Road To Overdraft Hell Paved With Floats

The short answer to the questions raised in “National City Bank Loves Inexplicable Overdraft Fees” is simple. If you’re a broke-ass, don’t fuck with float.

We got into gobs of trouble in college ourselves by “keeping track of it in our heads.” Nu-uh. Doesn’t work. We didn’t beat the overdraft genie until we started keeping a spreadsheet with debits and credits and making a hard rule to never make a transaction unless our money was definitely in the bank.

The long answer, provided by an inside man at a financial institution, after the jump.


“As the IT Manager of a financial institution (but not the one in question), I would like to comment on your story. I know it is a bit long, but I tried to bang out something that made sense. Here’s the skinny…

Checking accounts have TWO balances. “Ledger Balance” is what we all think of as “Balance” and it is how much money you have in your account. This is the balance that is being shown in the online banking system screen shot you have in your story. There is, however, another balance that this particular institution does not do a good job of showing to the consumer in that screenshot. It is the “Available Balance” and there can be a world of difference between the two. Please allow me to explain.

There are typically two reasons that Ledger and Available will differ. The first is deposit holds. When you deposit checks into a checking account, your bank can place holds on those funds subject to a quasi-law called Regulation CC.

http://www.federalreserve.gov/Pubs/regcc/regcc.htm

Reg CC specifies how long a bank can hold a check depending on the location of the institution that backs the check. For “local” banks, funds must be made available on the second business day following the day of deposit. This is known as a “2 day hold” and is the quickest an institution must make funds available most of the time. There are all kinds of exceptions and exclusions, but they are spelled out in the link above.

The second reason that your available balance might be substantially less than your ledger balance is called a “Debit Hold”. These holds are not regulated in the same way as deposit holds and can work a few different ways, but to understand these holds you first must understand how debit transactions work.

When you go into the 7-11 and swipe your card at the gas pump, they put an “Debit Authorization” on your card. The merchant can request either a “Hard Hold” or a “Soft Hold” authorization based on the configuration of their terminal and their agreement with their merchant provider. If they request a “Soft Hold” on your account and you have the money, that hold is issued but it does NOT affect your available balance. On the other hand, if a “Hard Hold” is requested, your Available balance is decreased by the amount of the authorization. Now once you are finished pumping gas, the merchant processes a Debit Completion which references the Debit Authorization. This completion has the actual amount you will be charged and will remove the hold (either hard or soft) that was placed when the authorization was issued. You may be asking yourself how much that authorization hold will be. It is whatever the merchant wants it to be. It could be one dollar or a hundred dollars.

If you think all that is confusing, you haven’t even gotten started yet. Try checking into a hotel. They often make a Hard Authorization for a large amount of money that puts a hard hold on your account that they never even use! Many times these Hard Holds will hang out on your account for WEEKS!

Most people don’t ever notice that this process happens every time you swipe your debit card as a signature-based transaction. Those holds appear and disappear without incident. The banks just post the transactions, and they are not always right. On the other hand, that online banking screen is NOT the whole story here either. In most cases where the consumer is not at fault, it comes down to bad practices at the merchants not bad practices at the banks.

The thing that would fix this problem for a lot of folks is simply more information. We need online banking systems that show the consumer how their available balance is being affected by holds. We need to show who has placed those holds and why. I suspect that if such a system were in place that the institution in question, this issue would never have made it to Consumerist. It would have been open and shit and the guilty party would be obvious.”

Comments

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  1. Ben Popken says:

    Joshua writes:

    “Beth, in the post on the consumerist is described as having a check for deposit. The amount of this check is not mentioned but a deposit is listed for $20.00 on Thursday. This was the same day her $150.00 check cleared. All banks, per Federal Regulation CC, are required to have hold policies and must disclose this information to customers. Most banks that I have encountered place all check deposits on hold for at least a full business day. This hold is for the full amount of the check not for the amount of the deposit. So if Beth’s deposit was more than $29.20 and she got all but $20.00 as cash back, the overdraft was due to the deposit being on hold. This is most likely the cause of the overdraft charge.

