ACH Return Codes and Best Ways to Handle Them

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on Feb23
ach return codes
Written by
James Davis
Written by James Davis
Senior Technical Writer at United Thinkers
Author of the Paylosophy blog, a veteran writer, and a stock analyst with extensive knowledge and experience in the financial services industry that allows me to cover the latest payment industry news, developments, and insights. Read more
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ach return codes
Reviewed by
Kathrine Pensatori
Product Specialist at United Thinkers
Product specialist with more than 10 years of experience in the Payment Processing Industry. I help payment facilitators and PSPs solve their various payment processing issues. Read more
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ACH return codes remain in focus of both analysts and businesses. Plenty of businesses in the US process ACH payments on daily basis. Acceptance of ACH payments presents businesses with various questions, some of which we will try to discuss here. The typical common questions are:

  • What are ACH returns and how to handle them?
  • What are ACH return codes?
  • Which ACH return codes are the most common ones and how to deal with them?

We have decided to provide our readers with the guidelines on ACH return codes to address these questions.

Why ACH return codes are crucial

Before discussing the ACH return codes, let us clarify what ACH returns are. ACH (the abbreviation stands for automated clearing house) is a system of inter-bank money transfers. ACH operates within the US, however, most countries have similar systems. Examples include BACS in the UK and SEPA in Europe. ACH is used alongside credit card payments.

ACH return is a process when a clearing house withdraws the funds, that it previously advanced to a merchant. This withdrawal, usually, results from some specific problem (as we will explain later). Each and every problem (ACH return reason) is denoted by a specific code. That is why ACH return codes are extremely important for analysis.

How ACH return codes can help

In order to optimize the revenue streams from ACH payments, businesses need to check return reason codes regularly. Managers of such businesses should be able to see the issue behind each and every ACH payment returned. Thus, it will be easy for them to detect the most typical ACH return codes and reasons. Based on this analysis, both merchants and PSPs can adjust their strategies and strengthen their ACH fraud prevention mechanisms.

What is an ACH return?

Even though, real-time ACH service is already available in some banks, most ACH transactions are still processed using file-based mechanism. For instance, when a utility company needs to charge people for their monthly electric bill, it processes a file, which includes ACH charges.

When running a credit card transaction, the processor can immediately check the availability of funds and correctness of account details. At the same time, when running ACH transactions, the processor cannot verify these details in real time. Since it is not possible to verify validity and correctness of payment information, the clearing house advances full amounts of all submitted transactions to the merchant (company) that sends the transaction file. At this point the processor has to assume that all the transactions will come through. This is the way the ACH operates.

The process does not end when the clearing house (ACH operator) advances the funds. Subsequently, the ACH operator sends requests to the respective banks holding the accounts. These requests often take up to 60 days to process. Sometimes, the bank, holding the account, cannot fulfill the request, that is, provide the funds. Common reasons: the account has no money in it, account number is incorrect or invalid, or account has been closed. In such cases the ACH operator requires the ACH receiver (merchant) to return the funds by generating an ACH return.

Shortly speaking, the ACH operator generates a reject in response to an ACH transaction, requiring money transfer, because the transaction cannot be processed. This reject is called an ACH return.

Now that we have clarified what the ACH returns are, let’s take a closer look at the list of ACH return codes and how they work.

What are ACH return codes?

ACH return codes are codes assigned to specific reasons behind each type of an ACH return. Each code includes the letter “R” and two numbers, following it. For instance, the code R01 means “insufficient funds”, R04 means “invalid account number” etc. Some ACH return types turn out more often while others are less frequent. Reason: ACH returns might depend on specific actions of the account holder or not.

Some might wonder: what is the purpose of the letter “R” if all codes denote returns anyway? Are there some other codes besides return codes?

What are notifications of change?

Well, another type of notification, associated with ACH payments, is the notification of change (NOC). Just like an ACH return, notification of change occurs when there is some issue with the transaction. However, in the case of NOC the issue is not significant enough to cause transaction rejection or reversal. The merchant does not have to return the money. However, it needs to address the respective issue. NOC codes start with the letter “C” and include two numbers, following it. Examples include C01 (“incorrect account number”), C04 (“bank account name change”) etc.

Notifications of change and ACH returns are sent in the same files. A business should pay attention at both types of notifications. If a business ignores NOCs for some time, it might have to pay a fine for non-compiance.

Notifications of change and ACH return codes are the main signals, informing merchants about issues with ACH payments.

ACH return codes: examples

Now let us get back to ACH returns. Why can ACH payments be returned? That is, what are the most common ACH return reasons? Well, it turns out that there are about 80 possible reasons for which an ACH transaction cannot be processed. Unique ACH return codes mark all these reasons. We will not explain what happens if an ACH payment is returned in each of the 80 cases. Instead, we will focus on the most common ACH return scenarios.

