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Why Do Consumers Accept Debit Card Abuse?

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This blog normally steers clear of the consumer finance space, except when it is amusing or has macroeconomic effects. But once in a while I cannot contain myself.

Why does anyone have a debit card? I am deadly serious about this question. Not long ago, I switched banks, going from one end of the spectrum to the other. I had been with US Trust, which has great service if you are doing anything complicated and can live with their 9-5 schedule, but costly if your needs are more plain vanilla. They were bought by Bank of America, the good people all left, and I figured if I was going to be with a regular retail bank, I might as well go with one that was cheap, had 24/7 service and good branch hours, and I wound up at Commerce Bank, now TD Bank.

Commerce tried foisting a debit card on me. It took some doing to get an ATM card instead. I do not know why people use debit cards, so perhaps readers can explain this mystery to me.

If your wallet is stolen, someone can pretty quickly drain your account and even go into overdraft. Unlike credit cards, where your losses are limited, you have no recourse. Having had my wallet taken more often than I care to recount and having had the perps run up truly impressive credit charges charges in a mere 10 minutes the last instance (they seem to be getting more savvy over time), the last thing I would want to carry is a debit card. The ATM pin affords you some protection; you have none with a debit card.

Now that would seem to be a sufficient reason not to carry a debit card. Then we have the fact that banks charge particularly aggressive over-limit fees on debit cards. From the New York Times:

When Peter Means returned to graduate school after a career as a civil servant, he turned to a debit card to help him spend his money more carefully.

Peter Means’s bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward.

So he was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks — and a $34 fee. He got the $6.50 student discount at the movie theater — but no discount on the $34 fee. He paid $6.76 at Lowe’s for screws — and yet another $34 fee. All told, he owed $238 in extra charges for just a day’s worth of activity.

Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge…

This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer’s balance.

In fact, banks now make more covering overdrafts than they do on penalty fees from credit cards.

I don’t get it. Debit cards are inferior to ATM cards (less security) and in some cases, higher fees (at my bank, if you have a line of credit established, you do not incur an overdraft charge if you go into the credit line). So why does anyone have a debit card? Is this a perverse example of behavioral economics, where the bank offers the worst “opt in” alternative (debit card) and consumers have to take the energy to opt out and get the better products?

And these debit cards, which ten years ago were deemed to be losers for the industry, have been redesigned into cash cows:

Debit has essentially changed into a stealth form of credit, according to critics like him, and three quarters of the nation’s largest banks, except for a few like Citigroup and INGDirect, automatically cover debit and A.T.M. overdrafts.

Although regulators have warned of abuses since at least 2001, they have done little to curb the explosive growth of overdraft fees. But as a consumer outcry grows, the practice is under attack, and regulators plan to introduce new protections before year’s end. The proposals do not seek to ban overdraft fees altogether. Rather, regulators and lawmakers say they hope to curb abuses and make the fees more fair.

Yves here. But we are already getting the usual defenses:

Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date. Ultimately, they add, consumers have responsibility for their own finances.

“Everyone should know how much they have in their account and manage their funds well to avoid those fees,” said Scott Talbott, chief lobbyist at the Financial Services Roundtable, an advocacy group for large financial institutions.

Yves here. I bet you he does not keep a running balance on his checking account. Back to the story:

Some experts warn that a sharp reduction in overdraft fees could put weakened financial institutions out of business.

Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney’s legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.

Yves here. Garbage in, garbage out. Does not distinguish between debit card overdrafts and check overdrafts. The two are mingled. Back to the story:

For years, banks had covered good customers who bounced occasional checks, and for a while they did so with debit cards, too. William H. Strunk, a banking consultant, devised a program in 1994 that would let banks and credit unions provide overdraft coverage for every customer — and charge consumers for each transgression.

“You are doing them a favor here,” said Mr. Strunk, adding that overdraft services saved consumers from paying merchant fees on bounced checks.

Yves here. Favor? Banks are not in the favor business. This is an insult to the reader’s intelligence. Here is a key bit:

But many of the nation’s banks have found that overdraft fees are easy money. According to a 2008 F.D.I.C. study, 41 percent of United States banks have automated overdraft programs; among large banks, the figure was 77 percent. Banks now cover two overdrafts for every one they reject…

Most of the overdraft fees are drawn from a small pool of consumers. Ninety-three percent of all overdraft charges come from 14 percent of bank customers who exceeded their balances five times or more in a year, the F.D.I.C. found in its survey. Recurrent overdrafts are also more common among lower-income consumers, the study said.

