Explaining External Debits & Credit Offsets

Amy Donaghue

By: Karen Sylvester, AAP, APRP, CAMS, CRCM, NCP, Senior Director, Compliance Education

We’ve had many members ask the question when it comes to external debits, can we hold the offsetting credit?

The answer is… It depends!

Allowing account holders to send debit transactions to accounts outside of their financial institution is becoming more common despite the associated risk. And often an external debit is used to fund new accounts.

As a typical consumer these days, I have used external debits to move money between current accounts and to open a new one. A few years ago, I would have visited a branch and written a check to make these transfers, but that too posed risk for my financial institution, including the possibility of kiting. While the industry has moved to more electronic everything, it makes sense for financial institutions to allow transfers between accounts at different financial institutions. However, the risks associated with this activity can’t be ignored.

The biggest risk for any deposit is the possibility of the item being returned, whether it be a check or ACH. Either way, the financial institution may be at a loss. So, the natural question is, can your organization put a hold on the deposit or offsetting credit?

In the old days (okay, not THAT long ago) a hold on the deposit as a new account hold or simply because of the type of deposit was common practice. Before check imaging, holds could last 11 days depending on where the check was from. With the movement to check imaging, check holds are now normally no more than five days (although there could be exceptions).

When we talk about an Electronic Funds Transfer (EFT) transaction, the idea of putting a hold on the transaction is not usually part of the conversation. However, the way the EFT transaction is processed impacts whether you can put a hold on an offsetting credit. If the online platform for creating the transaction is creating balanced transactions, meaning both sides of the transaction are sent out into the ACH Network, the Receiver is receiving an incoming ACH, in which case you must follow funds availability rules set forth in the ACH Rules. If the outgoing debit is offset in your ACH File by the credit transaction, in which case what is going to the Receiver is not technically an ACH transaction (like an internal GL transaction), you can do a short hold if you make a disclosure.

In either scenario, there is the risk that the outgoing consumer debit could be returned via the ACH Network within 60 days of settlement or within two years and 95 days outside the network for authorization issues.

Before you stop the presses on this type of activity, remember there are steps you can take to mitigate your risk. While every financial institution must be aware of the risk of return for any transaction that is originated by their institution, a few restrictions go a long way. Setting limits including dollar and velocity limits is essential. Another key practice for mitigation is knowing your account holder, what is normal and understanding that this service is not for everyone.

Online Account Opening is Risk Business…

But luckily, the information you need to get ahead of it is available on-demand! Check out our Risk & Fraud in Online Account Opening webinar recording to review the risks associated with Online Account Opening and A2A Transfers and how they are often used together to commit fraud using real-life case studies. Sound Business Practice to help minimize your institution's risk and loss potential when offering these services is also addressed. Register now!