Guides

August 11, 2022

RFDI & ODFI Guide

Carla McMorris
Director of Content

ACH Transactions - The Role of RDFI and ODFI

In digital payments, both the Receiving Depository Financial Institution (RDFI) and Originating Depository Financial Institution (ODFI) play a critical role in enabling Automated Clearing House (ACH) transactions. ACH provides a faster and more efficient electronic way to transfer money than checks or cash and is used by more individuals and consumers. Find out how RDFIs and ODFIs team with ACH Operators to enable digital payments for consumers, businesses, and the government.

What is ACH?

The Automated Clearing House transactions, or ACH system, is used to move money for purposes including direct deposit of paychecks, tax refunds, online bill paying, and B2B transactions such as paying suppliers.

The National Automated Clearing House Association, or Nacha, oversees the ACH Network, including the many banks and financial firms involved in the transactions. Nacha both sets and enforces the rules for the ACH Network. The Federal Reserve, along with The Clearing House, a banking association and payments company, processes most transactions as ACH Operators. 

According to Nacha, in 2021, the value of payments through the ACH Network jumped 17% to $72.6 trillion from 2020. Much of the growth was driven by increased business-to-business ACH, as more companies turned to electronic payments during the pandemic. In addition, thanks to recent enhancements from Nacha, transactions as big as $1 million can be transferred through an ACH in as little as one day.

What are RDFI and ODFI?

For each ACH transaction or entry, there’s an Originating Depository Financial Institution (ODFI) and a Receiving Depository Financial Institution (RDFI). The ODFI transmits entries into the ACH network on behalf of the Originator, which can be an individual, business, or government body. An ODFI typically batches ACH transactions to be sent out throughout the day. 

A Receiving Depository Financial Institution, or RDFI, receives entries directly or indirectly from its ACH Operator for debit or credit to its customers' accounts. 

All financial institutions must be an RDFI to allow a customer or member to accept funds via ACH. However, a firm can choose to be an RDFI without an ODFI. If that's the case, they only can receive electronic payments, but their customers cannot send them. 

An ODFI and RDFI must have received certification through Nacha to send and receive payments through the ACH system. Note that if both the receiver and originator hold accounts at the same bank, the ACH transaction does not go through an ACH Operator like the Clearing House or Federal Reserve. Instead, they can go straight between bank accounts. These transfers are known as "On Us" transactions.

What role does the ODFI play in an ACH transaction?

For each ACH transaction, an originator must initiate the transaction. For example, it could be a business, employer, or customer. The ODFI is the bank or credit union that receives the transaction from the originator and transmits the entries in an ACH transaction. Other ODFI duties include:

  • Protecting ACH data
  • Obtaining authorization for credit and debit payment requests
  • Maintaining contractual relationships with customers

What role does the RDFI play in an ACH transaction?

The RFDI is a bank or credit union that receives entries from the ACH Operator on behalf of their customers. The RDFIs then post those payments to their customers' accounts. They are responsible for receiving, validating and posting ACH entries to their receiver's accounts in a timely fashion. They are also responsible for informing Originators of any incorrect information in the entry. 

What is a common example of an ACH payment?

A business or individual can make an ACH payment as a one-time event, or it can be recurring. For example, let's say a consumer wants to set up automatic bill pay for the cable bill. To do that, they would first provide the cable company with their bank account information and authorize the monthly deduction. Then, when the bill comes due, the cable company's bank (the ODFI) sends a request to the consumer's bank (the RDFI) asking for the money to be transferred. The banks also communicate to ensure the consumer's account holds sufficient funds to pay the bill before completing the transaction. 

 

Through Synapse, fintechs can gain access to a full infrastructure of payment networks to align their networks with their business models domestically and around the world. Deposit Hub offers a feature complete deposit and payment platform. Our Crypto Hub is a complete crypto wallet, investment and exchange platform, while our Credit Hub enables you to build various credit product experiences, including: Open Loans, Revolving Loans and One-time Loans.


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1 Synapse Financial Technologies, Inc. is not a Bank. Deposit, Banking and Card services are provided by Synapse Financial Technologies, Inc.’s partner banks, Members FDIC. Credit services are provided by Synapse Credit LLC, a licensed U.S. lender in designated States. Global cash management services provided by Synapse Brokerage LLC, a registered broker-dealer and member of FINRA and SIPC. Crypto services are provided by Wyre Payments, Inc., a US Money Service Business. Synapse Brokerage LLC does not offer crypto services and no cryptocurrencies may be held in any account established through Synapse Brokerage, LLC.. Cryptocurrencies are not stocks and your cryptocurrency investments are not protected by either FDIC or SIPC.

RFDI & ODFI Guide

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Carla McMorris
August 11, 2022

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