    There is a possibility that the representative was correct. I doubt it. I personally feel she was given a line of bullshit from someone who didn’t know what they were talking about. Assuming for a moment she was correct, I would switch banks immediately. Any bank that implements a system that can cause overdrafts due to merchant holds are banks to avoid. There are three types of transactions when you use a debit card. Credit transactions and Offline Point of Sale transactions both work the same. The company sends a pre-authorization request to the logo company on the debit card (Visa, MasterCard, etc…). The logo company notifies the bank that the card has been authorized for a transaction and the bank, typically, places the pre-authorization amount on hold for 24 business hours. This isn’t an actual purchase, however, just a notification that the merchant is authorized to make the purchase. I don’t know the laws around this but I believe an overdraft due to a merchant hold would be illegal as no funds have changed hands at this time. The other transaction type is an Online Point of Sale transaction which is more commonly known as a Debit transaction. Debit transactions pay the merchant immediately.

    On Beth’s screen shot, the Point of Sale purchases are all listed as the 22nd. This means they were done AFTER the business day of the 21st which is when the overdraft charge posted. If National City Bank was telling the truth, they have what is likely a very illegal policy. This gets into another very tricky aspect of banks. Banks have what are called “cut-offs” on their business day. This is usually 2 or 3 pm. Any transactions made after that cut-off point is considered the next business day. This includes both credits and debits. Overdraft charges, depending on the company policy, either post on the day of the overdraft or the day following the overdraft. I have never heard of a bank posting an overdraft the day PRIOR to an overdraft. The point of sale transactions on Beth’s account were either done on the 22nd or after the bank’s cut-off point on the 21st. There is no logical reason why they should be the cause of the overdraft. “

  2. tedonion says:

    There is one simple way to avoid all overdraft fees all the time… don’t have overdraft protection!

    I was one of the millions of consumers screwed hard by overdrafts by a large bank, and since then, I switched to a credit union which I love, and when I opened the account, I told them NO OVERDRAFT PROTECTION OF ANY KIND EVER! They tried to add it later, but I called them on that one…

    If my debit card is ever declined, I can use my credit card. Simple as that. No overdrafts ever, and if and when I need to borrow, it is done on a credit card that does not charge me $35.00 for borrowing $5 for 2 days.

    I advise everyone to do the same, cancel any overdraft protection on your checking account.

  3. OnoSideboard says:

    This post made my head hurt but has really useful information. I now appreciate my bank’s method of printing both “Balance” and “Available Balance” on every ATM receipt. (Compass Bank, FYI.)

  4. yes

  5. [last comment was test comment]

    Ben, this is long as boring and hell, but don’t take that personally. The banks intentionally make these rules, regulations a byzantine mess. By the time someone can understand them they probably have a diploma in finance.

  6. olegna says:

    I agree, that post is thick with info, but to me it sounds like banks and vendors have too many options for screwing around with your running balance. The system should work like a checking account, because that’s all a “debit card” is: a paper-less “real-time” checking account. Banks and cc companies are notorious of exploiting their ability to create confusing “lawyerly” financial mechnisms with tons of caveats consiously engineered to exploit consumers’ ignorance of confusing ever-changing and varied financial mechanisms.

    At the same time, consumers that play with the hold period to squeeze an extra debit out hoping their pending paycheck deposit clears first are doing precisely what banks encourage by having this system. Don’t do it, because the bank already has their asses covered in the fine print.

  7. gte910h says:

    1> Federal Banking Law prohibits the bank from holding the first 100 of a check.

    2> Wachovia shows both balences on their online checking.

  8. Falconfire says:

    I actually had another funny issue once where the bank charge me a overdraft fee even though I had enough money to cover it at the time… BUT they said it cleared 3 days earlier, even though I saw it was on hold for those 3 days and it didnt clear until THAT day. So because three days earlier I didnt have enough available balence (because it was on fucking hold) they charged me a overdraft fee.

    Personally I think overdraft fee’s period are bogus. I never understood the idea of someone charging someone a fee for NOT having money…. like that would make a person have more money by making them have less money. I know its ment to be a penalty, but its in truth the #1 way banks make money just in front of ATM fees which I think are a crock of bull. Really there is not much in the days of electronics banks should be ALLOWED to charge you anymore.

  9. gypsychk says:

    “Open and shit,” indeed. Bank members are always notified when fee policies are put in place or changed in any way. (You know those little pamphlets with really small print that are included with every bank statement you receive? Yeah, those. Turns out they’re important. Who knew?) Banks surely know nobody reads them, and that those that do won’t understand them or be able to keep track of changes.

    Try this: call the bank when you’re hit with a fee, particularly one that snowballs into a series of bounced payments. Be polite, and explain your situation (“The money was there, but not ‘available,’ can you do anything to help me?”). In my experience, banks are generally willing to reverse at least one fee per year, sometimes more. I actually had a bank rep tell me once, “No problem. Everyone is entitled to a bad month, now and again. We’re happy to reverse the charge.”

