This could fit in a few forums; please move to a more appropriate one if needed.

I’m sorry this is so long; I didn’t want to leave out any details that seemed pertinent. I really appreciate the time any of you put in to reading and responding to this. I thought maybe posting in segments might be easier to digest...

Background: During our last exam, the FDIC asked us to consider offering more alternatives to our Overdraft Protection Program. At the time, we already offered a less expensive transfer service wherein a money market or savings account could be linked to a checking account. We decided to expand on this service and added HELOCs as an option to connect with a checking account last year. This addition to transfer options has been going perfectly since implementation. We are now working on adding credit cards to the list of options; however, during testing we have encountered a problem.

Problem: Because we don’t service our own credit cards, the two interfaces (credit card and checking account) only communicate once a day. At that time, the checking account will note the balance of the credit card and retain it as the maximum amount that the checking account can overdraw, with the assumption that at the end of the day, the negative balance will be covered via an automatic transfer from the credit card to the checking account. Because of the once a day communication, there is a great possibility that a credit card transaction could occur after the communication but before the end of the day. The checking account would have retained the higher credit card balance as the maximum amount the account could overdraft, and then, if the checking account is overdrawn by the maximum amount, the transfer would occur at the end of the day and draw the balance negative.

Example: Credit Card Balance: $500; Checking Account Balance: $100
(Checking Account stores $500 as the maximum amount the account can overdraw that day)
Credit Card Transaction: -$450 = Credit Card Balance: $50
$500 Check Posts to Checking Account = Checking Balance: -$400
(Check is paid that night based on the Transfer Amount recorded)
End of processing (~midnight):
$400 is automatically transferred from the Credit Card to the Checking account
Credit Card balance: -$350; Checking Balance: $0

In another test, we closed the credit card before the end of the day and the transfer still occurred – drawing the closed card negative.

Analysis: To Compliance, this seems like too big of a risk to take on, especially to satisfy an FDIC suggestion that we have already satisfied by adding HELOCs. Our first reaction was our credits cards absolutely cannot be overdrawn. The suggested fix from the project leaders for this issue is force posting the negative balance on the credit card back to the checking account the following morning. This would happen regardless of what Overdraft Limit the checking account is assigned (our overdraft limits fluctuate daily based on deposit and transaction history, amount other factors). The compliance issue here is the OD fees will be much higher than the interest in most cases. And, we’re putting a customer in a debt that we already determined was too high for them. The project leaders suggested “considering” waiving all fees incurred by this situation.


Conclusion: We brought this all to our Risk Officer, and were kind of surprised to find that he thought the risk was low enough for us to continue. He also pointed out that other banks offer this product and, because it’s rare for a mid-sized bank to service their own credit cards, they are most likely working with the same issue.

So, I’m really hoping some of you are from said other banks and can explain to me how you have handled this situation. Also, knowing there’s a high chance that the above-described situation will occur, any opinions on us going through with this project are welcome. Thank you!

Bump. I'm hoping those who are in today are bored enough to help out on this.

Abridged version: proposed alterative option for overdraft protection program: add credit cards to the list of options as a transfer account connected to a checking account. Auto-transfer occurs after processing from the credit card to the checking account if the latter is overdrawn. Problem: systems aren't in real time, so there is a very good chance that the credit card could be overdrawn if the communication occurs before a large credit card purchase or if the credit card gets closed between communication and auto-transfer.

Is the risk worth it? Is there anyone out there with a similar setup that can provide some insight? Thank you!

Not really sure what you are asking. Only you know your customer base and can judge the risk based on your credit card underwriting criteria. How many of your credit card holders currently overdraw their checking account anyway???