Debit card

A debit card is an ISO 7810 card which physically resembles a credit card, and, like a credit card, is used as an alternative to cash when making purchases. However, when purchases are made with a debit card, the funds are withdrawn directly from the purchaser's current/checking or savings account at a bank or credit union. Some companies, such as Visa refer to their branded debit cards as check cards.

Types of debit card

Although many debit cards are of the Visa or MasterCard brand, there are many other types of debit card, each accepted only within a particular country or region, for example Switch (now: Maestro) and Solo in the United Kingdom, Carte Bleue in France, Laser in Ireland, and "EC electronic cash" (formerly Eurocheque) in Germany. The need for cross-border compatibility and the advent of the euro recently led to many of these card networks (such as Switzerland's "EC direkt", Austria's "Bankomatkasse" and Switch in the United Kingdom) being rebranded with the internationally recognised Maestro logo, which is part of the MasterCard brand. Some debit cards are dual branded with the logo of the (former) national card as well as Maestro (e.g. EC cards in Germany, Laser cards in Ireland, Switch and Solo in the UK, Pinpas cards in the Netherlands, Bancontact cards in Belgium, etc.).

Banks in France charge annual fees for debit cards (despite card payments being very cost efficient for the banks), yet they do not charge personal customers for chequebooks or processing cheques (despite cheques being very costly for the banks). This imbalance most probably dates from the unilateral introduction in France of Chip and PIN debit cards in the early 1990s, when the cost of this technology was much higher than it is now. Credit cards of the type found in the United Kingdom and United States are unusual in France and the closest equivalent is the deferred debit card, which operates like a normal debit card, except that all purchase transactions are postponed until the end of the month, thereby giving the customer between 1 and 31 days of interest-free credit. The annual fee for a deferred debit card is around €10 more than for one with immediate debit. Most French debit cards are branded with the Carte Bleue logo, which assures acceptance throughout France. Most card holders choose to pay around €5 more in their annual fee to additionally have a Visa or a MasterCard logo on their Carte Bleue, so that the card is accepted internationally. A Carte Bleue without a Visa or a MasterCard logo is often known as a "Carte Bleue Nationale" and a Carte Bleue with a Visa or a MasterCard logo is often known as a "Carte Bleue Internationale". Many smaller merchants in France refuse to accept debit cards for transactions under €15.25 (equivalent to 100 French Francs) because of the minimum fee charged by merchants' banks per transaction. Merchants in France do not differentiate between debit and credit cards, and so both have equal acceptance.

In the United Kingdom, banks started to issue debit cards in the late 1980s in a bid to reduce the number of cheques being used at the point of sale, which are costly for the banks to process. As in most countries, fees paid by merchants in the United Kingdom to accept credit cards are a percentage of the transaction amount, which funds card holders' interest-free credit periods as well as incentive schemes such as points, airmiles or cashback. On the contrary, debit cards do not usually have these characteristics, and so the fee for merchants to accept debit cards is a low fixed amount, regardless of transaction amount. This means it is cheaper for a merchant to accept a debit card for a large amount and to accept a credit card for a small amount. Although merchants won the right through The Credit Cards (Price Discrimination) Order 1990 to charge customers different prices according to the payment method, few merchants in the UK charge less for payment by debit card than by credit card, the most notable exceptions being budget airlines, travel agents and IKEA. Debit cards in the UK lack the advantages offered to holders of UK-issued credit cards, such as free incentives (points, airmiles, cashback etc), interest-free credit and protection against defaulting merchants under Section 75 of the Consumer Credit Act 1974. Despite these disadvantages of debit cards over credit cards, many people in the UK prefer paying with debit cards rather than credit cards, often because they fear that using credit cards will result in accumulation of unmanageable debts. Almost all establishments in the United Kingdom that accept credit cards also accept debit cards (although not always Solo and Visa Electron), but a minority of merchants, for cost reasons, accept debit cards and not credit cards (for example the Post Office).

In Germany and Belgium, many merchants, including most supermarkets, do not accept credit cards because of the higher fees charged by their banks. However, most merchants usually accept debit cards, because the fees for accepting them are much lower, for example in Germany 0.3% with a minimum of €0.08.

In Poland, local debit cards, such as PolCard, have become largely substituted with international ones, such as Visa, MasterCard, or the unembossed Visa Electron or Maestro. Most banks in Poland block Internet and MOTO transactions with unembossed cards, requiring the customer to buy an embossed card or a card for Internet/MOTO transactions only. Recently however the number of banks which do not block MOTOIO transactions on unemossed cards is increasing.

Online and offline debit cards

There are currently two ways that debit card transactions are processed: online debit cards and offline debit cards. Online debit cards require electronic authorization of every transaction and the debits are reflected in the user’s account immediately. The transaction may be additionally secured with the personal identification number (PIN) authentication system and some online cards require such authentication for every transaction, essentially becoming enhanced automatic teller machine (ATM) cards. One difficulty in using online debit cards is the necessity of an electronic authorization device at the point of sale (POS) and sometimes also a separate keypad to enter the PIN, although this is becoming commonplace for all card transactions in many countries. Overall, the online debit card is generally viewed as superior to the offline debit card because of its more secure authentication system and live status, which alleviates problems with processing lag on transactions that may have been forgotten or not authorized by the owner of the card. Banks in some countries, such as Canada and Brazil, only issue online debit cards.

Offline debit cards have the logos of major credit cards (e.g. Visa or MasterCard) or major debit cards (e.g. Maestro) and are used at point of sale like a credit card. This type of debit card may be subject to a daily limit, as well as a maximum limit equal to the amount currently deposited in the current/checking account from which it draws funds. Offline debit cards in some countries are not compatible with the PIN system, in which case they can be used with a forged signature, since users are rarely required to present identification. Transactions conducted with offline debit cards usually require 2-3 days to be reflected on users’ account balances. This type of debit card is similar to a secured credit card.

