What Is RDFI (Receiving Depository Financial Institution)?

If you’ve ever used bank account information and a routing number to make a payment, you’ve used an automated clearing house or ACH. Automated clearing houses are an important part of payment processing. In every ACH transaction, there are two institutions involved, the ODFI and the RDFI. In today’s article, we will cover everything you need to know about the receiving depository financial institution, also known as the RDFI.

Key Takeaways

To understand the process of accepting payments via ACH, you’ll need a base understanding of both the RDFI and ODFI. In this article, you’ll learn:

• An RDFI is a financial institution with an agreement to accept ACH transfers
• AN ODFI is a financial institution that can transmit original entries
• There are similarities and differences between ODFIs and RDFIs
• We will show you examples of each, explain some key terms, and answer some frequently asked questions

Here’s What We’ll Cover:

What is RDFI (Receiving Depository Financial Institutions)?

What Is an Originating Depository Financial Institution?

How Are They Similar?

ODFI vs. RDFI

ODFI & RDFI Examples

Other Terms Associated With RDFI and ODFI

Conclusion

Frequently Asked Questions 

What is RDFI (Receiving Depository Financial Institutions)?

An RDFI is a bank or credit union that has an agreement with an ACH Operator to receive entries. They act on behalf of their customers when receiving these entries from the ACH Operator. The ACH Operator is either the Federal Reserve or The Clearing House. Entries are either in the form of debit entries or credit entries. RDFIs post payments to their customers’ accounts.

For a financial institution to allow members or customers to receive funds, they must be an RDFI. To become an RDFI, a financial institution must be recognized by the NACHA. This recognition means they are qualified to participate in the ACH network and receive and accept ACH payments.

RDFI Responsibilities

The responsibilities of any RDFI are as follows:

• Timely receipt of all ACH entries
• Timely validation of all ACH entries
• Timely posting to recipients’ (Receivers’) accounts
• Timely notification to Originators regarding incorrect information

The term timely refers to how quickly payments are posted, as well as how quickly notifications are sent. Many of these institutions can post payments on the same banking day they’re received. Regardless, they must do so in an adequate number of business days to remain qualified.

An institution can choose to be an RDFI without being an ODFI. However, this means they can only receive electronic payments, and their customers cannot send them.

What Are Entries?

Entries are a complicated way of saying payments or payment requests. These can be derived from credit card payments, a wire transfer, or processing a paper check. For them to take place, sufficient funds must be in the account that money is being sent to or requested from.

What Is an Originating Depository Financial Institution?

An originating depository financial institution is a financial institution that can transmit entries. For short, they are called ODFI. They function similarly to an RDFI, except they are able to create an original entry. This makes them Originator. To become a qualified ODFI, institutions must assume responsibility for the authorization of entries.

ODFI Responsibilities

The responsibilities of any ODFI are as follows:

• Obtaining authorization for any credit entry or debit entry
• Protecting ACH data
• Having contractual relationships with their customers or members
• Keeping ACH return entries below a defined threshold

Not all institutions will opt to become ODFIs because of the associated fees, as well as the risks involved.

How Are They Similar?

Look at the following ways that ODFI and RDFI are similar to one another.

• Both handle money for their customers or members
• They must have a relationship with an Automated Clearing House Operator
• Fees must be paid to access faster payment methods
• Both need to be recognized by the National Automated Clearing House Association

ODFI vs. RDFI

Although the receiving depository financial institution and originating depository financial institution both have a few things in common, ODFI and RDFI also have some key differences. The main difference between the two is that RDFI is responsible for receiving ACH payments, while ODFI is representative of originating payments. 

If a bank or financial institution wants their clients to initiate and receive ACH payments, they’ll need to be ODFI and RDFI. However, banks don’t need to be both; many financial institutions will opt not to be ODFI due to the credit risk and fees related to processing ACH transactions. 

ODFI & RDFI Examples 

Now that you understand these two types of financial institutions and the ACH network, how can they be applied to the business world? Here’s an instance of ODFI and RDFI in action.

Take the example of a company doing their payroll for their employees. This company uses direct deposit from their bank account to that of their employees in order to pay each staff member’s salary. In this example, the company paying its employees would be the Originator and initiate an ACH debit entry from their account at their bank, which would be the ODFI. 

The ODFI bank would then send the relevant ACH file to their ACH Operator, which would then allow the transaction to be finalized, and for the employee’s payroll to be deposited into each employee’s bank account. The banks responsible for receiving this transaction would be classified as an RDFI. 

Other Terms Associated With RDFI and ODFI

Check out this list of helpful terms and definitions related to the RDFI and ODFI processes, as well as ACH Operators.

ACH

This stands for Automated Clearing House. There are a number of ACH Operators, but the most popular is the Federal Reserve and The Clearing House. They are able to transmit ACH transactions. These ACH transactions are credit entries and debit entries.

Credit Entry

A credit entry is a transaction that deposits money into a Receiver’s account. Also known as a payment.

Debit Entry

A debit entry is debit transaction that withdraw money from a Receiver’s account. Also known as a payment request.

Originator

An Originator is a merchant or institution that can initiate ACH entries. These are payments or payment requests.

Receiver

Receivers are individuals or organizations to that entries are sent. Entries have to be authorized before they can take place.

Return Entry

A transaction that is returned or rejected by the ODFI or RDFI. Return entries are normally the result of insufficient funds in a Receiver’s or Originator’s account.

Conclusion

An RDFI is one of three entities involved with ACH payment processing. The other two are the ODFI and the ACH Operator. In order to receive fast electronic transactions, the RDFI must have a relationship with an ACH Operator. It must also be recognized as qualified by the NACHA.

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FAQs on RDFI 

More questions about RDFI, ODFI, or anything else to do with ACH payments and the ACH network? Here are some frequently asked questions. 

What does ACH RDFI mean?

An ACH RDFI is a financial institution that has entered an agreement with an ACH Operator to receive transactions. The purpose of being designated as an ACH RDFI is to be able to receive ACH transaction entries (either in the form of debit or credit entries) on their client’s behalf. 

Can a bank reverse an ACH payment?

Banks can only reverse an ACH payment under certain considerations. ACH payment processing can only be reversed if it was processed in error, and the reversal entry must be transmitted to the bank in question within five banking days. 

What happens if an ACH transfer goes to the wrong account?

If an ACH entry is sent to the wrong account as a result of an error, it’s up to the Originator to send a reversal entry. This must be done within five banking days of the transaction going through, and the reversal entry must be sent within 24 hours of the error being discovered.

What is RDFI in banking?

An RDFI is a receiving depository financial institution. Simply put, it is a payment recipient’s banking institution that is responsible for receiving the recipient’s debit and/or credit transactions. 

What is RDFI not qualified?

If you receive ACH return code ‘R13: RDFI not qualified to participate’, it is because of one of two reasons: either your chosen financial institution is not qualified to participate in ACH payments and the ACH network, or there is an error in the entered routing number.

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