FlexATM Regulatory Compliance
Federal Reserve rules implemented in 2010 were designed to provide debit and ATM card users options when it came to how transactions are approved and how their bank treats account overdrafts.
An overdraft is triggered by making a purchase (or ATM withdrawal) when funds are not available in the cardholder’s bank account to pay for the transaction. The bank can provide a service to temporarily cover this overdraft, for a fee. The fee can be either a flat amount for overdraft protection per incident, or a type of “transfer fee” when the overdrawn account is linked to a secondary account (typically savings).
Overdraft Protection background.
Historically, many cardholders were automatically enrolled into an overdraft protection program by their financial institution. The 2010 Federal Reserve rule changes required that each cardholder must “opt in” for any type of overdraft protection offered by their bank. If the cardholder does not opt in for overdraft protection, their debit card and ATM transaction will be declined if they do not have enough money in their account. While this ensures that the cardholder will not be subject to overdraft fees, they are required to be more diligent with their personal financial management.
The removal of automatic enrollment of overdraft protection – and the associated fee income it generates – forces financial institutions to rethink their use of static positive balance files. A positive balance file (PBF) is an extract of all account balances, which is transmitted to their debit card vendor at least once per day. The card vendor approves/denies incoming debit and ATM card transactions based on this balance file. Unfortunately, a PBF cannot be updated as other “non card” transactions occur (checks cashed at the teller window, an internet banking bill payment, wire transfer, etc.). This creates numerous opportunities for the cardholder to overdraw his/her account and not be subject to overdraft fees. Banks counter this behavior by generating multiple PBFs in a given day to collect other activities which affect account balances. Some financial intuitions generate a PBF as frequently as four times each day. FlexATM real time processing eliminates the resources allocated to continual balance file updates and management of cardholders who understand the limitations of PBF debit card authorizations.
ODP processing exceptions.
The Federal Reserve rule changes did make an exception for automatic bill payments. Because many cardholders may tie recurring bill payments to their debit card, banks are allowed to continue providing overdraft protection for this subset of transactions, even if the cardholder has not opted in. This is designed to better protect cardholders who would suffer substantially should a mortgage payment or utility bill be denied for insufficient funds. As a result, debit card authorizations performed by FlexATM must rely not only on the available balance in a checking or savings account, but be able to discern between a standard transaction and what is defined as a “recurring transaction”. This proper handling of recurring transactions and use of overdraft protection funds when appropriate ensures regulatory compliance for the financial intuition and better customer satisfaction for its cardholders.
Regulatory rules even include simple balance inquiries performed at the ATM – while a cardholder may have opted in for overdraft protection, a balance inquiry cannot include these additional funds on a printed receipt. The Federal Reserve does not allow overdraft funds to be included on any balance inquiry receipt for the customer – this can be viewed as encouraging the cardholder to spend more than their true available balance and create an overdraft protection situation (and fee income for the bank). FlexATM and each partner debit card network certify not only this compliance aspect but allow the financial institution to determine that appropriate balance information it chooses to print onto receipts (available balance, current balance, both).