What is a daylight overdraft?

A daylight overdraft refers specifically to a negative funds position that is resolved within the same business day. This concept is particularly relevant in banking and payment processing, where a financial institution allows a customer to temporarily have an account balance that falls below zero, as long as the institution can manage and recover from that negative position by the end of the business day.

During the day, transactions may lead to a situation where the available balance dips into negative territory. Many financial institutions and payment systems recognize this as a part of normal operations, allowing businesses to process transactions smoothly without waiting for all funds to be cleared or transferred in real-time. Once the business day concludes, the negative balance must be corrected, and any overdraft must be settled by the end of the day to prevent further financial implications and ensure liquidity.

This differentiates it from other options. For instance, a negative funds position cleared the next day would imply a carryover of the negative balance, which does not align with the daylight overdraft definition. Excess funds over a day's transaction are more indicative of a surplus rather than a deficit. An account with insufficient balance may encompass various scenarios but does not specifically capture the nature of a daylight overdraft.