ACH Overview

Intro to ACH network and how Lithic processes ACH

ACH (Automated Clearing House) is an electronic payment system in the United States that enables consumers and businesses to transfer funds between bank accounts. People use ACH to collect payment for bills and invoices, pay employees and contractors, etc. ACH transactions are processed in batches several times a day in accordance to the standards and procedures set by the National Automated Clearing House Association (NACHA).

This guide will walk you through the basics of ACH, how Lithic facilitates ACH with our direct connection to the ACH networks, and how to initiate an ACH transaction at Lithic.

Basics of ACH

There are three types of ACH transactions:

  • ACH Origination: when an ACH transaction is initiated by you. A debit origination means you are collecting funds from another bank account while a credit origination means you are sending funds to another bank account

  • ACH Receipt: when an ACH transaction is initiated by another bank account. A debit receipt means the other bank account has withdrawn funds from your bank account while a credit receipt means the other bank account has deposited funds to your bank account

  • ACH Return: when the ACH recipient reverses an origination initiated by you. When an ACH origination is sent, the ACH network immediately moves the funds; it does not wait for the receiving bank to confirm they can process the origination. If the receiving bank cannot process the ACH transaction due to insufficient funds or other reasons, they then send an ACH return against the origination to reclaim those funds. NACHA has guidelines on the types of return reasons and how long the receiving bank has to send these returns

Let's see how these ACH transactions are used in an example bill pay use case. Assume ABC LLC has set-up auto-pay with their supplier Hardwood Windows Inc. This means ABC has authorized Hardwood Windows to ACH debit their bank account (i.e., initiate an ACH debit origination) on a recurring basis. Let's assume ABC has a $100 invoice from Hardwood Windows:

  1. Hardwood Windows initiates an ACH debit origination for $100. The ACH processor uploads an ACH file for that amount to their bank who then uploads the file to the ACH network. The sending bank will then add $100 to Hardwood Windows' bank account but mark it as pending since there is a risk that the ACH debit origination is returned by ABC LLC

  2. At the next scheduled ACH window, the ACH network distributes these ACH transactions to the receiving banks as ACH receipts. ABC LLC's bank will receive a $100 ACH debit receipt from Hardwood Windows

  3. Unfortunately, ABC only has $50 in their bank account, so their bank initiates an ACH return with the return reason code R01 (Insufficient Funds)

  4. At the next scheduled ACH window, Hardwood Windows' bank receives the ACH return and reverses the $100 debit in their bank account. Luckily Hardwood Windows has not spent that $100 because it was held in pending

  5. The next day, ABC LLC deposits a check and now has enough balance to pay the $100 invoice to Hardwood Windows. They enter ABC's bank account information into their bank portal and initiates an ACH credit origination for $100 to Hardwood Windows

  6. At the next scheduled ACH run, Hardwood Windows receives an ACH credit receipt from ABC. Their bank then adds $100 to Hardwood Window's bank account as available funds (not pending) since ABC LLC cannot reverse an ACH that they originated

ACH at Lithic

Lithic enables our customers to receive and initiate ACH originations with the following features:

  • Next-Day ACH cutoff at 11:59PM ET: Lithic has access to all six ACH windows, enabling us to process next-day ACH as late as 11:59PM ET on non-holiday weekdays

  • Same Day ACH support: Lithic also supports same-day ACH transactions submitted prior to 3PM ET on non-holiday weekdays

  • Frequent ACH uploads: Lithic uploads ACH files to the ACH network every hour; we are not limited to upload schedules of partner banks or other intermediaries who may only upload once or twice a day

  • Fast ACH postings: Lithic receives ACH receipts directly from the ACH network six times a day instead of through an intermediary bank or third party. We process these receipts immediately and update balances based on the instructions in the file. In some cases, the ACH network or the sender may forward date a receipt, in which case Lithic will post the ACH transaction as pending before clearing it as settled on the settlement date specified by the file. This often happens when a same-day ACH misses a bank's cutoff and is sent to Lithic as a next-day ACH

