Overdraft fees are still causing issues, and some have deemed them to be unfair or deceptive acts or practices. The Federal Reserve, the Federal Deposit Insurance Corporation and the National Credit Union Association have all considered certain practices related to handling overdrafts on preauthorized transactions as unfair.
The issue cited involves preauthorized point-of-sale (POS) transactions. If you have an opt-in program for one-time POS or ATM transactions and an overdraft protection program, be sure you understand how your system processes transactions that involve a preauthorized hold being placed on funds in a customer’s account to cover such purchases. These are also known as “debit holds” in the industry and occur when a customer uses their debit card for purchases before the actual amount of the purchase is known. This practice is widely used when a debit card is used to reserve a hotel room or to purchase gasoline before the gasoline is pumped and when the full amount of the sale is not known.
The problem occurs when the account had enough funds to cover the hold amount at the time of the preauthorization, but the transaction takes a day or more to settle, resulting in other transactions reducing the account balance prior to settlement of the preauthorized transaction. When the preauthorized purchase settles, which can be days later, there are no longer enough funds to cover the purchase. If the customer has opted in for payment of one-time POS transactions, the system may be charging an overdraft fee at the time of settlement even though the funds had been available and a debit hold was placed on the system at the time of purchase.
For example, on Monday your customer has an available balance of $300 at the time they swipe their debit card at the gas station pump. At the time of preauthorization, a hold of $75 is placed on the account and the available balance is reduced to $225 and the ledger balance remains at $300. On Tuesday, a check clears the customer’s account for $325. If the check is paid, the available balance is then negative ($100) and the ledger balance is negative ($25), and the customer is charged an overdraft fee of $30 caused by the check transaction. Now, with the overdraft fee, the available balance is negative ($130) and the ledger balance is negative ($55). On Wednesday, the purchase at the gas station settles and the actual purchase amount was $60. Now both the current and available balance are negative ($115). If the customer opted-in for one-time POS transactions, the system might be charging an overdraft fee at the time of settlement for the gas station purchase because it is settling on insufficient funds. Now the customer is charged a $30 overdraft fee and has a negative balance ($145).
This practice of charging an overdraft fee for an item that was already authorized to be paid on good funds is deemed to be unfair. Your financial institution makes the decision to “pay” debit card transactions at authorization. Once the transaction is authorized, your institution is obligated to pay the transaction due to network rules as discussed in Regulation E. Your customer had sufficient funds at the time the transaction was authorized and would not expect or anticipate that an overdraft fee would be charged later at the time of settlement.
Another thing to keep in mind is that if the same scenario occurred for a customer that had not opted-in for one-time POS transactions, they would not be charged the second overdraft fee for the debit card transaction at the gas station. In this example, there was no benefit to the customer that opted in. Both the opt-in and opt-out customer had their gas purchase covered, but only one was charged an overdraft fee for that transaction.
In conclusion, be sure you understand how your system processes this type of transaction, know when an overdraft fee is charged or not charged and verify your overdraft program is thoroughly disclosed so each customer understands how it will work.