Many debit cards are actually capable of accomplishing both types of transactions, depending on the availability of proper equipment at the POS.

In the United Kingdom, Solo and Visa Electron are examples of online debit cards, which are typically issued by banks to customers whom the bank does not want to go overdrawn under any circumstances, for example under-18s.

"Credit" and "debit" purchases

In some countries (e.g. the United States), terminals allow the user of a Visa or MasterCard debit card to choose whether the purchase is a "credit" or "debit" purchase. In a "credit" purchase, the user signs a charge slip (as in a traditional credit card purchase); in a "debit" purchase, the user enters a PIN. In either case, the user's bank account is debited.

In some countries and with some merchant service organisations (as of this writing), a "credit" transaction is without cost to the purchaser beyond the face value of the transaction, while a small fee may be charged for "debit" transactions (although it is often absorbed by the retailer.) Other differences are that "debit" purchasers may opt to withdraw cash in addition to the amount of the debit purchase (if the merchant supports that functionality); also, from the merchant's standpoint, the merchant pays lower fees on a "debit" transaction as compared to "credit" transactions.

The fees charged to merchants on "credit" debit card purchases -- and the lack of fees charged merchants for processing "debit" debit card purchases and paper checks -- have prompted some major merchants to file lawsuits against debit-card transaction processors such as Visa and MasterCard. Visa and MasterCard recently agreed to settle the largest of these lawsuits and agreed to settlements of billions of dollars.

Many consumers prefer "credit" transactions because of the lack of a fee charged to the consumer/purchaser -- and many terminals at PIN-accepting merchant locations now make the "credit" function more difficult to access. Also, in the case of a benign or malicious error by the merchant and/or bank, a debit transaction may cause more serious problems (e.g. money not accessible; overdrawn account) than in the case of a credit or charge card transaction (e.g. credit not accessible; over credit limit).

To the consumer, a debit transaction is perceived as occurring in real-time; i.e. the money is withdrawn from their account immediately following the authorization request from the merchant, which in some countries, is the case when making a PIN-based purchase. However, when a purchase is made using the "credit" option, the transaction places an authorization hold on the customer's account which then may take several days to be reconciled and hard posted to the customer's account. This is in contrast to a typical credit card or charge card transaction which can have a lag time of a few days before the transaction is posted to the account, and many days to a month or more before the consumer makes repayment with actual money.

Chip and PIN

In many countries, the use of PIN validated transactions with smartcard chip readers is being strongly encouraged by the banks as a method of reducing cloned-card fraud; to the extent that cardholder-present transactions will soon not be possible in these countries without knowledge of a PIN, and the POS terminal reading the smart card chip on the card.

Cards for mail, telephone and Internet use only

Special pre-paid Visa cards for mail, telephone (MOTO) and Internet use only are made available by a small number of banks. They are sometimes called "virtual Visa cards", although they usually do exist in the form of plastic. Such cards can be used whenever the remote store accepts Visa cards. Before making the transaction, the customer transfers the required amount of money from his main account to the card's sub-account using the bank's website or the telephone. Next, the customer gives the card number and the CVV2 code to the merchant, who authorizes the transaction electronically, as with a regular Visa card. If there is enough money on the sub-account, the bank grants the authorization and locks the adequate amount on the sub-account.

Such a card prevents fraud by a card number thief even if the card is not blocked, because the customer normally does not store any money on the sub-account and fraudulent transactions do not get authorized by the bank. For extra security, the CVV2 code is not printed on the card but rather sent separately to the customer in a secured envelope.

The bank also rejects local transactions, that is ones that are not made over the Internet, mail or telephone. However, some merchants use software incompatible with Visa regulations and send authorization requests that wrongly tell the bank that the transaction is not a MOTO/Internet one, in which case the bank rejects the request. Additionally, some merchants do not use electronic authorization at all, in which case the transaction cannot be completed as well. For these two reasons the card is unusable with a small minority of Internet, telephone and postal stores.

Popularity

Debit cards and secured credit cards are popular among college students who have not yet established a credit history, or the "unbanked". Debit cards may also be used by expatriated workers to send money home to their "unbanked" families holding an affiliated debit card.

The Canadian experience

In Canada, the debit card is sometimes referred to as a "bank card". It is simply a bank client card, issued by a bank, providing client access to funds and other bank account transactions, such as transferring funds, checking balances, paying bills, etc, as well as point of purchase transactions connected on the Interac network. Since its national launch in 1994, Interac Direct Payment has become so widespread that, since 2001, more transactions in Canada were completed using debit cards than cash. This popularity may be partially attributable to two main factors: the convenience and safety of not having to carry cash (or at least, large amounts of cash) and the prevalence and availability of "bank machines" (automated teller machine or "ATM", or automated bank machine or "ABM") on the network. However, Canadians tend to use Interac more often than ABMs. Almost every merchant, restaurant, gas station, or service provider is equipped with Interac technology. Interac is a small hand held device located at the cash of every business. The customer swipes his card, enters his PIN, and accepts the purchase. The charges are immediately withdrawn from the customer's account.

Debit cards may be considered similar to stored-value cards in that they represent a finite amount of money owed by the card issuer to the holder. They are different in that stored-value cards are generally anonymous and are only usable at the issuer, while debit cards are generally associated with an individual's bank account and can be used anywhere on the Interac network. Debit cards usually offer some protection against loss, theft, or unauthorized use while stored-value cards usually do not.

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