Originating Depository Financial Institution | B2B Finance Glossary

What is an Originating Depository Financial Institution?

An Originating Depository Financial Institution (ODFI) is a critical part of the ACH network in the banking industry. In sending an ACH payment, an ODFI is a financial institution that operates as the interface between the ACH network or Federal Reserve and the transaction's originator (the party that created the ACH transaction first).

The ODFI is the entity that helps initiate the original transaction. It is responsible for ensuring that the sent transaction complies with the standards and rules of the National Automated Clearing House Association (NACHA). To be an ODFI, the depository financial institution must get authorization before crediting or debiting an account, protect ACH data security, maintain contractual relationships with each originator, and keep ACH returns below an agreed-upon amount.

How Does an ODFI Work?

An ACH return is a message telling the ODFI that the ACH network could not collect or deposit funds into the receiving account. The best way to think about these kinds of returns is to think of them like a bounced check.

ODFI is encouraged to work with ACH originators to lower the risk of ACH returns to ensure they have proper control over payment processing. A payment provider operates as a business ACH originator and works to make ACH files to submit to the ODFI for payment processing. The ODFI is a bank or financial institution representing the financial institution that partners with the ACH originator or payment processor. The ODFI transfers these files to the ACH operator (the Electronic Payments Network, usually abbreviated to EPN or the Federal Reserve). This allows sending deposits to the Receiving Depository Financial Institution (RDFI).

What is a Receiving Depository Financial Institution (RDFI)?

An RDFI is a financial institution that receives entries (another name for payments or payment requests) directly or indirectly from its ACH operator (Federal Reserve or the EPN) for debit or credit to its customers' accounts. These entries are either in the form of debit entries or credit entries, and RDFIs post payments to their customers' accounts. RDFIs must accept all entries to their customer accounts to comply with NACHA's rules regarding ACH operations.

During the ACH payment process, the payment begins with the RDFI, the bank that receives the ACH transaction. The RDFI's job is to control the ACH processing for the ODFI that partakes in the ACH transfer. While this occurs, the RDFI ensures that the banking information provided is correct. It is then responsible for reporting any codes that may delay processing or keep a transaction from occurring (this can happen when the sender has insufficient funds to make the transaction).

For a financial institution to accept funds via ACH, that institution must become an RDFI because RDFIs comply with NACHA's operating procedures. RDFIs are responsible for accurate and timely posting to receivers' accounts, timely receipt and validation of all ACH entries, and proper notification to originators of incorrect information on any accepted entries.

Financial institutions can be an RDFI without being an ODFI, but to be an ODFI, the institution must also be an RDFI.

What is the Difference Between an ODFI and an RDFI?

The most significant difference between an ODFI and an RDFI is that the ODFI is the financial institution that initiates ACH transactions. The ODFI is the institution where the ACH entry request is first placed. This ensures that an original entry is accurate to debit money from the bank account sending the transaction. The ODFI is responsible for responding to any return codes or entries.

On the other hand, the RDFI is the financial institution that receives ACH transactions. It assumes the role of conducting checks and reporting return codes to the ODFI.

What Are the Similarities Between an ODFI and an RDFI?

ODFIs and RDFIs must establish and maintain relationships with an ACH operator, the Federal Reserve, or the EPN. This is essential when sending and receiving ACH payments since those payments need to comply with specific standards and rules. Additionally, both ODFIs and RDFIs need to be recognized by NACHA; otherwise, they don't qualify to perform the responsibilities associated with these roles. Finally, ODFIs and RDFIs are similar because they handle money for their customers and are an essential part of the ACH payment process.

What is an Originating Depository Financial Institution?

An Originating Depository Financial Institution (ODFI) is a critical part of the ACH network in the banking industry. In sending an ACH payment, an ODFI is a financial institution that operates as the interface between the ACH network or Federal Reserve and the transaction’s originator (the party that created the ACH transaction first).

Essentially, the ODFI is the entity that helps initiate the original transaction. The ODFI is responsible for ensuring that the transaction being sent complies with the standards and rules of the National Automated Clearing House Association (NACHA). To be an ODFI, the depository financial institution must get authorization before crediting or debiting an account, protect ACH data security, maintain contractual relationships with each originator, and keep ACH returns below an agreed-upon amount.

How Does an ODFI Work?

An ACH return is a message telling the ODFI that the ACH network could not collect or deposit funds into the receiving account. The best way to think about these kinds of returns is to think of them like a bounced check.

ODFI is encouraged to work with ACH originators to lower the risk of ACH returns to ensure they have proper control over payment processing. A payment provider operates as a business ACH originator and works to make ACH files to submit to the ODFI for payment processing. The ODFI is a bank or financial institution representing the financial institution that partners with the ACH originator or payment processor. The ODFI transfers these files to the ACH operator (the Electronic Payments Network, usually abbreviated to EPN or the Federal Reserve). This allows deposits to be sent to the Receiving Depository Financial Institution (RDFI).

What is a Receiving Depository Financial Institution (RDFI)?

An RDFI is a financial institution that receives entries (another name for payments or payment requests) directly or indirectly from its ACH operator (either the Federal Reserve or the EPN) for debit or credit to its customers' accounts. These entries are either in the form of debit entries or credit entries, and RDFIs post payments to their customers’ accounts. RDFIs need to accept all entries to their customer accounts to be in compliance with NACHA’s rules regarding ACH operations.

During the ACH payment process, the payment begins with the RDFI: the bank that receives the ACH transaction. The RDFI’s job is to control the ACH processing for the ODFI that partakes in the ACH transfer. While this occurs, the RDFI ensures that the banking information provided is correct. It is then responsible for reporting any codes that may delay processing or keep a transaction from occurring (this can occur when the sender has insufficient funds to make the transaction).

For a financial institution to accept funds via ACH, that institution must become an RDFI because RDFIs comply with NACHA’s operating procedures. RDFIs are responsible for accurate and timely posting to receivers’ accounts, timely receipt and validation of all ACH entries, and proper notification to originators of incorrect information on any accepted entries.

It’s possible for financial institutions to be an RDFI without being an ODFI, but to be an ODFI, the institution must also be an RDFI.

What is the Difference Between an ODFI and an RDFI?

The biggest difference between an ODFI and an RDFI is that the ODFI is the financial institution that initiates ACH transactions. The ODFI is the institution where the ACH entry request is first placed. This ensures that an original entry is accurate to debit money from the bank account sending the transaction. The ODFI is responsible for responding to any return codes or entries.

On the other hand, the RDFI is the financial institution that receives ACH transactions. It assumes the role of conducting checks and reporting return codes to the ODFI.

What Are the Similarities Between an ODFI and an RDFI?

ODFIs and RDFIs must establish and maintain relationships with an ACH operator, whether the Federal Reserve or the EPN. This is essential when sending and receiving ACH payments since those payments need to comply with specific standards and rules. Additionally, both ODFIs and RDFIs need to be recognized by NACHA; otherwise, they don’t qualify to perform the responsibilities associated with these roles. Finally, ODFIs and RDFIs are similar because they handle money for their customers and are an important part of the ACH payment process.