Offering to accept ACH payments is a low-cost way to deliver greater convenience to your consumers. In fact, the more payment types and payment channels you provide, the more revenue your business will bring in. But on the back-end, ACH payment processing and reconciling works differently from credit card payments. Here are some of the most frequently asked questions merchants have regarding their ACH payment processing services.
What Does ACH Stand For?
ACH stands for Automated Clearing House. The Automated Clearing House is a network of financial institutions across the U.S. that enact Electronic Funds Transfers. The system exists to provide a way to transfer money from one account or financial institution to another.
The system of electronic funds transfers is self-regulated by the electronic payments association NACHA.
What is an ACH Transaction?
An ACH transaction is any transaction that requires the automated clearing house to transfer funds. Most one-time or recurring ACH transactions are payments debited from a checking account.
What is an ACH Hold?
An ACH hold is when a payment is authorized by the owner of an account and the bank in charge of that account reserves (holds) the specified payment amount. Holds exist because ACH payment processing takes time. In most cases, transactions are processed over a matter of days. The banks moving the funds need to be sure that money won’t be spent elsewhere before the transaction has been completed.
How Long Does an ACH Transfer Take?
Standard ACH payment processing services offer ACH payments on a four day hold. However, many people don’t realize this refers to four business days. Because ACH payments are batched and sent to the ACH network at the end of each day, the four day count begins with processing the next morning. So no matter what day of the week an ACH payment is authorized, it usually takes about one week for funds to deposit in your company’s account after accounting for weekend days.
What is the Difference Between Voiding and Crediting?
Voiding an ACH payment can only be done before the payments have been batched and sent to the ACH network. This will stop the transaction from being submitted to the ACH network. If the payment has not been stopped before the batch deadline, it must be credited to the consumer rather than voided.
However, many merchants may not be able to qualify for the ability to credit transactions through their ACH payment processing services. Because crediting through the system requires a reserve of extra money to be kept in the merchant account, many businesses find it easier to refund money through paper checks or discounting the owed amount on a future payment.
How Much Does a Returned ACH Payment Cost My Business?
Returned payments can add up. Although simple returns may cost a little less, the typical return fee for an ACH payment can be as high as $25. A return a consumer initiates through their bank–called a chargeback return–will come with a heftier fee for the merchant. Returns due to administrative issues are less costly and are most times avoidable.
How Can I Avoid Returned ACH Payments?
A simple way to prevent a chargeback return is to let consumers know what your company’s descriptor will look like on their bank statement. This will make sure they don’t contest the payment later on by not recognizing its origin. You should also provide a customer service number on your receipt. It is always best that consumers can reach you with issues so they don’t have to contest a payment through their bank.
To avoid administrative returns, require dual authentication for the account number for online payments. Also ensure your staff is trained correctly in how to use your payment system so they don’t make any unnecessary errors.
There are also three acceptable reasons NACHA lists for consumers to dispute an ACH charge:
- If the transaction was never authorized by the account holder or the authorization was revoked.
- If the transaction was processed on a date earlier than authorized.
- If the transaction is for an amount different than the amount the consumer authorized.
To combat these returns make sure you don’t leave consumers open to exercise these three types of disputes. This means obtaining the proper authorizations for one-time and recurring payments.
What is a Proof of Authorization
As mentioned above, payments can be contested by a consumer under three circumstances. To prevent this from happening, your organization must obtain the proper authorization from consumers depending on the transaction type.
TEL - A one-time or recurring payment processed while on the phone with the consumer. Proof of Authorization Requirements: voice recording/call recording OR email notification. (If the client enters an email address when taking the payment over the phone, PDCflow automatically sends the Notice Prior to Debit on behalf of the client).
CCD- A one-time or recurring business to business ACH transaction, requires written authorization or "wet" signature.
WEB - A one-time or recurring ACH processed via any web interface, requires input that validates identity, permission to debit and revocation language.
Many ACH Merchant Service Providers will do random checks of your ACH transactions. Their aim is to ensure your company is obtaining the proper authorizations for each transaction type. If you receive a notice for proof of authorization and are unsure what is required of you, your payment processing software provider should be able to advise you.
What is an ACH Return? How Can It Impact My Business?
NACHA has created rules about how many returned transactions each merchant may have. This is done to minimize risk to the financial institutions that handle ACH transactions and the consumers who use them to make payments.
The rates are found by calculating what percentage of total transactions are classified as returns. The three types are:
- Overall return rate - 15 percent
- Administrative return rate - 3 percent
- Unauthorized return rate - 0.5 percent
Some ACH merchant service providers may have even lower acceptable return rates in order to keep their merchants from exceeding these NACHA rates.
What is ODFI?
ODFI is seen in many ACH returned payment codes. It stands for Originating Depository Financial Institution. The originator is the individual or institution that initiates a transaction.
What is RDFI?
RDFI also appears within many return codes. It stands for Receiving Depository Financial Institution. The receiver is the individual or financial institution that is on the receiving end of a transaction (either receiving debited funds or having funds removed at the request of the originator).
What are the Most Common ACH Return Codes?
There is a long list of reasons an ACH payment might be marked as returned. Because of this, it’s hard as a merchant to memorize the list of return codes you might come across. Some of the most common ACH return codes are administrative, associated with an account that has been closed or can’t be located (or if the account number is coming through as invalid).
Other codes apply to your overall return rate, such as insufficient funds or returned per ODFI. Other codes will count towards your ACH account’s unauthorized debit entries return rate. These include revoked authorizations and unauthorized debits among other codes.
For a complete easy-access list of these questions and answers, download the PDF.