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What is ACH?

Updated

Table of Contents

Overview

ACH (Automated Clearing House) is an electronic network used for processing financial transactions in the US. It enables direct transfers of funds between banks, commonly used for:

  • Direct deposits (e.g., payroll, government benefits)
  • Bill payments (e.g., mortgage, utilities)
  • Business-to-business payments
  • Peer-to-peer transfers (e.g., Venmo, PayPal bank transfers)

ACH (Automated Clearing House) is widely used because it offers several advantages over other payment methods, making it an efficient and cost-effective choice for businesses, financial institutions, and consumers.

How to Set Up ACH Payments

To set up an Electronic Check processor for the merchant:

  1. Choose an ACH Payment Processor

    • The merchant has the flexibility to choose any processor from the processor matrix when using our gateway. To view a full list of processors available, please log in to your partner portal  → Help  → Processor Matrix. 
    • Additionally, they can utilize our in- house ACH processor partnership. Please visit our Electronic Check for more information.
  2. Add the processor to the Merchant Account
    • Go to 'List Accounts'→ click on the merchants name → scroll down to 'Processing Services' → on the right side, click on the 'Add' button → click on 'Add Electronic Check'.

Note: If you select a processor outside of our partnership, you will need to obtain the processing details directly from the ACH processor and enter the required fields that are requested from our gateway to properly integrate with the ACH processor.

Handle ACH Returns & Errors

Merchants should be aware of the potential for returns, which can occur before or after funds are deposited into their bank account:

  • Return: A transaction is rejected before the merchant receives the funds.

  • Late Return: A transaction is rejected after the merchant has received funds, resulting in the amount being withdrawn from the merchant’s account.

Returns and Late Returns can be tracked through automated email notifications, provided the user has enabled the "Receive E-Check Notifications" setting. Additionally, merchants can review check returns by filtering for "Returns/Chargebacks" when running a Transaction Report.

To find out why the transaction failed/returned, login to the merchant portal and go to Transaction Reports →  Search Transactions to pull up the ACH transaction. Once you locate the transaction, click on the transaction ID number to be directed to the Transaction Details page. In the last section at the bottom of the page it will display the 'Gateway Response Text' and 'Gateway Response Code'.

In the ACH network, transactions can fail for various reasons. When this happens, the bank returns a return code indicating the reason for the failure. Here are some common failed ACH return codes:

Insufficient Funds & Account Issues

  • R01 – Insufficient Funds: The account doesn't have enough funds to cover the transaction.
  • R02 – Account Closed: The recipient's bank account has been closed.
  • R03 – No Account/Unable to Locate Account: The account number doesn't match any records at the receiving bank.
  • R04 – Invalid Account Number: The account number is incorrectly formatted or invalid.
    • It could be due to someone typing in the account number incorrectly.

Authorization & Transaction Errors

  • R05 – Unauthorized Debit to Consumer Account: The consumer has not authorized the transaction.
  • R07 – Authorization Revoked by Customer: The account holder previously authorized the transaction but later revoked permission.
  • R10 – Customer Advises Not Authorized: The account holder reports the transaction as unauthorized.
  • R29 – Corporate Customer Advises Not Authorized: A corporate account holder reports the transaction as unauthorized.

Bank & Processing Issues

  • R08 – Stop Payment: The account holder requested a stop payment on the ACH transaction.
  • R09 – Uncollected Funds: There are funds in the account, but they are not available for withdrawal.
  • R16 – Account Frozen: The account is restricted due to legal or other reasons.

Invalid Data & Formatting Errors

  • R11 – Check Truncation Entry Return: The check-related ACH entry has an issue requiring a correction.
  • R12 – Branch Sold to Another DFI: The bank branch has been sold, and the account is no longer valid.
  • R13 – Invalid Routing Number: The provided bank routing number is incorrect.
  • R20 – Non-Transaction Account: The transaction was attempted on an account that doesn’t allow ACH transfers (e.g., a savings account with restrictions).

*Excessive ACH returns may trigger fines or account suspension.

Stay Compliant with NACHA Rules

The National Automated Clearing House Association (NACHA) governs the ACH Network, ensuring security, efficiency, and compliance in electronic payments. Any business or financial institution processing ACH transactions must follow NACHA rules to avoid penalties and fraud risks.

How to Stay NACHA Compliant?

  • Use NACHA-approved payment providers.
  • Encrypt sensitive customer data to prevent fraud & security breaches.
  • Verify bank account details before processing transactions.
  • Keep detailed authorization records (minimum two years).
  • Monitor ACH return rates to avoid penalties.

Every ACH transaction must have proper authorization from the account holder. This authorization can be obtained in various ways, such as:

  • Written Authorization – A signed paper or electronic form.
  • Verbal Authorization – Typically for telephone-initiated ACH transactions, with proper verification and record-keeping.
  • Online Authorization – For transactions initiated online, such as through a website or mobile app, often requiring authentication.

