Banks and financial institutions that facilitate ACH transfers must be certified by the National Automated Clearing House Association (Nacha) financial institution. Nacha manages the governance of the ACH network and its electronic systems to minimize financial fraud and to improve the speed and efficiency of ACH transfers.
If your business wants to be part of this exchange, and you want to offer ACH transfer services as a payment method, then you must be Nacha certified as an ODFI and RDFI or hire the right third party partner. Here’s what you need to do to start that process:
What are ODFI and RDFI?
Banks within the Nacha network are known as ACH operators. Names are given to financial bodies during the transactions, as well as being a way to verify that the body is capable of processing the payment.
The two main ACH Operators for banks are ODFI and RDFI.
ODFI stands for Originating Depository Financial Institution and it means that this financial institution is where the transaction entry for the ACH transfer originated. This usually indicates from where the financial request was made, and which bank account owner is requesting payment or sending payment.
RDFI stands for Receiving Depository Financial Institution and it means that this financial institution is where the transaction entry is deposited or received. The RDFI will process the majority of the return codes and issue payment receipts.
Roles of ODFI and RDFI
Both the ODFI and the RDFI have an agreement with the Clearing House and the Federal Reserve to transmit ACH transfers along the network. Their role is simply to ensure that the individuals involved, such as the Originator and the Receiver, are authorized to send money along this network and to gain authorization for crediting or debiting an account.
The ODFI specifically must:
- Obtain authorization before crediting or debiting an account
- Be approved to transmit ACH entries on behalf of the Originator
- Implement ACH data security systems
- Keep ACH returns within an agreed upon threshold
- Have a contractual agreement with Originators
- Mitigate risks by working with Originators to ensure KYC/KYB regulations
- Have oversight on the payment process
The RDFI will have the following roles; they must:
- Be approved to receive ACH payments
- Accept all entries to their customer accounts that comply with Nacha operating rules
- Must directly or indirectly receive credits/debits from customers
- Must gain authorization from the Receiving customer to accept these funds on their behalf
- Issue timely receipts and validations of all entries
- Post the ACH transaction to the Receiver’s account in a timely and appropriate manner
- Issue notifications to Originators of incorrect information (i.e., accurately respond to ODFIs if a return code pops up)
Considerations for Becoming an RDFI and ODFI
There are some things to consider when becoming RDFI/ODFI certified.
Being an ODFI and an RDFI is very similar, but each must abide by its own set of rules around its roles. One financial institution is often both so that their customers can both send and receive ACH transactions.
Most businesses do start out as an RDFI for a few years because the move to Origination services can be a little daunting.
Getting Nacha Certified
Additionally, third-party senders who have been in operation for two years can become Nacha certified under a voluntary accreditation program.
Becoming certified means that your business will have to follow a rigorous set of financial operating standards. Once you have passed the certification, then your customers will know that you follow the ACH payment processing core best practices.
Getting Nacha certified is different from becoming an RDFI and ODFI operator. In order to become Nacha certified, you must complete the following:
- An approved, independent Nacha rules audit
- An Agreement to Criminal Background Check all principals and key officers
- Providing audited financial statements
- A compliance and risk program policy and procedures document
- An ACH risk assessment
As of right now, the application fee is $5,000. If the certification is achieved, the certification period is two years. A $750 intervening year fee and documentation to maintain certification are required at the end of the first year. The full review is conducted every two years.
Becoming an ODFI, RDFI
The process of becoming an ODFI or RDFI involves setting up the proper checks and balances and then seeking registration with Nacha and the Federal Reserve.
You need to go through your own set up, organizational, and assessment process before you can even register.
Understand first what you are looking for:
- The type of qualification you are looking for: Financial institutions can add Origination services to your RDFI schedule. You might already be RDFI only, an ODFI internal only, ODFI third party applications only internal vs. external. You’ll want to map out the landscape of each requirement and then choose which one works best for you.
- Identify your stakeholders: You’ll need a core team with product management, ACH operations team, IT and systems team, accounting, project managers (maybe), and vendor project management. You’ll also need a team with risk, compliance, fraud, auditing, legal, marketing, credit, sales or cash management, and customer relations.
- What are your goals for qualification: You may want to expand a service offering, increase non-interest income, or respond to customer demand. Identify why you want to be qualified so you can understand what you need.
- Then you need to refine your budget and set timelines: Once you’ve mapped out the goals and strategy, begin to allocate budget resources and set timelines.
Once you have these ideas, then you can reach out directly to your regional ACH association or regional Fed bank. Sometimes the specific documents, like the pre-product Risk Assessment, can be impossible to work out on your own. Reach out to these resources for an easier qualification process.
ACH Associations: Most often, your regional ACH association will have a ton of resources to help you and they will even host webinars, post recorded seminars, and send out a representative to your on-site location.
Federal Reserve Banks: There are 12 regional Federal Reserve Banks, like the Federal Reserve Bank of New York, who operate within the Federal Reserve System, and they are in charge of providing elastic currency, supervising and regulating depository institutions, assisting government financing operations, formulating monetary policy, and being a US government banker.
The Federal Reserve Banks in your region will be a huge help because they are designed for maintaining national payment systems operations, protecting consumer rights, and setting policy (its three main functions are monetary policy, supervision and regulation, and international operations).
Becoming an RDFI is easier than becoming an ODFI. Both require a lot of paperwork and qualifying through the Federal Reserve and Nacha. Start by reaching out to your regional association so you know which forms are needed.
If you’re just starting out, then you likely need to do a lot of setup around risk management and compliance. Once you have these models in place, then you can likely seek either RDFI or ODFI or both. However, recognize that this start-up period might take a while.
If you are looking to implement this service offering sooner rather than later, you may want to work with an already established third-party vendor to process ACH payments on your behalf while you work through the qualification process. You can also consider a service like Sila, which offers SDKs for pre-built ACH APIs so you can create a white-labeled banking API with compliance and ACH transfer capabilities (among others) built-in.