Part I
How much thought do you give to your banking? If you’re like most people, you probably don’t think about it a lot. Maybe you’re using the same bank where you opened that savings account for your birthday money when you were 12. Or maybe you just picked the bank that was closest to your home or workplace. Do you understand how your account works, how to avoid fees, what happens to your money if you die?
Not the most fun things to think about or talk about, I’ll agree. But important. And after 30 years in banking, I still don’t know it all. There are still situations that come up on a daily basis where I have to go looking for the answer. This is the first installment in a multi part series where I’ll tackle some of these issues based on the frequency in which I see these questions–and problems–on a daily basis in my own career as a Banker. The topics I will address today are:
1. How Banks Process Transactions
2. Debit Cards and Insufficient Fees
How Banks Process Transactions
Banks process transactions using either an online system or a batch system, or a combination of both. An online system means that transactions are processed in real time, meaning as they occur. So if you make a cash deposit at 10 a.m. and someone goes into the bank to cash a check you wrote to them, the deposit is available to cover the check. In the reverse scenario, if you needed that deposit to cover the check, your payee may get your check handed back to them to try again later.
In a batch system, transactions are processed overnight. In most cases, this benefits you, as banks almost always post credits (deposits) before debits (withdrawals). This means that you can make an ATM withdrawal at 10 am and a cash deposit at 11 am and when items post at the end of the day, your deposit will post first, making it available for your ATM withdrawal.
Within the “credit,” and “debit” categories, there is further detail about transaction posting order. Your bank may post your debit card transactions first and paper checks second. And dollar limits play a role as well. Some banks post from largest to smallest. This is good in that if you don’t have enough funds to cover all the items clearing on that day, your largest bill (maybe your rent or mortgage), will get paid first. The downside to that is that the largest item may eat up all your available funds and you could be assessed fees for every item that comes after.
Many banks now use a combination of online and batch processing. In most cases, this will benefit you. If, for example, you make a cash deposit at the ATM at 10 am, your bank may make that money available to you right away, so it hits the available balance in your account immediately. This can sometimes come in handy if you remember later that you meant to keep $20 from that money. You would be able to go back to the ATM and withdraw that right away.
When you open your account, your bank will give you a document, typically called the Deposit Account Agreement, that will explain the manner, and order, in which they process your transactions. It is valuable information to know if you have high levels of activity or tend to keep your account balances very close to what is needed to pay items. If you don’t have that agreement from when you opened your account, or if you’re shopping banks and would like to know how they process transactions, you can walk into your own bank, or any other bank, and ask for this document.
Debit Cards and Insufficient Fees
Debit cards and debit card transactions warrant their own conversation.
For those of you who use debit cards, and I’m going to guess that’s almost everyone, you may appreciate the convenience, and may have become aware of some of the potential problems. A debit card can make recordkeeping a little more challenging. While most debit card purchases show up immediately on your transaction history (possibly posting as “pending”), this is not always the case, so its still important to pay attention to your account activity so you don’t overdraw. Some places, like gas stations and restaurants, may authorize your card for an amount higher–or lower–than your actual purchase, as they don’t always know what the final purchase amount will be. When you swipe or insert your card at a gas terminal, the approval is made immediately, before you start pumping. In a restaurant they will process your card for the total of the food, and you may then add a tip, causing a different amount to be needed.
Online orders can also cause some confusion. If you order multiple items from an online store, they may only charge your debit card as items ship. So you have to remember that additional charges will be coming as your remaining items ship. This means knowing that some of the funds showing in your account balance are already spoken for.
The first debit cards were issued in 1978. My the mid 1980s they had become popular, and by 1998 they had exceeded check usage as a payment source. Banks quickly learned that they could make additional income on debit cards by “paying” items against insufficient funds. This means that when you swipe your debit card, the bank will authorize the payment, even though you don’t have enough to cover it–and then charge you a fee. If your bank does offer this service (often disguised as overdraft protection), they must give you the option to “opt out.” This means that you authorize them to decline the transaction when presented against insufficient funds. Although it may cause some minor embarrassment when this happens to you in a store, you get to walk away without having incurred any fees. You can decide if it’s worth it to pay the fee (you’re out late at night and need gas) or have the transaction declined.
Other areas where larger (and longer) “holds” are placed when using a debit card include hotel reservations and car rentals. This can more greatly impact you as the holds are often for longer periods of time and will affect your account balance, meaning you can’t use those funds while the transaction is pending. This could be for the entire duration of your stay, or rental.
Here are some best practices for using a debit card and avoiding fees:
–Make your decision about how to handle transactions against insufficient fees and notify your bank of your choice
–Monitor your account daily using your bank’s online banking platform and/or app
–Use a credit card when possible for larger, or more long term purchases like hotel or car reservations
–Avoid using your debit card for “subscription” services like netflix, gyms, or amazon as its difficult to remember when these items will hit your account and are often the cause of overdrafts
Do you have a question about Transaction Processing, Debit Cards, or Insufficient Funds Fees? Ask Me!
Be on the lookout for my next installment of Banking Questions!
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