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being an e-commerce store owner, you know how important it is to have easy and efficient payment processing for your customers. You also understand the need to stay on top of any issues that may arise with payments or refunds. 

One of these potential issues involves Automated Clearing House (ACH) return codes – codes provided when an attempted ACH transaction fails for some reason or another. Understanding these codes can help provide insight into why a customer’s payment failed and make the process go much more quickly, avoiding unnecessary delays in getting paid or issuing refunds.

 In this blog post, we'll walk through what you need to know about ACH return codes and strategies merchants can use to prevent them from becoming a problem in the future.

Understanding ACH Return Codes

ACH return codes can often seem confusing and intimidating, however, they don't have to be complicated. ACH return codes are three-digit numerical codes that banks use to explain why a transaction was returned or rejected

These essentially explain the reason why any type of electronic payment has been sent back, such as if it's been incorrectly formatted or if there wasn't enough money available. Understanding — and being familiar with — these codes can help organizations doing business detect any potential problems far quicker in order to reduce the risk of losing money and maintain their daily cash flow operations.

Common Reasons for ACH Returns

ACH returns are inevitable, especially for merchants who accept electronic payments. Common reasons include insufficient funds, invalid account information, and processing errors. Insufficient funds occur when a customer’s bank account does not have enough money to complete a transaction. 

Invalid account information happens when an incorrect routing number or bank account is provided by the customer. Processing errors can occur on either the merchant's or banks' ends and can happen due to equipment malfunction, incorrect coding, etc. 

Regardless of the reason for the return, merchants do incur costs associated with the ACH return may range from a few dollars up to 0.50 cents per transaction. 

These costs can add up over time and make it difficult for small businesses to remain profitable as they operate in the red and possibly pass these costs on to customers in other ways.

Common ACH Reason Codes

When an ACH payment is returned, the reason for the return is indicated by an ACH Return Code. These codes are typically provided to the merchant through their payment processor, and understanding them is crucial for minimizing returns and improving payment processing. Some of the most common ACH Reason Codes that merchants may encounter include:

1. R01 (Insufficient Funds)

It shows that the account holder did not have enough money in their account to cover the payment. It is one of the most common reasons for ACH returns.

2. R02 (Account Closed)

This indicates that the account used for the payment has been closed by the account holder. The merchant will need to contact the customer to obtain updated payment information.

3. R03 (No Account/Unable to Locate Account)

Code shows that the account number used for the payment does not match any account on file with the receiving bank. This may be due to an error in the account information provided by the customer.

4. R04 (Invalid Account Number)

This code indicates that the account number used for the payment is not valid. This could be due to a mistake in the account number provided by the customer or a technical issue with the payment processing system.

5. R05 (Unauthorized Debit)

This code tells us that the customer did not authorize the payment, or that the authorization was revoked by the customer. This may occur if the customer believes that the payment was made in error or that the merchant charged an incorrect amount.

6. R07 (Authorization Revoked by Customer)

This code indicates that the customer has revoked their authorization for the payment. This may occur if the customer changes their mind about a purchase or if there is a dispute with the merchant.

7. R10 (Customer Advises Unauthorized)

It indicates that the customer did not authorize the payment, and the payment was not initiated through an authorized channel. This may occur if the payment was made through a fraudulent website or if the customer's payment information was stolen.

By understanding these common ACH Reason Codes, merchants can take steps to prevent returns and manage them when they occur. It is important to work closely with payment processors to identify the root cause of ACH returns and implement strategies to minimize their occurrence in the future.

Strategies for Merchants to Reduce ACH Returns

Merchants should prioritize reducing ACH returns as they can detrimentally impact cash flow and profitability. Several tips can be employed to reduce the likelihood of ACH returns, such as:

  • Verifying customer account information upon signup and setting up low balance alerts.
  • Monitoring and managing returned payments is also important in ensuring the consistency of successful payment transactions. 
  • Utilizing a comprehensive money movement platform or an automated system with safety measures in place can track suspicious transactions so merchants are able to respond quickly and avoid costly resolution fees associated with ACH returns. 
  • Dedicating sufficient attention to reducing ACH return rates can help merchants prevent any disruption of their daily operations.

Steps to Take When ACH Returns Occur

When an ACH return occurs, swift action is key. Merchants should first reach out to their customers and ascertain the reason for the returned payment. If a bank account has been closed, merchants must make sure they have updated records so future payments go through without incident. 

Verifying that customer contact information has not changed is also essential in this process. Once the root cause of the return is identified, merchants can take corrective action in resolving the issue quickly and minimizing disruption of service if applicable. 

To avoid costly fees assessed on returned ACH transactions, it’s important for merchants to promptly act upon an ACH return notification. 

It’s also wise to implement proactive steps such as seeking authorization from buyers before processing ACH transactions or providing alternative payment options to prevent them from happening at all. Taking such steps now can help avoid ACH returns in the immediate future and keep businesses running smoothly moving forward.

Working with Payment Processors

Working with a reputable payment processor is crucial for minimizing ACH returns and ensuring smooth payment processing for merchants. When choosing a payment processor, merchants should ask the following questions:

1. What measures do you have in place to prevent ACH returns?

A good payment processor should have systems in place to prevent returns, such as fraud detection and verification tools. Merchants should also ask about any fees associated with ACH returns and how they will be handled.

2. What support do you offer for managing ACH returns?

A payment processor should be able to provide merchants with tools for managing returns, such as reporting and tracking features. Merchants should also ask about the processor's policies for handling disputes and chargebacks.

3. How do you ensure payment security?

Merchants should ask about the payment processor's security measures, such as encryption and tokenization, to ensure that customer data is protected.

4. What are your fees and pricing structure?

Merchants should be aware of any fees associated with payment processing, such as transaction fees and chargeback fees. They should also ask about any setup or cancellation fees.

5. What integrations do you offer?

Merchants should consider whether the payment processor integrates with their existing systems, such as their website or accounting software.

By asking these questions, merchants can ensure that they are working with a payment processor that meets their needs and can help them reduce ACH returns. It is also important to regularly monitor payment processing activity and work with the payment processor to identify and address any issues that arise.

Final Thoughts on ACH Return Codes

As you have learned, understanding ACH return codes is an essential part of successful payment processing for merchants. Most returns can be avoided with careful planning and preparation and by being proactive about staying up-to-date with changing regulations. 

It's also important to work with a payment processor who makes it easy to understand return codes and troubleshoot possible problems. 

With the right knowledge, resources, and experienced partner in place, managing ACH returns is efficient, profitable, and ultimately easier than ever before. An open line of communication between payment processors, merchants, and customers helps build trust while reducing the chance of returns happening unexpectedly. 

Knowing how to parse through return codes when they do occur will help businesses stay on top of their payments while ensuring a good customer experience as well. As a merchant, following these strategies is the key to mastering ACH return codes at every stage of the process.


What is the difference between a return and a reversal ACH transaction?

A return ACH transaction is initiated by the receiving bank when a transaction is unable to be processed, such as insufficient funds or an invalid account number. A reversal ACH transaction is initiated by the sending bank to cancel a transaction that has already been processed.

How long does it take to receive an ACH return code notification?

It typically takes 1-2 business days for the receiving bank to process an ACH return code notification and for it to be received by the merchant.

What actions should I take if I receive an ACH return code?

The first step is to review the reason code provided with the ACH return to determine the issue with the transaction. From there, merchants should contact the customer or client to resolve the issue and then work with their payment processor to resubmit the transaction or issue a refund if necessary. It's also important to identify and address any potential issues to avoid future ACH return codes.

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