Differences Between ODFI and RDFI

ODFIs and RDFIs are two types of financial institutions that operate within the Automated Clearing House (ACH) Network. Most major operating banks are ODFI and RDFI approved, allowing them to send and receive ACH money transfers.
Third-party payment processors (TPPPs), such as a payment gateway, ACH payment API, and credit union, can also be approved as an ODFI and RDFI to accept ACH payments as a valid payment method.
ODFIs and RDFIs must adhere to strict regulations that protect and safeguard sensitive banking and client information. Understandably, it may be difficult to understand what these acronyms mean and how they relate to an ACH payment process.
To help you better understand the ODFI and RDFI, this article will do the following:

  • Describe what they are and what they do
  • Break down how an ODFI and RDFI is used
  • List the similarities between the two
  • And explain how they work for ACH transfers

What are ODFI and RDFI?

ODFIs and RDFIs are acronyms that represent the level of qualification that a bank or financial institution has in processing ACH payment services and operating in the ACH Network. Both an ODFI and an RDFI are considered to be an ACH Operator, which means that they have gone through a level of certification through NACHA, the National Automated Clearing House Association.
ODFI stands for Originating Depository Financial Institution, RDFI stands for Receiving Depository Financial Institutions, and they each have a slightly different function in processing an ACH transfer.
The biggest takeaway is that the ODFI is the financial institution where the ACH entry request is originally placed. Therefore, the role of the ODFI is to ensure that the original entry is accurate and then to either debit money from the originating bank account or deposit the money in (depending on whether an ACH debit entry or ACH credit entry was submitted). They must also respond to a return entry.
To compare, the RDFI is the financial institution that has received the ACH entry. Their role is to operate as the financial institution in control of ACH payment processing for the other bank account involved in the ACH transfer. In addition to the ODFI checks, the RDFI must check to make sure that the bank account and other sensitive banking information is correct. The RDFI’s main role is reporting any return codes back to the ODFI.

How ODFI and RDFI are Used

In ACH payment processing, the ODFI and RDFI are the main entities responsible for ensuring that the information passed during an ACH transfer is accurate. They are also the ones responsible for completing an ACH payment request. Most importantly, to accept ACH payments or process ACH payments, the financial entity must be approved as an ODFI/RDFI.
Understanding how an ODFI and RDFI are used first comes with a solid understanding of the ACH Network. The ACH Network is the U.S. network that processes bank-to-bank electronic payment transfers. Any entity operating along this network is involved in ACH processing, such as ensuring that the entry requests are accurate, that the individuals involved are not likely to commit a financial crime, and that the request is completed.
This means that ODFIs and RDFIs must abide by security and financial controls measures, which include:

  • Know Your Customer (KYC; under the USA Patriot Act of 2001) or Customer Due Diligence (CDD) rules
  • Bank Anti-Money Laundering (AML) policy
  • Regulation E of the Electronic Funds Transfer (EFT) Act
  • The Office of Foreign Assets Control (OFAC) of the U.S. government
  • The National Automated Clearing House Association (NACHA) Operating Rules
  • CCPA and GDPR, which governs all people and transactions based out of the location of coverage

In addition to these government regulations, ODFIs and RDFIs must invest strongly in data protection, the security of ACH payment data (through encryption, authentification, and authorization), and maintaining Payment Card Industry Data Security Standards (PCI DSS).
Because of these regulations and the security checks in place, such as return codes, ACH transfers through a financial institution might take longer than expected from an electronic transfer. An ACH transaction might process in 1 business day or it may take up to four business days.

Similarities Between ODFI and RDFI

As depository financial institutions, ODFIs and RDFIs operate in a very similar manner. Usually, a financial institution approved as an ODFI or RDFI ACH Operator will be approved to do both, since the roles of each are interconnected.
The biggest similarities between the two entities are their role in ACH payment processing. For an ACH transaction to move through the network, the financial institution must ensure that the entry request was completed accurately and that no return codes emerge. Each bank must also ensure that compliance is met in all required areas as any illegal transaction could compromise the ACH Network, the financial institution, and the money of other accounts at the bank.
Both the ODFI bank and the RDFI bank act as mediators between the owner of the bank account involved in an ACH transaction and the ACH Network or Federal Reserve. This intermediary is in place to protect the bank, the other individual involved, to limit the risk, and to provide a safeguard for storing the payment data.

How ODFI and RDFI Work for ACH Transfers

To submit an ACH transfer request, the Originator must provide the following information to their bank:

  • The name of the financial institution that will be receiving the funds on behalf of the individual
  • The type of account that the funds will be deposited into (i.e., checking or savings account)
  • The bank’s ABA routing number
  • The recipient’s account number
  • The name on the receiving bank account

Once this request is made, the bank where the information was submitted, now known as the ODFI, begins processing this entry request. The request will be pushed through the Clearing House and Federal Reserve and then to the RDFI.
The RDFI has 48 hours to complete the request. This time is granted so that a return code can be processed. If a return code is pulled, it means that there was an issue with the ACH entry request.
While return codes are not always negative, they do indicate that the ACH payment request cannot be processed. This can be for many reasons, including insufficient funds, wrong payment data entry, or a compromised account.
Through this process, and the process put in place by NACHA, ODFIs, and RDFIs facilitate the automated money transfer of an ACH payment as well as relay to the Originator if the request was stopped. These two entities act as safeguards to protect the financial information of all parties involved in the transaction.

Being an ODFI or RDFI as a TPPP or ACH Payment API

A third party payment processor (TPPP) and an ACH application programming interface (APIs) can be authorized as an ODFI and RDFI and can legally facilitate the transfer of ACH money.
Many TPPPs and ACH payment APIs operate as digital wallets or digital payment processors. An electronic transfer with a TPPP or ACH API must always comply with the regulatory oversight that governs U.S. money transfers and ACH transactions.
Facilitating an ACH transaction as a TPPP or ACH payment API can save the user ACH payment fees, which are commonly associated with things like a wire transfer or with larger financial institutions. However, TPPPs have a lot more freedom when determining rates.
ACH APIs can easily be integrated into a variety of electronic payment methods. For example, an ACH API can be integrated into an eCommerce website, digital wallet, payment processing gateway, or financial system to allow for ACH payment acceptance and customer verification. They can also help businesses to develop apps that primarily provide ACH payment processing.
ACH APIs are revered as highly secure, and they can even facilitate inter-national ACH transactions and ACH transactions with cryptocurrencies.

ODFIs and RDFIs are crucial to the integrity of the ACH Network and the U.S. Federal Reserve. Through extensive governmental regulations and financial compliance, these two entities ensure that the transactions that move through ACH Network are legitimate.