ACH Returns: What Merchants Need to Know

May is now in full swing, and with it, Direct Deposit and Direct Payment via ACH Month as observed by NACHA The Electronic Payments Association ®. In our last blog, we discussed the ins and outs of Automated Clearing House (ACH) transactions that is, with one exception we at E-Complish consider equally worth covering: returned (aka, unpaid), ACH payments.

Such payments can cause big headaches for merchants. For example, many merchants will issue a refund on an ACH transaction too fast only to see the original payment returned. Now, they end up with a liability since they have sent a refund out too soon. Often, a returned ACH payment is connected with fraudulent activity. Understanding ACH returns, their causes, and how to handle them should keep ACH return-related difficulties to a minimum.

An ACH return is generated by a Receiving Depository Financial Institution (RDFI) in response to an ACH transaction that has been initiated but cannot be processed. This occurs for many reasons in fact, there are more than 80 “ACH Return Codes”, and each corresponds to a different reason for the return. In some cases, the RDFI generates a return because the receiving account has insufficient funds to cover the payment, is closed, or does not exist/cannot be located. Other causes for ACH returns include but are of course not limited to, the fact that an unauthorized debit has been made to the customer’s account, the customer has revoked authorization for the payment to be processed, a “stop payment” has been placed, or a paper check (“source document”) to cover the same payment has already been presented. Sometimes the catalyst for an ACH return is “uncollected funds”. Here, the balance in the customer’s account is sufficient to cover the payment, but the collected balance is not enough to cover the entry.

In addition to being aware of what causes ACH returns, it’s essential to debunk the myth that if an ACH return on a transaction does not arrive within two or three days after that transaction is processed, the funds are permanently in the merchant’s hands. Odd as it sounds, depending on the ACH Return (mostly in the cases of fraud), returns can take months or even years to return. The point is that consumers and businesses have certain rights when it comes to disputing ACH transactions. Late ACH Returns are almost always disputes of some sort. The consumer or business is claiming they have no authorization or this was a fraudulent transaction. In either situation, the RDFI will contact the Originating Depository Financial Institution (ODFI), the merchant’s bank, for proof of authorization.  

ACH, just like a paper check comes with risks. For example, a consumer can order a product or service from a merchant and pay for it through ACH. But suppose the bank account used by the consumer to pay for the purchase contains insufficient funds to cover the purchase. In this case, the consumer has time to “get away” with the product or service before the ACH return. As you see, this is exactly like acceptance of a paper check.

There are a number of tools merchants can use to push back against consumer fraud and the ACH returns they subsequently cause. One such tool is IP address-based filtering of accounts, which prevents ACH transactions from being processed if an account comes from a high-risk location. The list of these tools also includes those that perform identity-based verification against various blacklists. Such blacklists contain email contact information, addresses, and other data on potential fraudsters; if an account is on a blacklist, the transaction is declined and there is no need for further verification and no potential for an ACH return due to fraud.

Worth considering as well are check verification and guarantee services; after all, an ACH transaction is actually an electronic check. Check verification services compare the check writer’s name, account number, and routing number data against different blacklists and conduct account status checks. Check guarantee services, which also handle paper checks at the point of sale, require that checks be approved via voice authorization or software installed on a PC in order for a merchant to accept them.

Payment solution providers like E-Complish offer other options to merchants to assist them in protecting themselves against ACH fraud and ACH returns. For example, merchants that use our VirtualPay check-by-phone solution can block customers who give bogus account information to representatives in an attempt to buy themselves extra time to pay a utility or other type of bill. With blocking in place, there is no ACH transaction and hence, no ACH return. Additionally, some merchants use electronic document signing for ACH and recurring ACH. Having something written will almost always prevent a dispute and E-Complish recommends its EDoc service to all its ACH customers. It’s a no-brainer!

ACH returns aren’t entirely avoidable. Schedule a consultation to know how to thwart at least some of them is an effort worth making. Start today!