For merchants and customers who want to avoid dealing with the credit card payments system, Automated Clearing House payments can seem like an obvious alternative. They’re affordable, easy to use, and don’t require registration with any third-party platforms.
However, they are not without their own risks, and it is not uncommon for ACH payments to fail for one reason or another. When this occurs, the receiving financial institution will send back a code that explains why the payment was rejected. What are ACH return codes, and when is it safe to retry a failed payment?
Bank-to-bank transfers that go through the Automated Clearing House (ACH) Network are becoming increasingly widespread in e-commerce.
Last year saw 29.1 billion ACH payments with a total value of $72.6 trillion, with the B2B and health care sectors experiencing some of the highest growth rates.
With credit cards carrying significant downsides for both merchants and customers, it’s not surprising that many have turned to ACH payments. They’re accessible to anyone with a bank account, and can be processed for a low flat rate.
In the rush to embrace ACH payments, some have overlooked its hazards, such as the potential for fraud, disputes, and the problems that can arise when a payment fails to go through. Merchants who accept ACH payments should have a plan in place for when payments are returned to the sender, and familiarize themselves with the various ACH return codes that explain why the payment was rejected and how it can be corrected and retried.
When an ACH payment cannot be completed, the bank that was supposed to receive the payment will send back a return code indicating the reason why it didn’t go through.
ACH payments are carried over a network managed by the National Automated Clearing House Association (NACHA). This organization sets the rules, standards, and terminology for ACH payments, including the return codes.
When a transfer cannot be processed, NACHA requires the receiver’s bank (the Receiving Depository Financial Institution, or RDFI) to send an explanatory return code to the sender’s bank (the Originating Depository Financial Institution, or ODFI) within a specified timeframe.
There are more than eighty different ACH return codes. Each one starts with the letter “R” and is followed by two digits. The ODFI can pass the information from the return code on to their customer, the originator of the transfer, so they can decide whether to try ACH again or use a different payment method.
Knowledge is power, but memorizing every single ACH return code might be overkill. Here are some of the codes that are most likely to come up in e-commerce.
The following codes must be returned within two business days:
These codes have a 60 calendar day timeframe for return. They are used for ACH disputes and other issues that may not be immediately evident:
An ACH return code not only means that a payment has failed, it also incurs a fee (usually just a few dollars, charged to the originator in most cases). Like credit card disputes, ACH returns are monitored.
If you believe you have received an ACH return in error, you can contact your bank. In some cases, errors can be resolved and reversed, but there is no equivalent to chargeback representment when it comes to ACH returns. For the most part, returns are final, and if a payment fails and you believe the customer still owes you money, you have to resolve it with them directly.
ACH payments can be useful option for merchants to keep in their toolbox, especially for large transactions such as B2B payments that would carry hefty fees if carried out by credit card.
You just have to keep in mind that while the ACH system doesn’t have a dispute mechanism as easy to use (and abuse) as the chargeback process, it does allow account holders to dispute unauthorized transactions.
Multi-factor authentication and other external security measures are a must if you want to conduct bank-to-bank fund transfers safely.
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