What Is RDFI in Banking?

Within the Automated Clearing House (ACH) Network, there are two different categories of financial institutions: ODFIs and RDFIs. The majority of significant functioning banks are authorized by ODFI and RDFI to transmit and receive ACH money transfers.

An ODFI or RDFI may also permit third-party payment processors (TPPPs) to accept ACH payments as a legitimate payment method. Examples of TPPPs include credit unions, payment gateways, and ACH payment APIs.

Sensitive banking and customer information is protected by stringent laws that ODFIs and RDFIs must abide by. Therefore, in this article, we are going to understand in detail about the RDFI in banking.

What Is an RDFI (Receiving Depository Financial Institutions)?

A bank or credit union that has an arrangement with an ACH Operator to accept entries is known as an RDFI. When they get these entries from the ACH Operator, they act on behalf of their clients. The Federal Reserve or The Clearing House is the ACH Operator. There are two types of entries: credit entries and debit entries. Payments are posted to customers’ accounts by RDFIs.

A financial institution needs to be an RDFI in order to permit its members or clients to receive money. A financial institution needs to be approved by NACHA in order to become an RDFI. They are now eligible to take part in the ACH network and to receive and process ACH payments as a result of this recognition.

Responsibilities of an RDFI

Any RDFI is accountable for the following:

Prompt receipt of every ACH entry
Prompt verification of every ACH entry
Prompt posting to the accounts of the recipients (Receivers’)
Prompt communication of inaccurate information to Originators

The speed at which alerts are received and payments are posted is referred to as “timely.” Payments received by several of these organizations can be posted on the same banking day. To stay eligible, they must nevertheless complete this within a sufficient amount of business days.

An organization is not required to be an ODFI in order to become an RDFI. Nevertheless, this implies that their clients are unable to give them electronic payments; they can only accept them.

What Does Originating Depository Financial Institution Mean?

A financial institution having the ability to send entries is known as an originating depository financial institution. They go by the name ODFI in short. With the exception of being able to create original entries, they operate similarly to an RDFI. They are hence the Originators. Institutions must take on the obligation of entry authorization in order to qualify as an ODFI.

ODFI Responsibilities

Any ODFI is accountable for the following:

Getting permission before making any debit or credit entries
Safeguarding ACH information
Having agreements in writing with their clients or members
Maintaining ACH return entries below a specified level

Due to the dangers and related fees, not all institutions will choose to become ODFIs.

In What Ways Are They Similar?

Take a look at the similarities between ODFI and RDFI, which are listed below.

Both manage finances on behalf of their clients or members.
They need to be in contact with an Automated Clearing House Operator, and using faster payment options requires paying fees.
The National Automated Clearing House Association must approve both.

What Are the Differences Between RDFI and ODFI?

Despite having similar external appearances, RDFI and ODFI are very different from one another. This is mostly because of their function in ACH processing.

To put it simply, the bank that receives money through the ACH network is represented by the RDFI, and the financial institution that initiates ACH transactions is represented by the ODFI. The RDFI, or the bank receiving the payment, takes on the primary responsibility of conducting checks and reporting any return codes to the ODFI, whereas the ODFI represents the bank where an ACH entry request is initially made.

Examples of ODFI & RDFI

Here is a situation in which ODFI and RDFI are used:

Think about a business that is running payroll for its workers. The company prefers to pay salaries via direct deposit into employees’ bank accounts. In this case, if we take the company as the originator, then they would have to create an ACH debit entry from their account (i.e., ODFI) at a bank. This transaction would be made possible by sending the corresponding ACH file through an ACH Operator service provider, which would effect the finalization of the transaction. This allows each staff member’s net wage payment to be directly credited into their own savings institution account (RDFI).

Other Terms Related to RDFI and ODFI

Take a look at this glossary of concepts that are useful while discussing ACH Operators, the RDFI and ODFI processes.

ACH: For Automated Clearing House, this is an acronym. While there are other ACH Operators, The Clearing House and the Federal Reserve are the most well-known. They have the capacity to send ACH transactions. Both credit and debit entries are made in these ACH transactions.
Credit Entry: A transaction where money is deposited into a Receiver’s account is called a credit entry. It is also referred to as a payment.
Debit Entry: A debit transaction that takes money out of the receiver’s account is called a debit entry. Also called a request for money.
Originator: An entity or merchant with the ability to start ACH entries is known as an Originator. Payments or demands for payments are these.
Receiver: Individuals or organizations designated as recipients are the ones to whom entries are submitted. Before anything can happen, entries must be approved.
Return Entry: A transaction that the ODFI or RDFI rejects or returns. Inadequate funds in the accounts of the Originator or receiver typically lead to return entries.

Boost Small Business Banking with Cheqly

One of the three parties involved in processing ACH payments is an RDFI. The ODFI and the ACH Operator are the other two. The RDFI needs to be connected to an ACH Operator in order to receive quick electronic transactions. It must also be accepted by the NACHA as qualified.If you are looking for small business banking finances, then Cheqly can help you with your banking operations. With a Cheqly account, you can transact online at a lower cost, access your bank from anywhere, and use both virtual and physical debit cards easily. Furthermore, it is a cost-effective bank; you are not charged for having an account, and no minimum balance is required. Let’s sign up for a Cheqly account today and improve your small business banking efficiency.