  • Customizable ACH files: Lithic directly generates ACH files, enabling us to customize certain ACH fields such as transaction description and company id

To get started on ACH, customers can provide their Financial Account's routing number and virtual bank account number to receive ACH transactions or use the Payments API to originate ACH transactions. ACH receipts and credit originations are immediately posted to the available balance of Financial Accounts. ACH debit originations are posted to the pending balance of Financial Accounts and are then released to the available balance after 4 business days:

ACH Return Reasons

When an ACH origination is returned by either the receiving bank or the receiver, Lithic also receives a reason return code that describes the reason for the return. These codes are set by NACHA, the governing body that sets rules for the ACH network and ensures participants are in compliance with these rules. The codes are periodically updated by NACHA.

The table below lists the most common return reason codes, a description of each code, the types of bank accounts that can submit this return, and how many days the receiving bank / the receiver has to submit the return

Return Reason CodeDescriptionBank Account TypeTime Frame
R01Insufficient funds. The receiver does not have sufficient available balance to cover the ACH debit originationConsumer or Non-Consumer2 Banking Days
R02Account closed. A previously active account has been closed by either the receiver or the receiving bankConsumer or Non-Consumer2 Banking Days
R03No account / unable to locate account. The account number provided is valid but the account number does not correspond to the individual identified in the ACH transaction or the account number is not an existing accountConsumer or Non-Consumer2 Banking Days
R04Invalid Account Number Structure. The account number is not validConsumer or Non-Consumer2 Banking Days
R05Unauthorized debit to consumer account using corporate SEC code. CCD or CTX debit origination was transmitted to a consumer account or was not authorized by the receiverConsumer60 Calendar Days
R06Returned per originating bank request (i.e., Lithic's bank partners). This generally happens due to an error in the origination fileConsumer or Non-ConsumerDetermined by originating and receiving bank
R07Authorization revoked by customer. The receiving customer revoked a previous authorization for their account to be debited by youConsumer60 Calendar Days
R08Payment Stopped. The receiving bank has placed a stop payment order on an ACH debit originationConsumer or Non-Consumer2 Banking Days
R09Uncollected Funds. The total balance (also known as the ledger balance) of the bank account is enough to cover the ACH debit origination but not the available balanceConsumer or Non-Consumer2 Banking Days
R10Customer Advises Originator is Not Known To and/or Authorized by Receiver. This occurs when the receiver indicates they do not know you or has not given you authorization to debit their account. This is different from R07 which is when an existing authorization is revokedConsumer; Non-Consumer for ARC, BOC, IAT, or POP transactions60 calendar days
R11Customer Advises Entry not in Accordance with the Terms of the Authorization. This occurs when the receiver has authorized you to debit their account but a specific ACH debit origination does not comply with the terms of your authorization agreement. For example, the amount debited was not the authorized amountConsumer. Non-Consumer for ARC, BOC, IAT, or POP transactions60 calendar days
R14Representative Payee Deceased. The representative payee is either deceased or unable to continue in that capacity. Beneficiary is not deceasedNon-Consumer or Consumer2 Banking Days
R15Beneficiary or Account Holder DeceasedConsumer2 Banking Days
R16Account Frozen / Entry Returned per OFAC. Account has either been frozen or restricted by the receiving bank or by other legal action. Or the receiving bank was instructed by OFAC to return the ACH originationConsumer or Non-Consumer2 Banking Days
R20Non-Transaction AccountConsumer or Non-Consumer2 Banking Days
R23Credit Entry Refused by ReceiverConsumer or Non-ConsumerReceiving bank must submit return within 1 banking day after receiving the refusal from the receiver
R29Corporate Customer Advises Not Authorized. A non-consumer receiver advised the receiving bank that a specific ACH origination was not authorizedNon-Consumer2 Banking Days