Understanding the ACH Returns Process

ACH (automated clearing house) transactions are similar to credit card transactions in many ways, but differ in one key respect: ACH transfers of funds must follow a strict set of rules within the banking industry. Why the banking industry? Because all ACH transactions, by their very nature, are direct movements of funds between banks. Other transactions involve merchants, consumers, or other middle-parties. Things like paper checks, cash, credit cards, and wire transfers are not related to the ACH process. In a sense, ACH transfers are electronic checks because they are originated by a consumer, flow through a merchant, and end up at a bank for payment.

So, an ACH movement of funds involves banks and banks only, not credit card companies. That’s the key concept for understanding other questions about the process. For example, in the financial industry today, there are two serious problems that arise from time to time. No one is immune from ACH fraud and what are called “ACH returns.”

ACH fraud has become so serious that there are numerous legal cases every year in which the sums of money involved are truly staggering, often in the many billions of dollars. No company, bank, or individual is safe from the reach of fraudsters.

Likewise, and a more common problem for consumers, are ACH returns. In a return, the original transaction does not ever get funded. There can be dozens of reasons for a return to arise. But, the bottom line for consumers is that one party to a transaction won’t get paid.

Depending who originated the funds transfer and whose institution refused to fund the transaction, either the merchant or the consumer can be the victim of an ACH return. Usually, it’s the merchant, who ends up having delivered goods or services and getting nothing in return due to a failed transfer of money.

In order to understand the entire situation surrounding ACH returns, it’s important to know the basics, the what and why of returns. It’s also wise to learn the most common return codes and find out about the many ways that fraud can occur in this otherwise safe way of transmitting funds between banks.

The What and Why of ACH Returns

What exactly are ACH returns and why do they happen? Understand these two pieces of the puzzle and the rest makes perfect sense. Even better, you’ll be in a position to avoid being on the wrong side of a return and will discover ways to deter fraud.

In its simplest form, when a “receiving depository financial institution,” also called an RDFI, generates a declined transaction, called a “return,” after a financial transaction has already been initiated by another bank, the transaction can’t be processed. In plain English, the bank that was supposed to convey the funds was unable to do so for a specific reason. In many cases, the bank does not have the funds available in the account that was supposed to be charged. If you’ve even had someone write you a “bad check,” then you get the main concept behind an ACH return. But, to be clear, ACH transactions are not paper checks or wire transfers. They take place only between banks and are completely electronic.

When a bank rejects an ACH request, it explains itself via a computer code called an “ACH return code.” There are nearly a hundred such codes, each one designating a different reason for the failure of the transaction to go through. All codes have three characters. Common ones indicate “insufficient funds,” and “account closed,” among others. A major part of understanding ACH returns is knowing the most frequent codes. Of the hundred or so that exist, there are only about a dozen that show up frequently.

All About Return Codes

What are the most frequent return codes, i.e., reasons that ACH transactions don’t go through? Here are the most common codes, reasons, and explanations:

  • Insufficient funds, R01: The most common reason for a return. There is not enough money in the account to cover the transaction.
  • Account has been closed, R02: The account was open at one time and was once a valid account, but it is now closed and inoperative.
  • Account does not exist, R03: The account number is bogus, or the account number does not match the name of the person who made the charge, or the account is simply not open at the present time.
  • The account number is invalid, R04: This usually occurs when the account number is not presented in the correct format or is missing digits.
  • Payment has been stopped, R08: This can happen when a consumer stops payment on the transaction, just as someone would stop payment on a paper check.

Understanding and Preventing ACH Fraud

ACH fraud is widespread and has become a serious problem for many financial institutions, merchants, and consumers. The bottom line about ACH fraud is that it usually takes place in one of two ways. Either the merchant or the consumer commits the fraud. Consumers do it by using bogus bank accounts for payment, get through the screening system, and take the goods. By the time the bank sees the transaction, and refuses to pay it because it’s drawn on a non-existent or empty account, the consumer has the chance to abscond, often never to be found.

The other common kind of fraud is perpetrated by merchants. They submit false charges to payment processors, receive their funds right away, and abscond. Sometimes the amounts in these kinds of cases are large. Merchants can pull this trick off by targeting banks and other financial institutions that are known to be slow with ACH processing. Once the charge gets to the bank, the merchant, who got the funds up front, can’t be found, or can be found and prosecuted.

What are some ways to prevent ACH transaction fraud? Here are a few of the more effective ways for banks to prevent fraud:

  • Be quick with funds verification
  • Make all merchants use check verification services
  • Run all consumer ID through lists of prohibited buyers
  • Refuse to process any requests for payment that come from high-risk places, like nations where financial fraud is rampant

Using the Right Payment Technologies

To minimize your chances of losing out on ACH returns or fraudulent transactions, it’s essential to get the very best equipment, support, software, and infrastructure.
Metro Payment Technologies has the payment technologies that can help large, medium, and small businesses operate safely and efficiently, even in the fast-paced and complex modern financial environment.

We offer gateways, payment and virtual terminals, e-commerce solutions, POS systems, wireless terminals, e-check processing, and many other products that can turn your company into a paragon of efficiency and security.

Additionally, our team can handle any business service you might need, at any level of growth or life cycle, including, payroll, PCI compliance, customer support, charge-back and retrieval handling, merchant cash advances, leasing, installation, and others. Don’t let ACH returns ruin your fiscal serenity.

Call us for help with whatever is standing between you and your business goals. Our toll-free phone number is 800.771.3719. Visit our website for more information about how we can help your company grow and prosper.