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How to avoid returned online ACH payments

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Last editedApr 20233 min read

An ACH payment is a type of electronic bank-to-bank payment available to both businesses and individuals in the US. Regulated by Nacha (National Automated Clearing House Association), ACH payments are a popular way to make payments due to their low cost and because they can be made by anybody with a US bank account. ACH payments are frequently used by businesses and individuals who must make regular payments – like payroll or utility bills. 

At times, an ACH payment may fail, and this is known as an ACH return. There are a number of reasons why you may have a returned online ACH payment, so let’s explore what happens if an ACH payment is returned and what you can do to avoid it.

If you're looking for an introduction, check out our guide to ACH return codes.

Why was my ACH payment returned?

There are almost 80 defined reasons why an ACH return may take place, with the most common being insufficient funds, incorrect details, or a lack of authorization. ACH return codes are used to represent the reason for a return. Below are the a few of the most common codes:

  • R01 – Insufficient Funds

  • R02 – Account Closed

  • R03 – No Account/Unable to Locate Account

  • R04 – Invalid Account Number Structure

  • R05 – Unauthorized Debit to a Consumer Account

To view more definitions, including those that are less common, view our complete list of ACH return codes.

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ACH debit is a payment system that allows an organization to automatically pull funds from a customer’s account. This is used commonly for recurring bill payments, where a customer can allow their service provider to automatically take the money owed from their account whenever payment is due. This is a convenient way to automate bill paying and ensure you won’t face penalties for missed or late payments. In order to use ACH debit, you must grant ACH Authorization to the organization, allowing them to withdraw from your account.

You may receive an ACH return because the organization you’re paying has not been correctly authorized to take payments from you. It may also be that for some reason, authorization has been revoked from the business. Perhaps you attempted to stop a previous ACH payment from going through by revoking ACH authorization, without realizing that this would prevent further payments.

Another common reason for ACH returns is that the information provided when making the payment was incorrect, incomplete or ineligible. Similarly, if the wrong data was submitted by the payee to the merchant bank, the payment will fail and the ACH will be returned.

Because payments are taken automatically with ACH debit payments, the payment process may initiate even if you don’t have sufficient funds in your account. When an ACH debit payment is made, it must go through a few steps before any money changes hands.

First, the originator – the payee – will authorize its merchant bank (Originating Depository Financial Institution – ODFI) to begin the process. The merchant bank will debit the customer’s account and credit the originator’s, but the money will not actually leave the customer’s account until settlement occurs at the end of the business day and the transaction is cleared by the customer’s bank (Receiving Depository Financial Institution – RDFI). It’s at this point that the RDFI may realize you have insufficient funds and in turn return the ACH payment.

While some ACH returns may be processed in a matter of days, others may take months to complete, depending on the reason for the return.

What is an ACH return fee?

Processing an ACH return may come at a cost to the bank, so either the originator of the payment or the account that has been debited may be charged an ACH return fee to cover this expense. If the ACH return was due to a lack of authorization, it’s likely that the originator will be charged. If the return is the result of insufficient funds or incorrect information provided by the customer, the customer is more likely to be charged.

This is why it’s so important to try and prevent an ACH return from happening, as it’s not just an inconvenience and a bit of extra admin – it could actually cost you money, and too many ACH returns may prevent a business from accessing the ACH network.

How to avoid ACH returns?

If you are setting up an ACH debit and granting ACH authorization to an organization, it’s absolutely crucial that you carefully ensure every detail is correct on any forms you complete. ACH returns may occur because of errors in the paperwork, so ensuring that the correct data is in the system is so important.

While ACH debit is a useful way to automate payments, you should still be sure to check your account regularly and ensure you have sufficient funds available for payments to be taken. Keep note of recurring payment days and always check your account ahead of time when you know a payment is approaching.

If you’re a merchant, make sure you have the correct authority to be taking payments, and ensure you have a good method for bank account verification, as consumer fraud is another common cause of ACH returns. Too many ACH returns could result in your business losing access to the ACH Network. Making use of tools and services to assist with bank account verification can help you prevent ACH returns from piling up and your access being revoked.

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Interested in automating the way you get paid? GoCardless can help

Interested in automating the way you get paid? GoCardless can help

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