You may have seen these terms if you process checks or debit transactions through the ACH network. Both ODFI and RDFI are entities that process payments, and without them, the ACH network wouldn’t be functional. This article tells you all you need to know about RDFI, ODFI, their differences, and their role in ACH payment processing.
ACH payment processing
Before diving into RDFI and ODFI, it is beneficial to have a broad idea of how ACH payments work. ACH payments are bank-to-bank transfers processed through The Clearing House or the FedACH. The ACH network is exclusive to national payments within the US, as each country has its own clearinghouse. In sum, the ACH connects all US banks and financial institutions to each other and routes transactions such as direct deposits. The ACH network is overseen by NACHA, a non-profit organisation.
What is RDFI?
RDFI stands for Receiving Depository Financial Institution, and it represents any banking institution or credit union that receives ACH funds. They need to have an agreement with the ACH Operator, which can be The Clearing House or the Federal Reserve. They receive the debit or credit payments from the ACH Operator on behalf of their customers. Essentially, any bank or financial institution that can accept ACH payments is an RDFI too. This is a mandatory requirement. To become an RDFI, banks need to be recognised by NACHA.
Some of the RDFI’s tasks and responsibilities include:
- Receiving ACH payment requests
- Validating ACH payment requests
- Posting these requests to the receivers’ accounts
- Notifying the Originator (ODFI) of incorrect information
They are required to perform these promptly, according to ACH regulations. Failure to meet deadlines may disqualify them from being an RDFI and, therefore, enabling their customers to receive ACH payments.
What is ODFI?
ODFI stands for Originating Depository Financial Institution and presents any bank or credit union that can transmit payment requests. As opposed to RDFIs, ODFIs start the payments and create original entries. Similar to RDFIs, ODFIs need to have an agreement with the ACH Operator to be able to originate payment requests. Banks that don’t have this agreement can’t enable their customers to initiate ACH payments/transfer funds through the ACH network.
Some of the ODFI’s tasks and responsibilities include:
- Protecting ACH payment data
- Obtaining authorisation for any credit or debit payment request
- Having contractual relationships with their customers
- Keep ACH returns below the agreed threshold
Differences between the RDFI and ODFI
The main difference between the two terms is that while RDFI represents receiving payments, ODFI represents originating payments. So, if banks want to enable their customers to initiate ACH payments and receive ACH payments, they need to be both an RDFI and ODFI. Banks and financial institutions don’t have to be both; they can also choose one or the other. The credit risks involved in originating ACH payments and the processing fees make some banks reluctant to be ODFI.
Imburse is a cloud-based middleware connecting large enterprises to the payments ecosystem, regardless of their existing IT infrastructure. Through a single connection to Imburse, enterprises can collect or pay out using a variety of payment technologies and providers around the globe.
In a world where consumers’ payment preferences and technologies are ever-evolving, Imburse works with insurers to future-proof their payment requirements. Regardless of the business area, market, or requirements, Imburse will connect you to your choice of technology and provider.
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