I'm hoping somebody can help me understand something a little better. In the June 2019 Compliance Supervisory Highlights from FDIC, they discussed the issue of overdraft fees being charged on signature based debit card transactions when the amount was authorized on a positive balance but actually cleared an account a few days later on a negative balance. In working with our Core processor to come up with a solution within the system that we could set to not charge a fee in these situations, we discovered that what we thought were signature based transactions, were actually being ran as PIN based transactions (even though a PIN is not being used). For example: when we tested the setup, we made a purchase from a local restaurant thru their mobile app. A PIN was not used and while we would normally have to sign when the food was delivered, they quit asking for a signature because of Covid-19. When we called and spoke with the restaurant, they told us that they are running all of these transactions as PIN based transactions.

1. Can somebody please explain to me the difference in a signature based transaction and a PIN based transaction, when it seems to me that they are processed in the same manner?

2. If a transaction is considered a PIN based transaction, is authorized on a positive balance, then clears on a negative balance - then wouldn't we NOT want an OD fee to be charged? What would be the difference between the two transactions? If FDIC believes it is wrong on a signature based transaction, then couldn't we say it is wrong on a PIN based transaction also?

We are currently trying to get our system to work correctly and make sure we aren't charging a fee if we shouldn't. And I have to add - signature based and PIN based transactions are totally throwing me for a loop! I can't imagine why we would think the customer would understand the difference.....

Any help would be greatly appreciated!

Thanks!

Fewer and fewer "signature based" transactions are signed by cardholders these days, since most of the major networks have been allowing retailers to skip getting signatures, especially on lesser amounts, for many months -- long before we (or the Chinese) ever heard of the novel coronavirus).

"Signature based" really means that the transaction is authorized but not settled until a couple of days later because it's run through a credit card network such as MC, Visa, Amex, etc. The retailer has to "batch out" the transactions to submit them, sometimes adjusting them up for added tips, etc.

"PIN based" for this purpose really refers to transactions that are authorized and processed at essentially the same time (like an ATM transaction). However, even these transactions are sometimes held up because they settle via multiple networks.

The FDIC is working with the fuzzy concept of signature-based transactions that don't clear an account for a couple of days vs. pin-based transactions that theoretically post the same business day they are authorized. I might add that the CFPB works with that concept, too.

Thanks John for the explanation. That does make a little more sense to me now!

So, for the sake of whether an OD fee should be charged on an item that is authorized on a positive balance and then clears on a negative balance, if a PIN based transaction is not immediate, should we be charging a fee? For the example I gave above, we tested this by ordering lunch (thinking it was a signature based transaction only to find out it was a PIN based after the fact) and then after the authorization, we made an ATM withdraw and overdrew the account. The lunch transaction did not actually clear the account until the following morning, which then caused a fee to be charged because the account was now overdrawn.

I know the supervisory highlight only discusses signature based transactions, but talking with my eBranch manager, he stated that of all of the debit card transactions that were processed, the majority of them are coming in as PIN based transactions these days. And they don't all post immediately.

Thanks again!

First: The 2019 Supervisory Highlights applies to institutions that charge overdraft fees based on the "available balance" method without appropriately disclosing that method. Does your institution charge an overdraft based on available or ledger balance?

Second: Do you offer a courtesy overdraft program that requires an opt-in. If there is no opt-in we can change for these transactions regardless of what method we use.

Third: Whether PIN-based or signature based, the requirements regarding fees are the same. The highlights focus on signature-based transactions include authorization holds which may not fall off the account immediately. In the example the FDIC cites here's what happened and why it's a problem:

7/1/20 Account balance - $50.00
7/2/20 $30.00 purchase - $20.00 (authorization hold stays on the account five days
7/3/20 $30.00 purchase - ($10.00) (authorization hold stays on the account five days
7/6/20 First purchase settles - ($40.00) (authorization hold has not dropped off so the available balance still shows negative)
7/6/20 Fee charged - ($75.00)
7/7/20 first authorization hold falls off - ($45.00)
7/7/20 second purchase settles - ($75.00)
7/7/20 Fee charged - ($110.00)
7/8/20 second authorization hold falls off ($80.00)

Instead of one fee being charged, they are charged two.