    [Incidentally, I've also done this with late credit card payment fees.]

  10. Trai_Dep says:

    I recall a bit of a hubub following a PR individual – suckled from the teat of Satan and whole-heartedly supporter of George Orwell’s Party on his off-hours – “represented” Wal-Mart by disinforming and clumsily attempting to bribe correspondents. It worked about as well as you’d expect but was quite entertaining for us, so mission accomplished. If not the mission that the person rep’ing that industry imagined.

    I was struck by the differences between that fiasco and what this industry professional did. Both rep’d the side opposite the consumer complain. Both represented industries not known for their humility or customer outreach. Yet the results are diametric.

    This guy is simply AWESOME. His post is educational, it addresses the problem, it even has citations! Good god!

    …It’s not that industry reps aren’t unwelcome here. But it’s best if they provide real information, no spin, and treat us like adults.

  11. InsaneNewman says:

    “It would have been open and shit…”

    So, pretty much, banks in a nutshell.

  12. Plaid Rabbit says:

    I’m a bit confused as to why people are suprised that this type of things happens. I worked at a bank, so I have a bit on the game spotting the ‘gotcha’ stuff banks do.

    But when it comes down to it, banks are in the business of making money, just like any other company. Of course they are going to look for ways to penalize you, as it’s a huge margin-rich (read: we got money and didn’t have to do anything for it) income source.

    At least in this situation, it makes sense (after explainging the two-balance system, that is). Just like you said above – don’t overspend, don’t fuck with the float, and take some responsibility.

    Or, if you really hate it, don’t use the bank if you think your time running and getting money orders or paying in cash is less than the cost of the potential overdrafts. I’ve got lots of friends who do that, and they seem to do just fine.

  13. olegna says:

    “banks are in the business of making money, just like any other company”

    And banks have the largest profit margin of any other business, especially compare to each bank’s market share.

    Legislation has helped the banking sector, too. The 1999 Gram-Leach-Bliley Act repealed restrictions and allowed banks to become insurance companies and brokerage houses in addition to commercial banks.

    The banks’ increasing dependence on risk-based pricing (read: 32% APRs targeting college freshmen) has given banks more than enough money to cover bad loans and earn the largest profit margins of any company on the planet.

    The Bankruptcy Reform Bill was clearly a measure to deal with the banking sector’s ability to engage in predatory unsecured loans, which, if you haven’t noticed has created some of the worst consumer savings rates in US history.

    My family business makes, like 5% profit on an average year. On a rare good year, when overhead is covered early and sales are strong, 15% profit. Fifteen percent profit for a bank would be a horrible year. So I don’t think it’s fair to compare Citicorp to mom and pop, especially considering that mom and pop can’t afford to buy legislation that helps them earn larger profits and consolidate into various sectors under one umbrella.

    I agree, however, that consumers must act more responsibly in the topic at hand.

  14. FLConsumer says:

    Ben: Being able to see the specific holds on my MBNA credit card, I can assure you that the holds almost always stay on there longer than 24 hrs. My Wachovia credit card doesn’t show the specific holds, but does show the difference between avail. balance and actual balance. They promise they’re adding the holds to the website in the next couple of months.

  15. Laz says:

    Washington Mutual shows Available Balance and Ledger Balance online.

    If my available balance is lower than my ledger balance, it is always for the exact amount of an outstanding transaction. It is never off by some arbitrary amount.

  16. Triteon says:

    Consumerist needs more insight, like the “long answer” above, from insiders and professionals. Great post!

  17. I agree with trai_dep and Triteon. High Five to the IT guy for the FI.

    If my available balance is lower than my ledger balance, it is always for the exact amount of an outstanding transaction. It is never off by some arbitrary amount.

    I’ve only had a larger-than-the-transaction hold a couple of times. Once was from a company that said ahead of time that it was going to happen. The other was from a restaurant I no longer go to (didn’t say it would happen).

  18. tell-it-right says:

    National City Bnk, business checking account. Funds missing? Asked the branch manager to look into this with me. Perhaps I missed something? After going over my deposits/withdrawes, she turns to me and says, I know where your missing funds are but you can’t retrieve them for 2 weeks. Leave it to these small town fucking banks to screw with you money. Ohio SUCKS.