As a fintech startup that wants to offer payment features, you need to work with a bank that is an Originating Depository Financial Institution (ODFI). An ODFI is an ACH operator who can facilitate the origination of ACH entries and is eligible for operating within the ACH network.
Not just any business can become an ODFI, but it is a requirement to have this relationship in order to offer payment services and ACH money transfers to your clients.
So, naturally, the next step would be to approach a bank to act as an ODFI? You may also be considering becoming an ODFI. This blog will help guide you through this process and prompt you to think about Sila as a much easier and more cost-effective route to starting your fintech app.
What is an ODFI?
An ODFI, which stands for an Originating Depository Financial Institution, is a financial institution that has been approved by the NACHA network and the Clearing House to operate on the Automated Clearing House (ACH) network as an originating institution for ACH money transfer senders.
The ODFI, in this relationship, primarily initiates an ACH return, or the issuance of a money transfer request, so that the request moves through the typical processes on the ACH network to be approved and deposited into the Receiving Depository Financial Institution (RDFIs) originator.
Becoming an ODFI takes a lot of work. The bank or financial institution must be eligible within NACHA and the ACH network and they must maintain eligibility. It’s not easy, which is also why most big banks that are ODFIs, and that act as ODFI on your behalf, will seriously vet the individual to ensure that the relationship is worth any risks they may assume.
To be an ODFI, the financial institution must be responsible for obtaining authorization before initiating a credit or debt into an account. They must also abide by numerous regulations under the ACH network, including ACH data security and maintaining relationships with Originators (or clients).
In essence, an ODFI acts as a controller for ACH transactions. This means that the ODFI must also ensure that they are confident working with their users (the Originators) so that the money transfer does not pose a major risk to the rest of the system. If too many of the ACH requests are returned, then this could signify a greater issue as well.
The key roles of the ODFI include:
- Safeguarding data during ACH transactions
- Maintaining a contractual association with each originator
- Ensuring ACH returns stay below an agreed threshold
How Your Bank ODFI Typically Operates
ODFIs work with originators to facilitate ACH payment processing. So in order to send ACH debits or ACH credits, a payment provider must work with approved ODFIs and RDFI.
The process to submit the ACH payment is simple. The Originator sends their request to the payment provider, who collects it using accurate NACHA requirements. THe DOIF bank submits the ACH entry request to an ACH Operator, usually the Clearing House, for approval. The deposits are then sent to the appropriate Receiving Depository Financial Institution (RDFI), which is the acting receiving bank on the other end of the transaction. The RDFI is in charge of informing the ODFI of any errors with the entry.
The best way to understand the ODFI role is from the perspective of someone submitting a request for direct deposit. In this relationship, the person would submit the request through their payment provider and ODFI bank. The information would have to be submitted accurately using their forms. The ODFI would then submit the request through the Network and RDFI.
If there are issues, then all communication goes through the ODFI. So if your direct deposit request is rejected due to insufficient funds, you’re being notified by your ODFI bank (even though the RDFI is the one who receives those error codes).
If the transaction is successful, then the transaction will take place without much further communication with the Originator.
The biggest role here then is: ensuring that the formatting is accurate and managing return codes with the Originators.
ACH return codes are essentially codes that the Automated Clearing House issues if a transaction is rejected. All return codes are available online, so you can refer to the documentation at any time.
Should You Become an ODFI?
Unfortunately, there are a lot of fees and mandates associated with becoming an ODFI. However, it is usually worthwhile for banks to become an ODFI so that they can originate ACH payment requests.
To become an ODFI, a depository financial institution must obtain authorization before crediting or debiting an account. In banking terms, it’s the entity that helps initiate the original transaction. Not just anyone can walk off the street and become an ODFI.
General Overview
To become an ODFI or RDFI, you must register with NACHA and the Federal Reserve, among other organizational tidying up. How to navigate this process will depend on what you are looking for:
- Qualification type: ODFI services, like Origination, can be easily added to an RDFI schedule. So, if you’re already an RDFI then you may not need to do as much work in the ODFI process. Additionally, there are different qualification types: RDFI only, ODFI internal only, ODFI third party applications only internal vs. external.
- Stakeholders: You’ll need a team for product management, ACH operations team, IT and systems team, accounting, project managers (maybe), and vendor project management in regards to being an ODFI. Also make sure to have teams for risk, compliance, fraud, auditing, legal, marketing, credit, sales or cash management, and customer relations.
- Goals: There are a number of goals that financial institutions have in mind when becoming an ODFI. You may want to expand a service offering, increase non-interest income, or respond to customer demand. Have this goal in mind so that you understand your capabilities or limitations before you begin the process.
- Budget and Timelines: And, of course, each of these factors dictate how long it will take to become an ODFI and the cost.
Once you’ve defined these things, then you can start the process. Know that you will need to reach out to support throughout the qualification process.
ACH Associations: You’ll want to connect with your regional ACH association. Attend their webinars and try to connect with a representative from your regional association.
Federal Reserve Banks: The Federal Reserve has 12 regional Federal Reserve Banks, like the Federal Reserve Bank of New York, to enact their regulations and processes. These regional banks are in charge of providing elastic currency, supervising and regulating depository institutions, assisting government financing operations, and more. Reach out to your regional Federal Reserve Bank throughout your ODFI process.
Getting NACHA Certified
Third-party senders with two years of operation can voluntarily submit to the NACHA accreditation program. This is good, as it informs your customers that you follow ACH best practices and are approved, but it also means that you’ll have to follow a rigorous set of financial operating standards.
Getting NACHA certified is different from becoming an RDFI and ODFI operator. You’ll need to complete the following to become NACHA certified:
- Successful submit and pass an approved, independent NACHA rules audit
- Successful pass Criminal Background Check (for all principals and key officers)
- Financial statements audit
- A compliance and risk program policy and procedures document
- An ACH risk assessment
As of right now, the application fee is $5,000 and you’ll be certified for 2 years. An additional $750 is charged in the intervening years and you’ll have to submit some documentation to maintain certification at the end of the first year. A full review is conducted every two years.
Finding a Bank to Act as ODFI
If you want to facilitate ACH bank payments, then you have a few options:
- Finding a bank to act as ODFI: This route requires that you provide proof of revenue for a few years and to hit a revenue threshold, which is often impossible for most new, bootstrapped fintech startups.
- Becoming an ODFI: Costly and often unnecessary, especially if you just want to provide a few services for your clients.
- Partnering with a fintech partnership to act as an ODFI: The best option as you can affordably tap into an existing fintech partnership.
The Sila partnership with Evolve and Trust Bank is perfect for this. With Sila’s technology, users have access to the bank’s ODFI status and can enable ACH payments in their app. With security top of mind, know that
With Sila, you’ll also get access to the Sila APIs, embedded compliance, and much more, for streamlined financial operations powered to change the world. Reach out to our sales team to learn more, or get started in our Sandbox!