In the next subsections we will outline the common ACH return codes and time frame ranges, associated with ACH returns.

R01 return code: insufficient funds 

R01 return code stands for “insufficient funds”. That is, the balance on the account is below the amount that the ACH operator needs to collect.

The best way to deal with the return is to reattempt the transaction after some time (say, several days). The funds may actually appear on the account after this period. Besides that, many people get their salaries on specific days of the month or week. For example, the funds land on their accounts on the 1st (or 15th) day of the month, or every Friday. However, these payments are sometimes delayed. That is why, if you try billing on the 1st day of the month and get an “insufficient funds” code, you might try repeating billing on the 5th. Similarly, if on Friday you get “insufficient funds” response, you might reattempt billing the following Wednesday.

R02 return code: account closed

R02 return code stands for “account closed”. The account, that might have been active during previous transactions, is now closed.

It makes sense to verify, whether there were any successful transactions in your system on this account. If there were no successful transactions, then you might need to contact the account owner personally and clarify the reasons. If there were successful transactions, then the account number might have gotten corrupt, potentially, due to some typo. In this case it makes sense to double-check the account number and the routing number. You should compare these data with the respective data from the last successful transaction. If the data are the same, you should contact the account holder.

R03 return code: unable to locate the account

R03 return code stands for “unable to locate the account” or “no account”. The account is not open, or its number does not correspond to the specified name of the account holder. At the same time, the account number structure is valid. If some previous transactions of the account holder came through, it makes sense to check the account number on those successful transactions.

Often (especially with new accounts) errors occur during account number input.

R04 return code: invalid account number

R04 return code stands for “invalid account number”. In contrast to the previous case, the structure of the account number is invalid. Just like in the previous case scenario, it makes sense to verify account number input format against previous successful transactions. Mistakes in account number input might result in invalid format and lead to subsequent return. Another potential reason for invalid format/structure might be migration of the account from a different billing system. So, the information may have got corrupt as part of the process. If you see previously successful transactions on the account, verify the account number before approaching the cardholder.

R13 return code: invalid ACH routing number

R13 return code stands for “invalid ACH routing number”. Error code r013 or r13 indicates that RDFI or gateway identification is not a valid ACH routing number.

R13 code, usually, means that a bank has undergone a merger with another branch or acquisition by a new owner. As a result, the bank’s routing numbers have changed. Another reason might be some typo in the routing number. In case of this particular return, it makes sense to double-check the routing number (say, online). Routing numbers of banks and branches are, usually, available on banking websites.

Sometimes, it might make sense to verify RDFI/ gateway credentials or contact the account holder.

R20 return code: non transaction account

R20 return code stands for “non transaction account”. Error code r20 “non transaction account” signifies the attempted ACH entry to an account, unavailable for transactions. Usually, the account becomes a “non-transaction” one, because the owner exceeds the established monthly withdrawal limit. It might make sense to wait until the moment when withdrawals become possible.

ACH return codes: categories and analysis

Categories

In terms of time frame ACH returns fall into three categories.

  • Mechanical errors of entry (transactions are rejected almost immediately and response arrives the same or the next day);
  • Returns, depending on the bank, unrelated to account holder (“insufficient funds”, “account closed”). These transactions get rejected and returns arrive within one or two business days;
  • Return codes, related to actions of the account holder. For example, the account holder can dispute a transaction, that he does not recognize. In this case he can have 60 days to dispute the return. Examples of return codes include R05 (unauthorized debit to consumer account using corporate SEC code), R07 (authorization revoked by customer), and many others.

Analysis

So, not all ACH returns depend on mechanical errors or banks and arrive within two business days. Some 20% result from account holder’s actions and actually take up to 60 calendar days to process. As we wrote in our previous articles, such lags sometimes allow unethical customers and merchants to conduct fraud. That is why if certain ACH return codes often show up in the reports, the company should not neglect this sign. It is time for the company to take adequate measures, and, perhaps, strengthen its fraud prevention tools.

In-depth analysis of ACH return codes allows a business to adjust its strategies and update account holder data in time. Notification of change (NOC), which we mentioned earlier is an important tool for such updates.

The overall goal of the analysis is to reduce the number of ACH returns and keep it as far from the threshold as possible. The more ACH payments you process successfully, the larger your revenues are.

To summarize

Every returned payment has some issue(s) behind it. Proper understanding and analysis of ACH return codes allows your company to successfully cope with the respective issues. If you resolve the most common problems, causing ACH returns, then you will maximize the respective revenue stream from this important and significant payment type.

Feel free to contact our experts at UniPay Gateway to learn how to optimize ACH payment processing for your business case.

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