A memo debit is a temporary deduction from a bank account. The bank uses memo debits to indicate that a debit is pending against the account, but the transaction has not yet fully processed. These temporary transactions are often used in scenarios where a merchant needs to check if sufficient funds are available in the account before finalizing a transaction.
For example, when you use a debit card at a gas station, the station might initiate a memo debit to verify that your account has enough funds to cover the maximum possible cost of the fuel you might purchase. The actual cost of the fuel you purchase may be less than this maximum amount, and the difference between the memo debit and the actual cost would be released back to your account once the actual transaction posts.
It’s worth noting that while a memo debit is pending, it reduces the available balance in the account, even though it has not officially posted. If the available balance in the account becomes less than the amount of the memo debit due to other transactions posting to the account, this could lead to overdraft fees or declined transactions.
Example of a Memo Debit
Let’s say you go to a hotel and use your debit card to pay for your stay. Here’s how the memo debit process might work:
- When you check-in, the hotel may place a memo debit on your account for the estimated cost of your stay plus some additional amount for potential incidental charges (like room service or minibar usage). For example, if your room costs $200 per night for 2 nights and the hotel estimates $100 for incidentals, they might place a memo debit for $500.
- This memo debit reduces your available balance by $500, even though the actual transaction has not posted yet.
- When you check out two days later, let’s say your actual charges come to $450 ($400 for the room and $50 for room service). At this point, the hotel will finalize the transaction for the actual amount.
- The memo debit of $500 will be replaced by the actual debit of $450, and the difference of $50 will be released back into your account.
This is a simplified example and actual practices can vary. Some hotels, for example, may place memo debits daily rather than for the entire stay at once. The important thing is to be aware that using a debit card can result in memo debits that temporarily reduce your available balance.