A Merchant's Guide to ACH Returns and ACH Return Codes

Imagine a retail company that just launched a weekend sale, and transactions are flooding in.

Then, a nightmare.

Instead of a wave of payments, they start noticing a spike in notifications from their bank. The Automated Clearing House (ACH) payments couldn’t be completed and have been returned to the customers’ bank accounts.

Panic.

This is more common than you think. That’s because there are many factors affecting ACH payment processing, like incorrect information or invalid accounts. These factors come with their corresponding ACH return codes, which can be confusing to figure out.

Regardless of the reasons, it’s like having bounced checks or credit card declines. Something breaks down along the way, and no one wins. The customer can be charged for the return, and the merchant may lose a sale. Together with chargebacks and other types of failed payments, ACH returns need to be minimized at all costs.

In this article, we’ll discuss:

• What ACH returns are
• The common ACH return codes
• How businesses can address these codes
• How businesses can minimize ACH returns

What Are ACH Returns?

ACH returns happen when an electronic payment or fund transfer (ACH entry) made through the ACH network can’t be processed. These returns cover both debit and credit entries.

Once the payor (the originator) initiates a transaction, their bank (the Originating Depository Financial Institution or ODFI) sends this entry for processing to the ACH operator. The ACH operator then transmits the entry to the recipient’s bank (the Receiving Depository Financial Institution or RDFI). It’s the RDFI that sends a return notification with a two-digit return reason code.

For example, let’s say a consumer authorized a music streaming service to automatically debit their monthly subscription payment. A return scenario can look like this:

• The RDFI (the streamer’s bank) tries to move the funds from the ODFI (consumer’s account).
• The consumer’s account doesn’t have enough funds to cover the payment.
• The RDFI alerts the ODFI that this payment initiation has been rejected, with a corresponding code (R01 for “Insufficient Funds”).

Note that an ACH return differs from an ACH reversal. Reversal happens when the originator requests to have a completed ACH payment canceled. This is mostly due to the originator’s error (like entering the wrong bank account or dollar amount). In contrast, an ACH return is a rejected payment.

A return can also happen at a later date. This means that the ACH payment can initially be processed and rejected later.

Talk about false hope for both the customer and the merchant!

Common ACH Return Codes

There are currently 85 ACH return codes that can affect both consumer and non-consumer accounts. These codes can be broadly categorized into (1) account and authorization concerns, (2) transaction errors, and (3) operational and compliance issues. In general, ACH return codes have a turnaround time frame of two banking days.

Here are some of the most common codes:

• R01: Insufficient Funds
• R02: Account Closed
• R03: No Account/Unable to Locate Account
• R04: Invalid Account Number Structure (the account number doesn’t match the bank’s numbering system)
• R05: Unauthorized Consumer Debit using Corporate SEC Code (a transaction was made without the account holder’s authorization, most often a recurring payment)
• R06: ODFI Requested Return (the ODFI requests the return of the ACH transaction, possibly due to a processing error)
• R07: Customer Revoked Authorization (the customer has just revoked authorization for a recurring debit entry)
• R08: Payment Stopped (the customer requested a payment process to be stopped)
• R09: Uncollected Funds (funds are not yet available in the account)
• R10: Originator not known and/or not authorized to Debit Receiver’s Account (the receiver reports a transaction that’s unauthorized, improper, or ineligible)

Other codes that may not be as common but still good to know are:

• R13: Invalid ACH Routing Number
• R15: Beneficiary or Account Holder Deceased
• R19: Amount Field Error
• R20: Non-Transaction Account (the payment was sent to a limited or prohibited account)
• R23: Credit Entry Refused by Receiver (the minimum amount wasn’t sent, so the receiver returned the entry)
• R24: Duplicate Entry
• R29: Not Authorized by Corporate Customer
• R67: Duplicate Return

Main Reasons for ACH Returns

Aside from insufficient funds, the most common reasons for ACH returns are:

• Incorrect account information. A simple typo in the bank account or routing number can trigger a return.
• Authorization issues. The customer has not given proper authorization for automated debits.
• Closed and frozen accounts. The account no longer exists or was frozen due to legal issues or ongoing investigations.

Negative Effects of ACH Returns

An occasional return might be a minor inconvenience. But when it keeps happening (and for larger amounts), it can be crippling. These incidents can disrupt cash flow, increase operational costs, and strain customer relationships. 

For example, the merchant would have to spend labor and resources investigating the reason behind the rejection and informing a disappointed customer to try paying again.

ACH Return Fees & Fines

On top of this, each return can come with a fee, ranging from $2 to $5. This depends on the payment processor and the return code. For example, the ODFI pays the RDFI $4.50 for every return due to an unauthorized ACH debit (R05).

Aside from fees, businesses that make a lot of returns (like unauthorized debits) will get fined. They can even be suspended from making ACH transactions altogether. Nacha, the banking association that oversees the ACH network, has set a 15% overall return rate threshold. Companies that cross this threshold will be sanctioned.

How Can Your Business Address ACH Return Codes?

Interpreting these codes is the first step to efficiently resolving them. Make sure you can differentiate them, and you’re constantly updated on any changes, additions, or deletions. Keeping up with Nacha’s announcements and industry regulations will help you stay on top of these codes.

Here are other ways to effectively address returns:

• Monitor and analyze return rate trends: Go through your returns for the past few months and see where things are breaking down. For example, you might need a better authorization process if there are too many R10s (unauthorized transactions).
• Communicate with your customers: Many of these codes can be resolved just by reaching out to the customer and updating your records. Regularly check your database to ensure all account numbers are correct, including stopping scheduled payments for those who have already canceled their subscription/service. Immediately contact customers whenever there are notices of insufficient funds or stop payments.
• Establish “retry” procedures: Many codes are temporary issues, such as uncollected funds. Ensure you have a policy/mechanism that retries the transaction after a few days.
• Know which returns can be disputed (dishonored return): A dishonored return can be requested from the ODFI for the following reasons: the return was a duplicate, misrouted, not issued within the established time frame, or had incorrect information.

3 Ways to Minimize ACH Return Codes

As with all things, prevention is better than cure. Review your admin operations and payment processing procedures to ensure they can handle any potential scenario.

Here are some other best practices:

• Adopt stronger verification tools: Use account verification tools that ensure accuracy, particularly account and routing numbers. One way Trustly Pay ensures this accuracy is through our real-time access to bank-grade financial data, which reduces false declines and maximizes approval rates.
• Establish a solid anti-fraud and risk management system: Many of the codes deal with suspicious or fraudulent activities, such as R39 (improper source document), R41 (invalid transaction code), and R44 (invalid individual ID number). Trustly’s risk engine addresses these by using machine learning to constantly analyze transactions across its merchant base to identify suspicious patterns and behavior.
• Automate manual tasks: Manual entry and processing are time-consuming and prone to errors. Partnering with a payment processor can streamline your entire transaction procedure so you don’t have to worry about incorrect or outdated information. For example, Trustly’s eCommerce solution offers end-to-end payment processing, from onboarding to initiation to collection.

Prevent ACH Return Codes with Trustly

We’ve helped some of the biggest businesses in the U.S. become compliant with Nacha rules for ACH returns. We can also help you prevent ACH fraud.

ACH return codes give you a clue as to where you may be having payment issues. You need to establish a system that effectively resolves them so you can avoid fees, fines, and subpar customer service. Partnering with Trustly can help you avoid these situations through our Open Banking solutions. Our connectivity with over 12,000 banks ensures you get verified account information, streamlined transaction processing, and strong fraud prevention.

Schedule a meeting with an expert to stop worrying about ACH return codes.

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