Non-compliance can lead to:

  • Fines
  • Loss of ACH processing privileges
  • Increased scrutiny & audits

What are SEC Codes?

SEC Codes are NACHA-required classifications that indicate how an ACH transaction was initiated. Merchants must accurately provide the correct SEC Code for each transaction based on how they received authorization from the customer. Failure to use the proper SEC Code may result in compliance issues or transaction rejections. It is advisable for merchants to consult with their ACH processor to determine which SEC Codes they should use based on their prearranged agreements.

If the merchant does not choose one, the gateway will default to WEB. If they're not set up for WEB, a gateway error will be thrown. If the merchant is ever audited by the ACH processor and has a prearranged agreement where PPD, CCD or TEL should have been provided and the transaction was sent as WEB (if this was requested and approved), they would fail the audit and not meet compliance.

Additionally, merchants are required to obtain and maintain a Proof of Authorization (POA) for each ACH transaction. The method of obtaining authorization must align with the corresponding SEC Code to comply with NACHA regulations.

Understanding ACH Transactions and SEC Codes

The ACH network is a widely used electronic payment system that facilitates transactions such as direct deposits, bill payments, and electronic check processing. To ensure secure and authorized transactions, the National Automated Clearing House Association (NACHA) mandates that every ACH transaction include a Standard Entry Class (SEC) Code. This three-letter code communicates how the customer authorized the debit or credit to their bank account. Some of the main SEC codes are listed below, but not limited to:

  • PPD - Customer signs an agreement with the payment schedule (customer has a personal bank account)
  • CCD - Customer signs an agreement with the payment schedule (customer has a corporate/business bank account)
  • WEB - Customer initiates payment Online via shopping cart / API
  • TEL - Customer calls merchant to make purchase of goods
  • POP - Point of Present, requires a check scanner

*Merchants can set a default SEC code in their SEC Code Configuration settings.

Processing ACH Transactions

Merchants can accept electronic check (eCheck) payments through a variety of transaction types, including:

  • Sale

  • Void

  • Refund

  • Credits

When an eCheck/ACH transaction is submitted, it does not immediately reach the customer’s bank. Instead, transactions are batched daily and submitted for processing. The customer’s bank must clear each transaction before funds are deposited into the merchant’s account. Standard funding time typically ranges from 3 to 5 days, though this may vary based on the merchant’s bank and ACH processor.

Where else can the Merchant use ACH?

  • Virtual Terminal - The merchant can process directly from the Virtual Terminal portal. Visit our Electronic Check Processing Virtual Terminal Guide for more information.
  • Recurring - The merchant can use a customers bank account information to process recurring payments.
  • Customer Vault - The merchant can securely store the customer's bank account details.
  • Invoicing - The merchant can allow the customer to pay an invoice using their bank account.
  • Collect Checkout - The merchant can allow the customer to pay using their bank account during checkout.
  • QuickClick - The merchant can allow the customer to pay using their bank account during checkout.
  • Batch Upload - The merchant can upload ACH transactions with Batch Upload.
  • API - The merchant can process ACH transactions via the API.
  • Customer Fee Configuration -  The merchant can apply Convenience Fees and Miscellaneous Fees to ACH transactions in the Virtual Terminal.

Best Practices for Merchants

To ensure smooth ACH processing and compliance with NACHA regulations, merchants should:

  • Accurately categorize transactions using the correct SEC Code.

  • Maintain proper Proof of Authorization for all ACH transactions.

  • Monitor funding timelines and be prepared for potential transaction returns.

  • Work closely with their ACH processor to align with the best practices for transaction submission

  • Retain ACH authorizations for at least two years for dispute resolution.

Understanding and implementing these principles will help merchants process ACH transactions securely and efficiently while maintaining compliance with industry regulations.

Frequently Asked Questions

How long does it take ACH transactions to settle? ACH transactions typically take 3-5 business days to settle. Holidays will also delay processing time.

What is a max ACH ticket amount? The max ACH ticket limit refers to the total amount allowed for ACH transactions within a specific time frame for each bank account number. To obtain precise information about the maximum ticket amount applicable to the merchants account, it's recommended to contact the processor directly.

Can ACH funds be verified through your ACH partnership? Our current relationship does not include Check Guarantee, but merchants can sign up for Check Guarantee directly with a supporting processor, such as Nuvei or any other compatible provider.

What is Check Guarantee? Check Guarantee is a financial service that ensures businesses receive payment for checks, even if the check bounces due to insufficient funds (NSF), closed accounts, or fraud. If a guaranteed check is declined or returned, the check guarantee provider reimburses the merchant and takes responsibility for collecting funds from the customer.