The Automated Clearing House is the electronic system responsible for moving funds between bank accounts within the United States. When a transaction moves between bank accounts, it’s considered an ACH transfer and this transfer can both credit and debit a bank account.
So naturally, there’s a lot more to it when you ask yourself, “What does ACH mean?”
In this post, get a better understanding of the ACH network, as explained by a series of commonly queried questions.
How does ACH work?
ACH transfers are facilitated between two bank accounts. This facilitation can look slightly different depending on the specific action taking place. There are two options: an ACH credit or an ACH debit. We’ve pulled together a comprehensive ACH for beginners guide, but here is an overview.
For the first example, we’ll explain how a DEBIT works. Imagine you’re paying a bill; here we assume you’ve previously connected your account and routing number, and enabled auto-pay. After you’ve enabled this functionality, your utility company can send a request to its bank to initiate an ACH debit entry FROM your account TO its account. This transfer doesn’t happen instantly. While the transaction is being processed, we call the transaction is a ‘pending ACH transfer’.
For the second example, we’ll explain how a CREDIT works. Imagine you’re receiving Direct Deposit from your employer. Receiving money as a credit to your bank account works somewhat similarly to an ACH debit, except in reverse since you’re receiving funds. You simply provide your account and routing number to your employer (or perhaps they have an instant account verification solution), and when payday comes, your employer’s ACH processor initiates the funds transfer to your bank account using the ACH network.
How long does it take for ACH to go through?
There is a lot of nuance around the timing of ACH payments, and new innovations like Same Day ACH are being pushed into the marketplace in order to speed up the clearing times.
However, in short, a standard ACH transaction may take as long at 3–4 business days to clear.
This is because the transfers settle on day 1 or 2, and then the funds may be held for up to 3 days to allow for any potential ACH reject notifications to be returned. Keep reading on to the next question to understand why an ACH transaction may not clear and what some potential return codes are.
Why might an ACH transaction fail?
If an ACH transaction fails, there are dozens of potential return codes that could come back. Some of the most common return codes are below. Here is a full list of the possible ACH return codes in the system.
R01 — Insufficient funds
The available and/or cash reserve balance is not sufficient to cover the dollar value of the debit entry. Basically, there were insufficient funds to complete a debit transaction.
R02 — Account closed
A previously active account has been closed by action of the customer or the RDFI. In other words, the bank account is closed, and this transaction should not be re-submitted.
R03 — No account or unable to locate account
The account number structure is valid and it passes the check-digit validation, but the account number does not correspond to the individual identified in the entry or the account number designated is not an existing account.
R04 — Invalid account number
The account number structure is not valid. The entry may fail the check digit validation or may contain an incorrect number of digits. This means that the account number entered is definitely not valid, for instance, your customer may have entered only half of the digits needed for a routing number.
Is there anything else I should know about ACH?
ACH payments are being used all around us, in ways you may not have even considered. Did you recently withdraw funds from a peer-to-peer payments app? That was probably an ACH transaction. Did you get paid out after selling some shoes on a marketplace? That was also probably an ACH transaction.
If you’re a business that would like to learn more about ACH, reach out. At Dwolla, we’ve created a developer-friendly ACH API that businesses can leverage within their current payment process.
Originally published at www.dwolla.com on June 12, 2017.