If you have a business that processes payments, it’s likely that you have encountered the terms RDFI and ODFI. They are among the many acronyms in the banking world that can often frustrate small business owners. They can be confusing, even for the most financially savvy minds. RDFI and ODFI refer to the institutions involved in an ACH transaction. One is on the receiving end and one is on the originating end.
What is the Difference Between RDFI and ODFI?
ODFI vs RDFI Table of Contents
Simply stated, RDFI is the banking institution that receives ACH transactions and ODFI is the institution that initiates them. Both acronyms refer to a banking institution and what role it plays in a particular transaction. As a result, an entity could be the RDFI in one transaction and the ODFI in another.What is RDFI?
RDFI stands for Receiving Depository Financial Institution. As stated above, it refers to the institution that is receiving an ACH transaction. This does NOT mean that it is receiving funds. An ACH transaction could be a debit or a credit to an account. RDFI simply represents the institution that originated the account that is being credited or debited.
Responsibilities of the RDFI include the following:
- Receipt of ACH transaction details
- Confirmation of the ACH transaction
- Timely posting of debits or credits to the receiver’s account
- Communication to the ODFI upon completion of the transaction
- Communication to the ODFI if inaccurate information was provided
Since the RDFI is the institution that holds the receiver’s account, it’s in their best interest to communicate efficiently and effectively with all parties involved in a transaction. If there is anything wrong with the transaction, the RDFI should immediately alert the parties and try to find a solution.
What is ODFI?
ODFI stands for Originating Depository Financial Institution and is basically the opposite of the receiving institution. The ODFI is the bank that holds the account that is imposing the ACH transaction on the other account. It originates the ACH (credit, or debit), and applies it to the account that is held by the RDFI.
Responsibilities of the ODFI include:
- Obtaining approval prior to crediting or debiting an account
- Implementing cybersecurity protocols to protect consumer data
- Maintaining and adhering to contractual agreements with all originators
- Ensuring that ACH returns remain below the minimum threshold
ACH returns can be a major concern for all parties to a transaction for the simple fact that they prolong the process and can incur additional fees. Both the ODFI and the originator create ACH files that are exchanged between the entities for the purpose of completing transactions. As a result, the ODFI should maintain close relationships with originators so they can control the payment process.
Finally, ODFIs are required to also be RDFIs. Some banks choose not to be ODFIs, but all are required to be RDFIs to allow their customers to receive credits and debits. Most financial institutions opt to be both so they can efficiently process payments for their customers.
How do RDFI and ODFI Work?
Now that you understand the difference between the two acronyms, let’s look at some examples and RDFIs and ODFIs.
When you receive your paycheck via direct deposit, your bank account is the RDFI and your employer’s account is the ODFI.
When your mortgage is auto-deducted from your account, the mortgage company’s account is the ODFI and your account is the RDFI.
If your business needs to charge a customer via auto-payment for services rendered, your business account is the ODFI and the customer’s account is the RDFI.
As you can see, the same institution could be an RDFI in one transaction and an ODFI in another. These designations are not specific to the bank or the account, but rather to the transaction.
What is ACH?
The acronym ACH is generally more recognizable than RDFI or ODFI, but it’s still important to understand what it is. ACH stands for Automated Clearing House. The ACH is a network that connects all the financial institutions in the United States for the purpose of transferring funds.
What is an Example of ACH?
When your employer wants to deposit your earnings directly into your bank account, the ACH is the entity that makes it possible. This network can link between RDFIs and ODFIs for various transactions that fall under the ACH category.
Who Oversees the Automated Clearing House?
The Automated Clearing House is a network, as mentioned above. However, since it is directly linked to a huge amount of personal and business assets across the country, it must have strict oversight. That’s where NACHA comes in.
What is NACHA?
NACHA is the National Automated Clearing House Association. It is responsible for the oversight and regulation of ACH activities. NACHA develops and implements protocols to protect the assets that are moved from one institution to the next through the ACH network.
How are ACH, RDFI, and ODFI Related?
The Automated Clearing House is the vehicle through which funds are transferred between RDFIs and ODFIs. Without the ACH, funds cannot be transferred between financial institutions. The ACH identifies various transactions and the entities involved. It then categorizes each of the entities as either RDFIs or ODFIs. Generally speaking, there is one RDFI and one ODFI in every ACH transaction.
Another entity to consider in these transactions is the payment processor. We touched on this in the ODFI section, but the processor plays a role in the ACH process, as well. A payment processor is responsible for gathering information about a transaction, encrypting it, and sending it from one institution to another. Most merchants use a payment processor that can handle not only ACH payments but also credit and debit card transactions.
The ODFI maintains a close working relationship with processors who are involved in ACH payments for which they are responsible. As mentioned previously, the ODFI and the processor exchange ACH files with one another prior to sending them over to the RDFI for credit or debit of an account. This relationship is critical to the success of the transaction.
Final Thoughts
RDFI and ODFI cannot exist without one another. They are the backbone of the ACH industry and make it possible for originators and recipients to send and receive funds from one another. Understanding how they work and how institutions are categorized can help clarify the bank statements and payment processing for your business.
