve their payment processes.

Implement prevention measures

• Use strong verification methods such as micro-deposits or third-party verification services to ensure account accuracy before initiating payments.

• Implement data validation tools and software to validate customer information, such as account numbers and routing numbers, to reduce errors.

• Clearly communicate returned payments’ fees and consequences to encourage customers to double-check their information.

Simplify return processing

• Invest in software that automates the return notification process, including customer communication and internal reporting. This can save substantial time and resources.

• Establish clear workflows for handling returns – outlining roles and responsibilities for each step in the process – for consistency and efficiency.

• Integrate your payment processing system with your accounting or customer relationship management (CRM) software to simplify data reconciliation and reporting.

Customer engagement

• Notify customers promptly about returned payments, explaining the reason and providing instructions on how to resolve the issue.

• Offer alternative payment methods such as credit cards and debit cards to customers who have experienced multiple ACH returns.

• Consider offering flexible payment plans or grace periods to customers facing temporary financial difficulties.

Continuous monitoring and improvement

• Regularly monitor your return rates and set benchmarks to measure progress.

• Analyse return data to recognize recurring issues or areas for improvement in your payment processes.

• Gather feedback from customers and staff to identify challenges and potential solutions.

Consider external support

• Partner with a payment processor that specialises in ACH processing and has strong return management tools and support.

• If you have a high volume of unpaid returned items, consider partnering with a collections agency to recover outstanding balances.

• Seek guidance from industry experts or consultants who specialise in ACH compliance and optimisation.

Best practices for handling ACH returns

Here are some best practices that can help you manage and minimise ACH returns.

Know your ACH return codes

• Ensure your team understands what each ACH return code means and how to handle it.

• Regularly update your policies in line with the latest guidelines and rules.

Double-check bank details

• Use checks such as small test deposits to verify bank details before processing transactions.

• Consider using services that perform real-time bank detail checks. This can greatly reduce return rates.

Communicate with customers

• Let customers know in advance when you’ll be debiting their accounts. This reminder gives them time to confirm they have sufficient funds.

• Educate customers on their responsibilities and the ACH process to minimise misunderstandings and unauthorised returns.

• Address issues quickly to keep customers happy and prevent future problems.

Get proper authorisation

• Always get written permission from customers for the amount and schedule of withdrawals. Maintain these records to quickly solve any disputes.
  

Watch for patterns

• Keep an eye on returns to see if there’s a recurring problem that needs fixing.

• Analyse return data and flag underlying issues so you can prevent future problems.

Know the fees

• Research the costs associated with ACH returns and include them in your budget.

• If you handle a lot of transactions, negotiate better fee terms with your bank.

Use technology

• Automate when possible to reduce errors and simplify transaction handling.

• Integrate payment processing with your accounting software to improve accuracy and reduce manual mistakes.