There are a lot of things to learn and understand if you are going to work with a merchant account provider. Knowing the basics of how that processor provides different services can mean percentage differences in your profit margin.
One of those services to fully understand is the ACH payment.
ACH stands for Automated Clearing House. In simple terms, it is an electronic bank-to-bank money transfer that bypasses the usual credit card steps. It requires a customer to use their bank or checking account instead of a credit card.
The payments are lumped into batches and sent from bank to bank in one group.
As a business owner, you will generally run into ACH payments in one of two circumstances: payroll or recurring payments.
Payroll will be outgoing and can be rolled into your merchant account if it is offered. Be aware that not all providers will have a payroll option. The other ACH interaction depends on your business. If you run a boutique burger joint, you probably won’t be offering a recurring payment option.
Merchants who can offer subscriptions will have the option of ACH payments.
What are ACH Return Codes?
Just like every other type of payment, there is always the potential for a return or refund request.
For merchants, this will apply to recurring payments that have been rejected for a variety of reasons.
There are 85 separate return codes. Many of them have similar causes, but understanding the specific reason can help prevent them in the future.
Another factor to keep in mind is a potential merchant fee for a return. This item can be found in the merchant account contract.
What Are ODFI and RDFI?
In technical terms, the ODFI is the Originating Depository Financial Institute. It is the financial organization where the ACH transaction originates. Generally speaking, this is the bank where the merchant holds their accounts.
The originator is the merchant or payment provider who uses the ODFI as an intermediary to initiate the ACH transaction with the ACH provider.
The ODFI ensures the proper procedures are followed and are ultimately responsible to keep returns below an established threshold.
On the far end of the transaction is the Receiving Depository Financial Institute.
Once the payment has cleared the ACH the RDFI must ensure it makes its way to the recipient’s bank account.
The purpose of separate entities for the two legs of the financial transaction is to ensure both parties, the payer and the recipient, have an unbiased party verifying the transaction proceeds promptly and to ensure the minimal probability of a needed return.
How do ACH Return Codes Work?
In the unlikely event of an ACH return, a code is given to the originator. Simply put, the money is unable to be transferred through the ACH system.
When this happens, the request for funds to be transferred is denied. Whether there is a problem with the routing number or insufficient funds, the multistep process verifies that the transaction cannot be completed as attempted.
The return can be enacted at any point within 60 days of the transaction.
Returns can also be triggered by any of the parties along the path the money follows. Realistically, return codes work to protect all the different pieces of the transaction.
There are eighty-five current codes and they are continually updating to cover the varied parameters of transaction refunds.
Once the return has been triggered, if money has changed accounts it returns to its point of origin. If the return is triggered before the transaction begins, the process is canceled and the money never begins to move.
Common ACH Return Reason Codes
The first ten numbers (R01-R10) are the most common reasons for returns. Each return type can be triggered by different parties. Below is a quick rundown of each return, who generally triggers it, and what can be done.
|Code||Title||Meaning||How to Fix it|
|R01||Insufficient Funds||This means there isn’t enough money in the account to cover the transaction. This return is triggered when the account is checked.||To remedy the situation, the originator can resubmit the transaction.|
|R02||Account Closed||At some point between the auto-debits, the checking account was closed. This return is generally triggered by the RDFI when the transaction is being processed.||To remedy the transaction, the originator needs to contact the customer to update the payment method.|
|R03||No Account/Unable to Locate Account||When the transaction is being processed the RDFI cannot find the actual customer account. The account number structure is valid but does not link to the customer’s account. This is often the result of a mistake in informational input.||Contact the customer to correct the information.|
|R04||Invalid Account Number||The account number is completely wrong and a dead end. This is most often discovered at the first check by the ODFI.||To fix this, contact the customer and request updated account information.|
|R05||Unauthorized Debit to Consumer Account Using Corporate SEC Code||This generally means a transaction was mixed up along the way. This indicates a corporate charge appears on a customer’s account. This is usually recognized by the customer as an invalid charge.||To remedy the situation, the customer will contact the merchant.|
|R06||Returned Per ODFI’s Request||Due to a discrepancy noted by the ODFI, the transaction is flagged for return.||This is at the discretion of the ODFI and they must be contacted to learn their reasoning.|
|R07||Authorization Revoked by Customer||This means the customer has stopped payment at the source. The customer has elected to terminate all payments to a specific merchant. This is triggered by the customer.||To fix it, the merchant needs to suspend the customer’s account and then contact the customer to resolve the situation.|
|R08||Payment Stopped||Similar to R07, the customer has elected to stop payment on a recurring bill, however, this targets a single payment instead of everything from a specific merchant.||This is completed at the customer’s choice. Only the customer can tell the merchant why they stopped payment.|
|R09||Uncollected Funds||This implies that the available balance is higher than what is actually in the customer’s account. This implies there are outstanding checks or payments that bring the balance below what is owed to complete the transaction. This return is completed by the customer’s banking institution.||To complete a transaction, a merchant can wait and resubmit the charge.|
|R10||Customer Advises Not Authorized||The customer has notified their banking institution or the RDFI that the transaction is unauthorized. This may be a result of the transaction being unauthorized, improper, ineligible, or part of an incomplete transaction.||The best course of action is to suspend the transaction and any more recurring transactions until the issue has been sorted out.|
Less Common ACH Return Reason Codes
After the initial ten codes, there are seventy more codes to tell those involved with an ACH charge why the transaction failed. The first ten make up the vast majority of return reasons merchants will be given.
