ACH Operational Guide

Tell me more about the entry types and time frames for return.

Another way to classify ACH transactions is by something called a Standard Entry Class (SEC) Code. This is a three-letter code that enables a Financial Institution (FI) to identify the purpose of a transaction. The majority of Dwolla clients are set up as either WEB (a credit or debit entry initiated online or via mobile device to a consumer’s account) or CCD (a credit or debit entry used to facilitate business-to-business payments). As you can see, some of the return codes apply to all SEC codes, while others are specific to certain types. In general, the majority of return codes have a 2 banking day turnaround time. However, unauthorized debits to consumer accounts typically have a 60 calendar day return time frame, meaning a consumer can dispute a transaction as unauthorized any time during this period. Most payment regulations are consumer-friendly, which is why this time frame is longer than that for an unauthorized debit to a business account using a CCD SEC Code (2 banking days).

What is my recourse if my customer claims a transaction was unauthorized and I receive a return for an item, but I believe the transaction was in fact authorized?

Per the Nacha Rules, as long as the consumer signs a Written Statement of Unauthorized Debit for certain return types (see chart above), the RDFI must return the item and the ODFI must accept the return. If you believe the transaction was authorized, refer to your user agreement to see what recourse you have, as at that point, collections must be settled outside of the ACH Network.

How will I know if we receive an ACH Return?

If you are set up for Dwolla’s webhook subscriptions, you can receive a notification with links to additional information when certain activities, such as ACH returns, occur on your account.

Is there anything else I need to be aware of in regards to ACH returns?

Yes. Per Nacha Rules, ACH debit returns must stay below specific thresholds:

Administrative Returns must stay below 3%. This percentage is calculated based on ACH debit returns for the preceding 60 days on the following return reason codes: R02, R03, and R04.

Unauthorized Returns must stay below 0.5%. This percentage is calculated based on ACH debit returns for the preceding 60 days on the following return reason codes: R05, R07, R10, R29, and R51.

Overall Returns must stay below 15%. This percentage is calculated based on ACH debit returns for the preceding 60 days and includes all return reason codes.

NSF Returns have no specific threshold by themselves; however, these returns contribute to the Overall Return rate (see above) and make up the largest number of returns, by volume. NSF Returns include R01 and R09.

What steps can I take to lower my return rates?

Great question! Depending on the type of returns you are receiving, there are several steps you can take to proactively lower your return rates. The main theme in reducing your rates is Know Your Customer (KYC) – gather appropriate documentation at signup, know their typical transaction history, and monitor appropriately.

• Monitor excessive returns by end users within your platform
• Have a fraud monitoring/ prevention process in place to combat unauthorized returns
• Deactivate accounts that display suspicious activity until resolved.
• Dollar limits for certain users (less than 30 days, repeat NSF offenders)
• Provide your end user with a way to cancel a transaction before it is completed. This will prevent them from submitting a payment they didn’t intend to, and then disputing it as unauthorized.
• Use the Check feature offered by Plaid to check your end user’s balance before attempting to debit their account. This will help to alleviate NSF returns.
• Use the Identity feature offered by Plaid to validate the account holder’s name, address, phone number, and email address.
• Monitor IP address usage – does the end user typically sign in from one IP address, and then you start seeing activity from a different IP address? This could be a sign of fraud.
• Consider alternate forms of payment. If an ACH transaction is returned as insufficient funds X number of times, it may be worth exploring another method to collect payment from that customer, such as credit card or check

3. Dishonoring ACH Returns

Dwolla is able to request the ODFI send back (or dishonor) a return if it meets any of the following qualifications:

• Was untimely (not within the proper time frames for return)
• Contained incorrect information
• Was misrouted
• Was a duplicate; or
• Resulted in an unintended credit to the Receiver related to the reversal process.

A dishonored return must be transmitted within five banking days of the settlement date of the return. Please be aware that the RDFI is able to contest a dishonored return, in which case recovery of the funds would need to happen outside of the ACH Network.

4. ACH Reversals

Dwolla can also request our ODFI send a reversing entry for payments originated in error. The following would qualify as an erroneous entry:

• Is a duplicate of an entry previously initiated by the Originator;
• Orders payment to or from a Receiver different than the Receiver intended to be credited or debited by the Originator;
• Orders payment in an amount different than was intended by the Originator; or
• Is a PPD credit entry satisfying each of the following criteria:
  • The PPD credit is for funds related to a Receiver’s employment;
  • The value of the PPD credit is fully included in the amount of a check delivered to the same Receiver at or prior to the Receiver’s separation from employment; and
  • The PPD credit entry was transmitted prior to the delivery of the check to the Receiver.

Reversing entries must be transmitted to or made available to the RDFI within five banking days following the settlement date of the erroneous entry.

Please note – ACH reversals are not a guarantee that funds will be returned, as there is a possibility that the funds have already been withdrawn. Once a reversal request has been sent, the RDFI has two banking days from the settlement date to return the entry.

5. ACH Return Requests

In limited circumstances, Dwolla can contact its ODFI to see if they are able to request that the RDFI return an entry. These circumstances are the same as those listed above for ACH Reversals, and also include credit entries originated without the authorization of the Originator. An ACH return request is an alternative to ACH reversals, and would be used in circumstances where the time frame for an ACH reversal has passed.

Please note – ACH return requests will be handled on a case by case basis, and even if they are sent to the RDFI, there is no guarantee that funds will be returned to your account, as there is a possibility that they have already been withdrawn.

6. Conclusion

We hope that this guide gives you a better understanding of your options and responsibilities under the ACH Network. If you have additional questions or concerns, please reach out to us – we are here to help!

– Confidential –