ACH Return Codes – What Are They and How They Work

For plenty of transactions, such as receiving a direct deposit of one’s paycheck or setting up automatic monthly bill pay, ACH payments are of incredible convenience.

However, when conducting business, there may be cases when a transaction fails to succeed. This is where ACH Return codes come into play.

ACH or automated clearing house return codes identify what went wrong with the transaction and why the recipient’s bank returned an ACH payment. In other words, ACH codes make it easy to communicate payment failures.

So let’s learn more about what ACH return codes exactly are and how they work. Keep on reading to make everything clear.

What Are ACH Return Codes?

ACH return codes are numbers that occur when an ACH payment can’t be completed. Every code begins with ‘R’ followed by a two-digit number.

For instance, ‘R10’ indicates that the originator is unknown or unauthorized to the Debit Receiver’s Account.

There is a number of reasons why the transactions fail, including:

• Insufficient funds in the transaction account
• The account number structure is not valid.
• Bank account closed
• A stop payment
• Unauthorized debit to consumer account using Corporate SEC code

The ACH network, in response, returns payment to the originating party if a transaction fails to succeed. Payments returned in such a way are commonly referred to as ACH Returns.

Based on the nature of the problem, there are currently 85 distinct ACH return codes.

But the list is constantly changing and growing as NACHA, which governs the Automated Clearing House (ACH) network, regularly updates existing codes and adds new ones.

How Do ACH Return Codes Work?

As we’ve already mentioned, each return code begins with ‘R’ followed by a two-digit number.

And each two-digit number, in turn, represents a unique scenario. The rules for handling every return code are set by NACHA.

Two parties involved in an ACH transaction are the originator, referred to as the Originating Depository Financial Institution (ODFI), and the receiver, referred to as the Receiving Depository Financial Institution (RDFI).

These parties are responsible for handling ACH return codes according to the NACHA’s rules.

The process follows: the RDFI receives an ACH request sent by the ODFI, and it accepts or rejects it.

If rejected, the RDFI sends an ACH return to the ODFI with a reason code that describes the cause of the issue.

The whole procedure goes directly via the ACH operator, who processes all of the transactions between the originator and receiver.

Now, let’s proceed to the example. Let’s say the originator isn’t authorized to debit the client’s account with an ACH payment.

In that case, the customer’s bank has up to 60 days after settlement to return the payment to the company’s bank with the ACH return code R10.

Let’s take another example: a transaction cannot be processed as the recipient doesn’t have enough funds. In this scenario, the bank has up to 2 days after settlement to return the payment to the streaming service with the code R01.

What are ACH SEC Codes?

SEC, or Standard Entry Class codes, are three-letter codes that specify how an ACH payment was completed by the consumer or the business receiving the ACH payment.

Like ACH return codes, SEC codes are also defined and maintained by NACHA, which allows a maximum number of 13 SEC codes on ACH transactions. Being a part of the NACHA file format, they are attached to the ACH payment request.

Originating Depository Financial Institution or ODFI is responsible for including the proper SEC code in the ACH payment. Including the wrong one could lead to an ACH return.

Modern Treasury supports six SEC codes when originating payment orders. They are PPD, CCD, CTX, IAT, CIE, and WEB.

How Long Does an ACH Refund Process Take?

The process of ACH refunds proceeds rather quickly. Normally it takes about two banking days. However, the time frame for some particular ACH return codes may be longer.

With some codes, the refund period can last up to 60 banking days. For example, ACH return codes R05, R07, and R10 can take up to 60 calendar days to resolve.

Also, always clarify with your merchant service provider for more information regarding the expected timeline.

Can ACH Returns Be Disputed?

In case the transaction meets certain criteria, ACH returns can be disputed. One may dispute a return if:

• As a result of the reversal, there was an unintended credit to the receiver
• The transaction was a duplicate
• The return didn’t appear within the proper time frames set by the NACHA
• The transaction was misrouted
• It included inaccurate information

As a typical turnaround time for ACH returns is two banking days, disputes must be resolved in a timely manner.

If they meet the above criteria, one will receive ACH returns within five banking days from the date of return settlement.

What is ACH Return Fee?

The same as with transaction processing fees, ACH returns also come with additional fees.

Depending on the particular ACH return code, the costs vary. In general, the costs range from $2 to $5 and are usually passed on to be paid by the consumer.

The Bottom Line

ACH Payments is a win-win option for many transactions.

Compared to hassle paper checks, they are faster and more convenient. Before adding ACH to your payment options, it is vital to familiarize yourself with ACH return codes.

An ACH transaction can fail to succeed due to many factors. Among the most common reasons are a closed bank account, a stop payment, an invalid account number structure, insufficient funds in the transaction account, etc.

ACH or automated clearing house return codes make it easy to communicate payment failures by identifying what went wrong with the transaction and why the recipient’s bank returned an ACH payment.

Knowing how the codes work will help you react when an ACH return occurs.

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