Automated Clearing House (ACH) Refund | B2B Financial Glossary

What Is An Automated Clearing House (ACH) Refund?

An Automated Clearing House (ACH) refund is a refund for a purchase initiated through the ACH network. ACH stands for Automated Clearing House: the official electronic network that initiates payments from one bank account to another. It connects over 10,000 banks and financial institutions in the US.

ACH payments are run by the National Automated Clearing House Association (NACHA) and include different payment categories such as direct deposits, peer-to-peer payments, bill payments initiated by e-commerce platforms, and ACH payments initiated by paper checks.

Refunds are the returning of funds for goods or services for various reasons: sometimes customers are not satisfied with what they paid for, their products were never delivered to them, or they paid too much for an item and need the excess funds returned. ACH refunds are no different; they allow funds to be returned to customers through the ACH network.

How Does An ACH Refund Work For An ACH Debit?

To understand how ACH refunds work, let’s look at how ACH refunds operate when it comes to ACH debits in particular. Remember, ACH debits are ACH payments that are “pulled” from the payer’s account and deposited into the payee’s account. The key difference between ACH credits and ACH debits is that direct deposits involve funds being pushed into an account. In contrast, direct payments (ACH debits) involve funds being pulled out of an account.

ACH debit refunds work differently than credit card refunds: they take three to seven days to process, meaning it will take three to seven days for the funds to be returned to the payer’s account.

Additionally, refunds for ACH debit payments must be initiated within 180 days from the date that the original payment was made. On top of that, a refund can only be processed after the payment process is complete; on the other hand, if the payment fails, the total or partial refund is set to be canceled because the funds were never officially pulled from the payer's bank account.

Before a company issues a refund, customers need to be properly informed about how long it will take for the funds to be returned (anywhere between three and seven days). Also, it’s important to remember that if businesses proactively issue their customers a refund while the customers’ banks also initiate the dispute process, their customers might get two credits for the same transaction.

ACH debit refunds typically refer to the payment descriptor for the original payment that the customer made.

How Does An ACH Refund Work For An ACH Credit?

While ACH debits “pull” payments from payers’ accounts, ACH credits “push” payments from the payers’ accounts to the payees’ accounts.

In the case that a refund is requested for an ACH credit, NACHA will approve the request if one of the following four situations occurred:

• The payment was for an incorrect amount.
• The payment was deposited into an incorrect account.
• There was a duplicate deposit.
• An incorrect settlement date was listed.

Typically, the Originating Depository Financial Institution (ODFI) has up to five business days to deliver a refund request from the requested settlement date. An ODFI is a financial institution that operates as the interface between the ACH network or Federal Reserve and the transaction’s originator (the party that created the ACH transaction in the first place). However, even if the ODFI requests a refund, there is no guarantee that the funds will remain there. This is because credit transactions typically settle by 8:30 a.m. EST on the second business day after the request is processed, meaning that the money might have already been made available for the recipient to spend or withdraw before the refund request goes through.

As a result, the Receiving Depository Financial Institution RDFI will work with the recipient to recover the funds, but they will not always succeed. The RDFI is a financial institution receiving entries (another name for payments or payment requests) directly or indirectly from its ACH operator (the Federal Reserve or the ACH network).

What Are The Benefits Of ACH Refunds?

ACH refunds make it possible for customers to get their money back in a way that is seamless and relatively fast. While these refunds can sometimes take several days, they are still much faster than paper check payments. On top of that, ACH payments tend to be very secure since they are digital and go directly from the payer to the payee (on average, eight people will handle a check before it goes through the entire payment cycle, making this form of payment much more susceptible to fraud). The ACH network oversees all ACH transactions and ensures they meet industry standards. Finally, customers prefer ACH payments to many other payments since they deposit the funds directly into their accounts.