I understand that for opt out customers, we are permitted to assess a fee for a recurring debit card transaction. My question, however, relates to the authorization of the transaction itself and not fees.

If a customer opts out we will generally deny an ATM/Debit card transaction if they do not have sufficient funds for the transaction. This opens the possibility of us denying a recurring debit card transaction that would have been honored had the same merchant presented the item as an ACH debit or check.
My interpretation is that this would be a violation as we are treating a transaction differently for opt in and opt out customers.

Is anyone aware of a solution to approving recurring debit card transactions for an opt out customer?

I'm confused. Either you have an overdraft program or you don't. You can't offer one only to those who opt in. If you are denying for an opt out customer, and not denying for an opt in customer you are treating them differently and that's not allowed.

If I'm not mistaken, our recurring debit card transactions actually come through with different codes than an ATM/POS transaction. Most recurring debit card transactions don't get prior approval do they?

We have an overdraft program, and agree that we cannot treat recurring transactions differently for opt in and opt out. We also see that recurring charges have a different code.

Hence my quandry.

Our card processor claims that most debit card transactions don't get prior approval. However, my review of the card transaction histories does not sustain these findings as a merchant loses chargeback rights if they do not obtain an authorization. Which brings me full circle.

A customer opts out of one time ATM/Debit Card transactions. As a result, I do not make the overdraft prorgam available to my card network. When a merchant attempts a preauthorization on a recurring debit that would cause an overdraft, I deny the charge...I am now out of complaiance.

Which is why I'm hoping someone else has a solution that is eluding me, or are we assuming the merchant won't obtain an authorization and going with that in our written policies/procedures?

Does the request from the merchant for the authorization include the flag that indicates it's for a recurring transaction?

John - Often times they do. Here is a copy of part of the preauthorization of a recurring payment I have set up on my own card - Location: T-MOBILE RECURRING PMT 800-937-8997 WA 98006 US

It is also flagged as such in the network detail information.

If that's the case, and if you are able to treat that authorization request differently, you could do so under Reg E.

But to the question raised by crowman3, I don't think you're out of compliance if you deny a request for authorization for a recurring debit. You retained the right to deny or refuse to pay transactions that overdraw (or will overdraw) the account.

Thank you for your opinion, John. As will all courtesy pay programs, that clause is in our disclosures.
I find that I am far more concerned about compliance than I am lost fee income. Everytime BOL posts a C & D with fine, I run it into management's office screaming, "See what can happen if we cut corners!!!"

If we have a recurring payment that is coded as such and we did not offer the opt in option, can we deny the authorization and return?

Since it's not a one-time payment, I understand we can charge a fee but wasn't sure if we could return?

We changed all the opt-in customers to opt-out and do not charge for any ATM or one time POS transactions. Thus, we don't offer an opt-in decision at account opening. In our TIS disclosure (fee disclosure) we took out "ATM withdrawals" and "one time POS transactions" from the items that can produce an NSF fee.
Our system is not one that will let the transaction be declined at POS anyway............
Is there anything else we need to disclose?

Brian - this is a very interesting point you bring up and I can see your concern as well as see examiner's picking up on this too. All the recurring transactions I see are sent as an authorization, so anyone who has not opted in, and they don't have funds, we deny, we have no other option, it's either opt-in which equals approve up to their limit or no opt-in which means all authorizations (recurring or not) are denied. I went and re-read the model notice for opt in and while it doesn't say that we "will authorize" recurring transactions, it doesn't say that we won't.

Thanks for brining this up as something to ponder, I'd much rather think about this now and resolve it to myself rather than have an Examiner start poking around and come up with it and not have a well thought out reply.

You can't return it for overdraft, because it's a debit card transaction, but you may charge a fee if it's coded as a recurring transaction.

You may be able to fight it on your customer's behalf if the customer files a claim that it was unauthorized, but only if the merchant failed to obtain an authorization in a situation in which it was supposed to.

This whole discussion just confirms my belief that we were right when we completely eliminated our automated overdraft protection system and went purely "ad hoc". It has cost us in terms of debit card fee income but has prevented the operational and regulatory nightmares you folks are talking about.

By the way, I'm an ops guy by training and experience, but I seem to spend most of my time in the last couple of years on compliance. Makes me miss the good ol' (and I do mean OLD) days when I ran a proof machine and only had to make sure my debits and credits matched!