Just wait. The next argument in defense of these practices will be that it is cheaper than payday lending.

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50 comments

  1. Ping

    I guess I’m from the old school that it was personal responsibility and a legal requirment to know how much you had in your checking account before you made a spending commitment on that account. Writing a bad check..nowadays ‘overdraft’ was serious business.. against the law. Its crazy to have one’s savings account and checking account linked (overdraft protection) thus exposure to having a savings account drained from a stolen debit card also….

  2. ndk

    So why does anyone have a debit card?…

    And these debit cards, which ten years ago were deemed to be losers for the industry, have been redesigned into cash cows:

    Question posed, question answered.

    That is because 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.

    Even if somewhat confounded, that’s still a preposterously high figure. Sick banks can justify the predation on grounds that they’re really hungry and would prefer to eat customers than either eat taxpayer dollars or die. That’s sick, indeed.

    Just wait. The next argument in defense of these practices will be that it is cheaper than payday lending.

    At least that argument will be valid, unlike the ones laid out above. :D

    FWIW, most of my tithes are foreign currency transactions, which between the 1% upfront and the exchange rate gouge are unpleasant enough, and I do not carry a debit card.

    1. Pat

      “Just wait. The next argument in defense of these practices will be that it is cheaper than payday lending.

      At least that argument will be valid, unlike the ones laid out above.”

      Actually that argument is not valid. The FDIC report issued last year clearly stated that overdraft programs were more expensive than payday loans. http://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_FinalTOC.pdf In fact, you can trace the beginning of storefront payday lenders back to the advent of high overdraft fees. Banks and credit unions created the market niche that payday lenders jumped into.

  3. mp

    I have a question.

    The man’s deposit had “…taken days to clear.” Why?

    We have electronic clearing now. I’d like to know what kind of item(s) he deposited. In most cases, he should have had the money in his account overnight.

    Is his bank playing float games? Illegally?

  4. donna

    I don’t carry one, still use checks. My husband and kids use them, but I still don’t like them. We bank with credit unions, so they don’t pull as much of the fee crap on us. But the boys have both been hit with charges a couple of times, and I do worry about thefts. Fortunately our credit union is really good at tracking unusual card use and calls us very quickly if they see it, often within minutes of us making a large charge. Can’t beat their very personal service, but we have been with them over 25 years now…

  5. Robert Dudek

    I guess I’m a little confused about this issue.

    I live in Canada and my debit card functions as an ATM card (and bank card if I need to deal with a human teller). It requires a pin code to use in these contexts, as well as when purchasing goods and services.

    I only use it as an ATM and Bank card, since my VISA card gives me 1-2% moneyback for my purchases. I pay off the credit card on time and never carry a balance.

    I suppose a debit card can be of use to those who are particularly prone to carrying a heavy debt load and want to avoid this situation.

    1. ndk

      I live in Canada and my debit card functions as an ATM card (and bank card if I need to deal with a human teller). It requires a pin code to use in these contexts, as well as when purchasing goods and services.

      Robert, Interac is completely different from an American debit card in that regard. An American debit card works largely like a credit card.

      I spent quite a bit of time fiddling with one in a Canadian Tire once. It’s already technologically advanced beyond what we’ve got here, and you’re looking at chip-based approaches next. Keep on innovatin’, and if you could export a little Interac to the south of the border, we’d probably all be grateful.

    2. eurostoxx

      although the big 6 banks in Canada dont really promote the same intense competition as the thousands of US banks do, the interac (debit card system) in Canada is a direct consequence of the banks co-operating.

      And after doing a little reseach into the debit system in the US, my only thought (as a Canadian) is that you guys need to get a similar system. Dont let MasterCard and Visa take over the debit payment network… those guys already charge too much (just wait until the interchange fees are regulated!)

    3. FrancoisT

      Let’s not forget that Canada has this creature within the government belly; the Superintendent of Financial Institutions.

      Contrary to the nightmarish patchwork of flummoxing “agencies” present in the US, the Super regulates pretty much everything financial.(IIRC) So, no regulatory shopping like we have down here. The importance of this little factoid cannot be overstated….think AIG for instance.

      And, they don’t have to regularly testify in front of this abomination called Congress, where too many members seeks teevee time to fire up their base and pontificate about the sacrosanct importance of “free markets” and “private sector good, gubmint bad” meme. Which is already bad enough without having those same clowns holding the strings of the purse.

