Check Processing

RDFI and ODFI: What’s the Difference?

Read Time: 5 min

If your business processes checks, you may come across the terms RDFI and ODFI. These are entities that process payments like checks and debit transactions. To get a better idea of the differences between RDFI and ODFI, you need to understand the processing of payments through ACH. If you wish to use payment processing services, you need to understand the basics of ACH credit and debit transactions, which RDFI and ODFI cover. Read on to learn what RDFI stands for and use the RDFI meaning to get a better idea of how electronic payments are processed.

ACH Payment Processing

rdfi odfi meaning

ACH payments are common in payment processing. When you receive your paycheck through direct deposit, you are interacting with the ACH network. While the term Automated Clearing House sounds like a place, it really represents a network that links all U.S. financial institutions and banks to each other. Therefore, the ACH network routes transactions, such as direct deposits or bill payments.

To remit payments using the ACH network, you need to understand the difference between RDFI and ODFI. To comprehend how ACH transactions work, you also need to acquaint yourself with the role of NACHA.

The term NACHA stands for the National Automated Clearing House Association. NACHA governs the ACH network, making it a major overseer of the movement of money in the U.S. It’s also in charge of the ACH’s administration and keeps the vast network of banks and other institutions running smoothly.

What Does RDFI Stand For?

Now that you have the background knowledge of ACH payments, we need to explore how RDFI and ODFI factor in. RDFI stands for Receiving Depository Financial Institution. The RDFI is the banking institution that receives ACH funds. All U.S. financial institutions must take part in RDFI activities so a customer can accept funds through ACH transfers, per NACHA’s operating procedures.

RDFI responsibilities entail:

  • The receipt and confirmation of ACH entries
  • Timely posting to receiver’s accounts
  • Notification from originators of the wrong information on accepted entries

A financial institution can become an RDFI without choosing to assume the role of an ODFI in ACH transactions. More on that later.

RDFI Example

The RDFI meaning may seem complicated, but it’s actually pretty simple. Now that you know what RDFI stands for, it’s easier to see how these institutions play a part in your life. Let’s examine this example:

Automatic withdrawals represent an RDFI transaction, such as monthly bill payments. Joe’s bank has authorized his utility company to automatically debit his account for electricity services on the first of each month.

After obtaining this authorization, the utility initiates a transaction through an ODFI to debit the RDFI bank account. After the transaction goes through, funds, in this instance, are “pulled” from the RDFI, meaning Joe’s bank, and credited to the account of the utility, or ODFI account.

ODFI Meaning

The Originating Depository Financial Institution (ODFI) agrees with Nacha or the Federal Reserve to transmit ACH transactions on behalf of an originator bank. 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.

The ODFI is also responsible for:

  • Safeguarding data during ACH transactions
  • Maintaining a contractual association with each originator
  • Ensuring ACH returns stay below an agreed threshold

To reduce the risk of ACH returns, the ODFI works with originators to facilitate the proper control over payment processing. A payment provider serves as a business ACH originator and creates ACH files to submit to the ODFI for payment processing. The ODFI bank represents the financial institution that partners with an originator or payment processor.

ach credit rdfi

The ODFI transmits files to an ACH operator—the Clearing House or Federal Reserve—so deposits can be sent to the Receiving Depository Financial Institution (RDFI). Not all banks choose to serve as ODFIs because of some of the mandates and fees. However, most banks elect to serve as an ODFI so they can transmit ACH payments with ease.

An ODFI must also agree to serve as a Receiving Depository Financial Institution or RDFI for the receipt of payments. An RDFI receives entries from an ACH operator to debit or credit the accounts of customers. All U.S. financial institutions must take part in RDFI activities so a customer can accept funds through ACH transfer, per NACHA’s operating procedures.

ODFI examples

There are several ways people interact with ODFIs every day. When a customer makes a payment to their electric company through the ACH network, the utility company’s bank transmits an ACH debit entry to its ODFI (the Originating Depository Financial Institution).

The ODFI and RDFI communicate with the customer’s account to make sure the debited account has sufficient funds. If the account has sufficient funds, the amount is routed to the bank account of the utility. If the customer’s account does not have sufficient funds to cover the utility payment or debit, the ODFI receives a return code.

ACH return codes

The Automated Clearing House authorizes or refuses payment transactions by using return codes. Therefore, return codes offer a reason, in most instances, why an ACH transaction could not go through. For instance, if your bank account does not have enough money for paying a bill, the ODFI will receive a return code, RO1. RO1 basically tells the financial institution that the customer’s bank account did not have enough money.

“On Us” transfers

If both the receiver and originator have accounts at the same bank, the ACH transaction does not go through an ACH operator, like the Clearing House or Federal Reserve. They go straight between bank accounts since they’re in the same place. These types of transactions are referred to as “On Us” transactions.

Differences Between RDFI and ODFI

While and RDFI and ODFI may appear the same from the outside they differ greatly. This is mainly due to the role they play during ACH processing.

In very basic terms, the ODFI represents the financial institution that initiates ACH transactions while the RDFI represents the bank that receives funds through the ACH network. While the ODFI represents the bank where an ACH entry request is first placed, the RDFI, meaning the bank receiving the payment, assumes the primary role of conducting checks and reporting any return codes to the ODFI.

Final Thoughts on RDFI, ODFI, and ACH

The role assumed by the ODFI ensures that an original entry is accurate to debit money from an originating bank account or to deposit money in an account. An ODFI must respond to any return codes or entries.

During ACH processing, the payment starts with the RDFI, meaning the bank that receives an ACH entry. Its role is to control the ACH processing for the ODFI involved in the ACH transfer. During the process, the RDFI checks to make sure that banking information is correct and reports any codes that may delay processing or that may prevent a transaction, such as insufficient funds. Now that you know what ODFI and RDFI stand for, you can better understand check processing and its role in your business.