Skip to content
PAY BY BANK

Instant Payments
Real-time payment processing.

Same Day ACH
Same day payment processing.

Standard ACH
Standard processing times.

FEATURES

Unified API
Fast transactions integrated with open banking all in one platform.

Automated Payments
Modernize your payments with pay by bank automation.

Mass Pay
Send multiple bank transfers with a single API request.

Open Banking Services
Instant account verification, balance checks and fraud mitigation.

Digital Wallet
Initiate faster transactions by utilizing Dwolla's Digital Wallet to hold funds.

 

Data Visibility
Access and manage your payments data through our user-friendly dashboard.

Security
Dwolla's platform is monitored 24/7/365 using a combination of internal and external tools and services.

Integration
Dwolla makes integrating pay by bank payments fast and easy.

Sandbox Environment
Simulate use cases and try out features.

Dedicated Support
Supporting your payments journey every step of the way.

SOLUTIONS

Enterprise
High-transacting payment automation

Balance
A digital wallet solution 

Connect
Direct bank connections 

INDUSTRIES

Insurance
Modernize outdated insurance payments

Real Estate
Revolutionize your real estate payments

Lending
Accelerate your lending operations

Healthcare
Elevate your healthcare payments

Manufacturing
Transform your manufacturing payments

USE CASES

B2B Payments
Streamline your business payments

Unload/Load Digital Wallet
Seamlessly move funds on and off your platform

Payouts
Pay out funds quickly and securely

blog_header-image_dark-orange@2x-2
4 min read

Explaining the Differences Between ODFI & RDFI

If you’ve ever entered a bank account and routing number to make a payment, you’ve initiated an ACH transaction. Understanding how those ACH transactions work and when they will be processed essentially requires learning a new language and a few acronyms.

With each ACH transaction, there’s an Originating Depository Financial Institution (ODFI) and a Receiving Depository Financial Institution (RDFI).

This blog post will explain the role each financial institution plays in an ACH transaction.

Originating Depository Financial Institution (ODFI)

The ODFI has an agreement with an ACH Operator (either the Federal Reserve or The Clearing House) to transmit entries into the ACH Network on behalf of the Originator.

To be an ODFI, the depository financial institution must—among other things—be responsible for obtaining authorization before crediting or debiting an account.

They also are responsible for:

  • Protecting ACH data security
  • Having contractual relationships with each of its Originators
  • Keeping ACH returns below an agreed upon threshold

To mitigate the risk of ACH returns, ODFIs are encouraged to work with Originators to ensure they have proper controls and oversight over their payment processes.

A commercial ACH Originator, usually a business or payment provider, creates one or more Nacha rules-formatted ACH files to submit to their Originating Depository Financial Institution (ODFI) to process payments each day. The ODFI is the partner bank of the Originator and originates ACH transactions.

The ODFI submits files to an ACH Operator, either the Federal Reserve, or The Clearing House. The ACH transactions will be sorted and sent to the designated Receiving Depository Financial Institution (RDFI).

Not all banks choose to be an ODFI because of the necessary requirements and associated fees. But because so many do choose to be an ODFI and accept ACH payments, financial institutions that choose not to participate put themselves at a competitive disadvantage in the market.

Receiving Depository Financial Institution (RDFI)

All ODFIs must also agree to act as an RDFI (Receiving Depository Financial Institution), to receive ACH payments.

A Receiving Depository Financial Institution receives entries directly or indirectly from its ACH Operator for debit or credit to the accounts of its customers. All financial institutions must be an RDFI to allow a customer or member to accept funds via ACH.

RDFIs must accept all entries to their customer accounts to comply with Nacha Operating Rules.

RDFI responsibilities include:

  • Timely receipt and validation of all ACH entries
  • Proper and timely posting to Receivers’ accounts
  • Proper notification to Originators of incorrect information on accepted entries

Financial institutions can choose to be an RDFI without being an ODFI.

Similarities Between ODFI & RDFI

Besides dealing with money, there are other similarities between an ODFI and RDFI.

Both the ODFI and RDFI must have a relationship with an ACH Operator in order to access the ACH Network. Both the ODFI and RDFI pay fees to access these payment rails and face strenuous auditing processes.

Even as faster payments become more popular, the transactions will still go through an Operator.

The Clearing House, a popular ACH Operator, offers an instant payment option through its payment rails, provided that both financial institutions are participating members.

The Federal Reserve unveiled plans for a real-time payment option that should hit the market by 2023 or 2024.

ODFI & RDFI Examples

Let’s illustrate these ACH transfers with real world examples. It is important to remember that no matter what type of ACH transaction—ACH credit or ACH debit—an ODFI and RDFI are always involved.

The ODFI and RDFI can even be the same financial institution. Remember, we never said understanding the ACH Network was easy.

ODFI Example

Direct deposit of payroll is an example of an ACH credit transaction, so let’s say Bill works for a company called Fintech USA. When it’s payday, Fintech USA, as the Originator, initiates an ACH debit from its bank account at  First Trust Bank, the ODFI in this transaction. First Trust sends an ACH file to its ACH Operator, which then passes the transaction to Bill’s bank, First Mutual, the RDFI, which pushes the funds into Bill’s bank account.

RDFI Example

Utility companies offer automatic withdrawal for their monthly bill payment. Let’s say Bill has authorized Central Energy to automatically debit his bank for his heating bill on the first of each month.

After obtaining authorization, Central Energy will initiate a transaction through the ODFI to debit the bank account each month at the RDFI. Once the transaction is initiated, funds are pulled from the account at the RDFI, then credited to the Central Energy bank account with the ODFI.

‘On-Us’ Transactions

If the Receiver and Originator have accounts at the same financial institution, the ACH transaction is not required to pass through an ACH Operator.

Some ODFIs will strip off those transactions that are on their own accounts prior to sending their batch file to the ACH Operator. These are known as “On-Us” transactions and are not required to pass through the ACH Operator.

Related Articles