  6. Auskalo

    Dear Yves,

    I’m writing from Europe, and I could be in another galaxy (because even the names or adjectives are different, maybe: we call debit card to that from your own bank which makes payments at the moment from your account—only accepted in the country and some places abroad—; and credit cards to those Visa, Mastercard or American Express which are accepted everywhere and are charged to your account in the last day of the month), but here the reason is very simple:

    — With a credit card (EU version)you can pay at any moment in any country (Visa, Mastercard, etc.) and they will charge you at the end of the month without any charges, as far as you only pay bills. If you take money out from an ATM, they will charge you a big fee in interest and operation. So, as far as you have money in your account and you just pay bills, they are free. If you use the credit part (taking money from an ATM or paying bills without having money in your account, they charge you a lot).

    — With a debit card, your account is charged at the very moment of the transaction, without any charge at all, always. But the debit card only works IN your county.

    In both cases it is the restaurant or the shop who’s charged with a small fee (0,5% to 2%) for the operation, but never the client.

    If you take money out from an ATM of the chain of your debit card, there is not fee at all, it’s free.

    People here use the debit card for the ATM and the credit card to pay bills. That’s all. They are free as far as you have money in your account. If you don’t, the debit card doesn’t work (operations refused), the credit card works but with a big fee.

    Thanks for your blog.

    Auskalo

    1. Camillus

      Just one correction. Debit card can, of course, be also VISA or Mastercard and you can pay with them also abroad. There may be some types of cards that can be used only within one country in EU but it has nothing to do with them being credit or debit one.

    2. eh

      But the debit card only works IN your county.

      The average European has what they call an EC card, which functions as an ATM card and as a debit card, and it can most certainly be used outside the country of issue. Mine does not cost me anything — there are no charges associated with it, although I have no need for, and have never used, any sort of overdraft. One caveat: I live in a euro zone country, i.e. one that uses the euro, and I do not recall using it for payment outside of the euro zone, so I am not sure if I could or not, but I would be surprised if I could not. (Normally I use a credit card for that.) I certainly use it everyhwere as an ATM card, and by everywhere I mean all the places outside of the euro zone I have visited too, including North America. For this there can be a fee, unless I withdraw cash at a partner institution, and so far it has not been a problem to find one in each country.

      1. Marcel

        One addition. I can use my normal bank card in other, non-euro countries as well. I’ve used it in the US and recently in Iceland. You’re charged with the currency you got from the ATM and nothing more.

        I mostly use my credit card on-line and sometimes in hotels, never to pay ordinary stuff, that’s what the bank card is for. When I paid for my furniture I had to extend the limit temporarily of the amount of money I could get with it.

        So yes the European system is radically different from the US system.

  7. Tayor

    Interac is a scam. Security researchers have shown that it is not hard to hack the pin, and then you the customer are responsible for any purchases made with that card. Interac is all about shifting responsibility for stolen cards from the banks to the customers.

    After many years with an ATM card, I ended up with a debit card because the bank could not issue me a temporary replacement ATM card, only debit card, and once the temporary was a debit card, the permanent would have to be as well. The bank person lied to my face about the risks of having and losing a debit card. The bank is Bank of America, may they rot.

  8. scrilla_gorilla

    I could be mistaken, but I’m under the impression that debit cards do carry the same protections as credit cards when they are used as a Visa/MC credit card. They only lack that protection when they’re used as debit cards (with the pin).

    That said, people are just irrational about credit. Some people are scared of credit cards for no real reason. They think the credit card itself will force debt upon them against their will, and don’t seem convinced by the idea that they can simply pay off the balance every month and not carry any debt.

  9. ggm

    I’ve had my debit card number stolen and I was reimbursed (by Bank of America) for the fraudulent charges. I had to use a debit card a few years ago for my business because we were making over 100 purchases a day at the time and I couldn’t find a credit card which would allow me this number of purchases and not constantly suspend the account for suspicious activity. In my experience, the entire credit card and debit card business is a nightmare of fees, fraud, inept reps and inconvenience.

  10. vlade

    Don’t know how it works in US, but in UK there are only two major differences between debit and credit.
    The first is the obvious one – debit is debited from your account immediately, credit you pay monthly and don’t have to pay in one go.
    The second is more subtle. For purchases of over 100GBP, you get extra consumer protection with a credit card. That is, if what you bought is “not fit for purpose, not delivered” etc., you can ask for refund from your CC company (important, NOT the seller). You don’t get this protection from debit card.
    As far as for the piece of plastic – they are the same, work the same.