Now - Same scenario using ledger balance method. (Note I have two running balances for this one available vs. ledger)

7/1/20 Account balance $50.00 / $50.00
7/2/20 $30.00 purchase $20.00 / $50.00 (Available balance is reduced by hold - ledger doesn't change until the charge settles)
7/3/20 $30.00 purchase ($10.00) / $50.00 (Available balance is reduced by hold - ledger doesn't change until the charge settles)
7/6/20 First purchase settles ($40.00) / $20.00
7/7/20 First authorization hold falls off ($10.00) / $20.00
7/7/20 Second purchase settles ($40.00) / ($10.00)
7/7/20 Fee charged ($75.00) / ($45.00)
7/8/20 Second authorization hold falls off ($45.00) / ($45.00)

With the ledger method, even though the available balance shows negative due to the authorization holds, we didn't charge a fee because the ledger balance was positive when the first transaction posted. The available balance method can also create issues with travel charges such as hotels and rentals cars. The merchant will place an authorization hold for more than the actual transaction that will settle to cover room damage, failure to timely return the car, etc. The authorization could make the available balance negative, but the actual charge that is less does not create an overdraft. If we are going to charged an overdraft fee on that negative available balance, we need to properly disclose that fact. If we use the ledger balance method, this should be an issue because the larger amount will never settle against the ledger balance.

Thanks Brian! Yes...we do offer an ODP program and we use the available balance method. I think the confusion is all because of the "signature" and "PIN" based description. Our Core processor provided an update that we could put into effect so the charge would not happen if authorized on a positive balance, however, it is only set up to work on signature based transactions. If PIN transactions are taking longer to clear, and causes a hold on the account (which they are), then we need for this update to work on those transactions also. And they currently are not.

I appreciate you and John's help!

I've been out of Deposit Operations for a few years since I've been a consultant. I'm used to transactions that are routed via PIN network (e.g. STAR, NYCE, Jeannie, Maestro, PLUS) to post the same business day they are initiated. At the longest, a PIN charge Friday night after cutoff would post Monday (or Tuesday if Monday is a Fed holiday.)

Also note, the absence of a signature does not automatically mean that a transaction is routed down a PIN network. V/MC eliminated the requirement to obtain signatures for in-person card present purchases in April 2018 so the FDIC's language is a little out of date. The timing difference the Supervisory Highlights identifies would be better classified this way:


Signature-based Purchase:
Dual message system network processed (V/MC)
Transaction settles when merchant balances their card terminal

PIN-based Purchase
Single message system network processed (PIN network)
Transactions are automatically batched at the conclusion of each business day

Some Single message networks offer "PINless debits" which are not routed through VISA/MC (interchange fees are cheaper for the merchant) but these are primarily for online payment services (utilities, PayPal, Doctor offices, etc.) I'd recommend checking with your debit card processor who can provide you with more information on the routing of transactions through the various networks and what types of transactions are supported.

With your lunch example, I'd also recommend verifying what your network cutoff time is. If the purchase was initiated after a cutoff time and was routed down a PIN network, posting the next day would still be the correct timeframe. (e.g not late).

So....if the lunch transaction was initiated after a cutoff time and that is why it didn't post until the next day, then are you saying it would be okay to charge an overdraft fee? Even though it was authorized on a positive balance the day before?

I feel like I having something straight in my head only for something else to happen to totally make me question myself again....ugh!

I appreciate all of your help Brian!

Thanks

Also, I just got off the phone with my eBranch manager and he stated our cutoff time is 3:00 pm. This transaction was initiated at 11:30 am on 7/9. The transmission date and time for the transaction shows 1:47 pm on 7/10. It posted to the account on 7/10. So it wasn't initiated after the cutoff time on the 9th but didn't clear the account until the following day.

Your description of that transaction sure sounds like it was routed via VISA/MC. Do you see a separate purchase authorization at 11:30 on 7/9 followed by a completion on 7/10?

Transactions routed via a PIN-based or single message network don't have a separate preauthorization/completion. They have just one entry on the card history- when the transaction was authorized.

We can only hope that the improved (read: same-day) payments initiative the Fed is working on will result in transactions routed via credit card networks (VISA, Mastercard, Amex, Discover, etc.) posting on a same-day basis (or at least next day for transactions after cut-off) in a couple years.

Brian - our system has a couple of different screens that I am looking at.

Keep in mind the transaction was actually completed by me on 7/9/2020 at 11:38 AM.

The transaction detail screen lists the following information:
Activity Date - 7/10/2020
Activity Time - 9:47:26 AM
Pot Date - 7/10/2020
Effective Date - 7/10/2020

The card transaction screen lists the following information:
Settlement Date - 7/10/2020
Transaction Date/Time - 7/10/2020/1:47:26 PM
Activity Date - 7/10/2020
Local Date/Time - 7/9/2020/9:47:40 AM

So confusing!!

We do have a case open with our Core processor to try and get a better understanding of things and to figure out how to proceed with the OD fees.

John - Lets hope so!!