Members of the next grouping rarely show up on reports, but give accurate reasons for a return.
Here is an abbreviated list of the less common ACH return codes:
|R11||Check Truncation Entry Return|
|R12||Branch Sold to Another DFI|
|R13||Invalid ACH Routing Number|
|R14||Representative Payee Deceased or Unable to Continue in that Capacity|
|R15||Beneficiary or Account Holder Deceased|
|R17||File Record Edit Criteria|
|R18||Improper Effective Entry Date|
|R19||Amount Field Error|
|R21||Invalid Company Identification|
|R22||Invalid Individual ID Number|
|R23||Credit Entry Refused by Receiver|
|R26||Mandatory Field Error|
|R27||Trace Number Error|
|R28||Routing Number Check Digit Error|
|R29||Corporate Customer Advises Not Authorized|
|R30||RDFI Not Participant in Check Truncation Program|
|R31||Permissible Return Entry (CTX & CCD Only)|
|R33||Return of XCK Entry|
|R34||Limited Participation DFI|
|R35||Return of Improper Debit Entry|
|R36||Return of Improper Credit Entry|
|R37||Source Documentation Presented for Payment|
|R38||Stop Payment on Source Document|
|R39||Improper Source Document/Source Document Presented for Payment|
|R40||Return of ENR Entry by Federal Government Agency|
|R41||Invalid Transaction Code|
|R42||Routing Number/Check Digit Error|
|R43||Invalid DFI Account Number|
|R44||Invalid Individual ID Number/Company Name|
|R45||Invalid Individual Name/Company Name|
|R46||Invalid Representative Payee Indicator|
|R50||State Law Affecting RCK Acceptance|
|R51||Item Related to RCK is Ineligible or RCK Entry is Improper|
|R52||Stop Payment on Item Related to RCK Entry|
|R53||Item and RCK Entry Presented for Payment|
|R62||Return of Erroneous or Reversing Debt|
|R70||Permissible Return Entry Not Accepted/Return Not Requested by ODFI|
|R71||Misrouted Dishonored Return|
|R72||Untimely Dishonored Return|
|R73||Timely Original Return|
|R75||Return Not a Duplicate|
|R76||No Errors Found|
|R77||Non Acceptance of R62 Dishonored Return|
The last five ACH Return Codes are for international use only.
|R80||IAT Entry Coding Errors|
|R81||Non-Participant in IAT Program|
|R82||Invalid Foreign Receiving DFI Identification|
|R83||Foreign Receiving DFI Unable to Settle|
|R84||Entry Not Processed by Gateway|
|R85||Incorrectly Coded Outbound International Payment|
What Happens if an ACH Payment is Returned?
Just like every other transaction a business can face, ACH transactions are no different. While the rate of returns is not quite as high as credit card purchases, due to the subscription-based nature of ACH transactions, they do happen regularly.
As the long list of return codes above demonstrates, there are many reasons for a return.
ACH returns happen much the same way a credit card return is processed. Regardless of the cause for return, if everything is approved, the money flows back to the originator’s financial institution.
Business owners might wonder what kind of impact returned payments can have on their merchant accounts and rates?
The answer to that question depends on the frequency and amount of returns.
ACH Return Fees
The actual return fee depends on the contract a business owner has signed. The general range is $2-$5 per return.
Unlike credit card returns there is no true penalty in terms of raising your merchant account to a high risk standing. This means there isn’t the same potential threat to your revenue.
High risk merchant accounts face higher rates and fees, plus the challenge of finding an account provider who is equipped to work with high risk businesses. Sometimes the business itself isn’t high risk, but a large volume of returns can bump a business into that category.
With ACH transactions and returns, you don’t have to worry about that on the same level.
Can an ACH Payment Return be Disputed?
The interesting thing about ACH payment returns is that they can be set in motion by multiple parties along the path the money follows.
As the long list shows, there are numerous reasons a transaction can fail.
To answer the above question, yes. Payment returns can be disputed. However, the return needs to meet very specific criteria to be disputed. Also, unlike credit card transactions, there is a relatively small window of opportunity for an ACH transaction to be successfully disputed.
Oftentimes the disputes are instituted by the ODFI and RDFI as they handle most of the intricate dealings between the banking institutions.
Is There a Penalty for ACH Payment Returns?
Aside from the return fee, there is no larger penalty for a return.
ACH returns are different from a credit card chargeback. They do not directly impact your standing with the Automated Clearing House. However, they can be taken into account when a contract is being signed.
In addition, they hurt the bottom line of any business.
Returned money counts against profit and ties up inventory. In the case of a subscription business, returns lock down customer accounts and prevent them from proceeding with monthly payments.
In addition, some of the returns can lead to legal issues in small claims court.
So, while ACH payment returns do not directly lead to penalties, they imply a greater impact on the business over the long run.
Easy Pay Direct is Here to Help
As a merchant account provider, Easy Pay Direct offers multiple avenues for accepting payments from your customers.
Regardless of your business type, we have the options to fit your needs.
With our promise of human help every time you contact us, EPD has the answers to help grow your business. ACH payment options are one of our many options and we have the experience to integrate seamlessly with your business.
At Easy Pay Direct, we understand how the whole ACH system works so you can focus on growing your business.
All the return codes listed above, we have them down so you don’t have to.
Contact us today and see how we can help you take the next step with your business. Let our knowledge be the stepping stone to help you grow.