[101] Explaining the confusing money movement for AFTs and OCTs

AFTs are Account Funding Transactions. They are initiated by an originating bank (acquiring bank) and they fund that bank’s balances. In cash flow terms, they are a credit to the originating banks balances and debit the other bank. They are a "pull" transaction - pulling money into the account. When AFTs occur, the originating bank (acquirer) pays fees to the network and the other bank (issuer) gets interchange.

 OCTs are Original Credit Transactions. They are initiated by an originating bank (acquiring bank) and they reduce bank’s balances. In cash flow terms they are a debit to the originating bank's balances and credit the other bank. They are a "push" transaction - pushing money out of the account. When OCTs occur, the originating bank (acquirer) pays fees and the other bank earns interchange (issuer).

AFTs and OCTs are therefore inherently independent transactions and do not require 1:1 matching. An AFT / OCT can occur without an equivalent OCT / AFT. They are not linked.

So if that’s the case, then how is it possible why does Visa call the credits to our account "OCTs" and the debits to account "AFTs"? Shouldn't it be the other way around?

Actually, the logic applies but it's counterintuitive because of who the initiator is. Hear me out on the flow:

Let’s use Bank A and Bank B in our example.

First the simple cases:

• If Bank A initiates an AFT transaction, money is credited to Bank A and debited from Bank B. Bank A pays network fees

• If Bank A initiates an OCT transaction, money is debited from Bank A and credited to Bank B. Bank A pays network fees

Now the counterintuitive ones that still align to original definitions.

• If Bank B initiates an AFT transaction, money is debited from Bank A and credited to Bank B. Bank A generates interchange

• If Bank B initiates an OCT transaction money is credited to Bank A and debited from Bank B. Bank A generates interchange

So that can mean that based on the userbase, the initiator of transactions could actually be primarily an external bank, which means that AFTs and OCTs will seem to have the opposite effect that they are supposed to have on Visa reporting. 

This can makes sense given scale and the use cases for accounts on platform today today, especially if these accounts are not considered primary. Gig businesses probably initiate payouts (OCTs) to your bank’s accounts. And Cash App / Chime / Chase probably initiate funding transactions (AFTs) from your bank’s accounts as users move money to primary accounts.

If you want to learn more about AFTs and OCTs, I’ve written a primer on these instant money transfer methods that every fintech is focused on.