    In New Zeland – unless it changed in the last few years since I left – it goes even further. You can have one piece of plastic per bank, which then serves as debit card, credit card and usually you can attach one extra account (say savings no notice period) to it. At the POS (point of sale) you chose which account you wanted to pay from. At ATM you could also move money between your nominated accounts (so day2day account, credit, savings).
    PIN security which was introduced with so much brouhaha in the UK few years back was in NZ for as long as I was there (since 98).

  11. fresno dan

    I pay cash for most things – most of the time ;)
    I buy gasoline with a credit card, but I note that the credit card device defaults to debit and I have to manually input “credit” and it used to be the opposite. Maybe the future holds that I will only be able to “debit.”

  12. Brick

    Yes they work differently in different countries. Mine incurrs no charges and will just palin be rejected if you don’t have sufficient funds. It has a pin number and has nearly the same protections as a credit card. Why have the hassle of paying your credit card off at the end of the month?
    Sounds to me like Americans are getting ripped off.

  13. eh

    Why have the hassle of paying your credit card off at the end of the month?

    Funny thing about my ‘credit’ card, which is a Visa card from Deutsche Bank. It does not actually seem to be a credit card, as each month the entire balance charged is automatically deducted from my normal bank account, which is linked to my ‘credit’ card (both are at Deutsche Bank). I don’t know if there is actually an alternative — e.g. like in the US, where you can elect to pay off the entire balance, some minimum, or anything in between (of course if you don’t pay the entire balance you incur interest charges). And since I never want to carry a balance anyway, I haven’t asked. So the Visa — which is actually a gold ‘credit’ card, not a Visa debit card — works more like a debit card, except the cash is not deducted from my account until the designated day each month (I pay no interest). Which I guess gives me time to put enough money in there, and is sort of a short term credit line. I wonder what would happen if there was not enough money in my bank account to cover the ‘credit’ card charges when the day came? I’m not sure.

  14. rsm

    You ask why people use debit cards?? My debit card requires a PIN (of course!), why would I carry cash in my wallet when I do not need to, and the card is accepted *everywhere*. Here in Canada 99% of the population has one and there are zero charges for using it. It sounds that what you are given as a “debit card” is something else.

  15. Toto deVeer

    With debit cards and direct debit payments the government and banking system are trying to eliminate cash transactions and move everything to an electronic system via the bank. This is as evil as was the introduction of income tax.

    Sad to think that for our work and our money we have to go and beg at the bank every time we want it.

    This is just another way to tie you down and pluck you bare.

    Beware.

  16. David S

    In NYC & with Citibank – I have used a debit card for years…

    For me, it is an advantage…

    I do not like “float”, with a debit transaction it is applied to my account immediately and I can go to most atms and query my balance and it is accurate…

    I don’t worry about loss of card because they need my pin to do a debit transaction and for credit transaction the standard “loss of card” protections are enforced (if I report it in a timely fashion).

    Bank card transactions have an advantage over cash transactions and that is the paper trail. I am NOT doing any transactions that require anonymity, so the trail work in my benefit.

    I aggressively manage my bank accounts (and by derivative, my money), I use all of the electronic tracking means available to me… the online banking, the text messages to my phone, the atms…

    I realize the bank is a for profit institution and that they are making the profit from me… so I do my best to make any profit that they earn worthwhile for me. By using a debit card I leverage my cash so that is 100% available to me at any time and I reduce my paperwork load, which can’t be said for cash transactions.

    If I am going to manage my money (and you really should manage your money) then a debit card is one of the best ways I know to keep track of my money down to the individual transaction.

  17. Nick

    A couple of points.

    On the debit card issue, in Australia they have become a very popular way to purchase stuff online using your own money, rather than needing a credit card. Also, if you use your Visa Debit to withdraw money from an ATM you definitely need a PIN. We have three main types of cards here: ATM/EFTPOS which is just your standard bank card that is used to withdraw cash from ATMs and pay for things at point of sale using a PIN. Then you have credit cards which are self explanatory. And finally there is the Visa Debit/Debit Mastercard cards, which allow you to make purchases anywhere Visa is accepted, and which actually debit real money from your account.

    As for overdraft fees, there has been a huge outcry in Australia over these, and all the Big 4 banks have essentially abolished them in the last couple of months due to pressure from consumers and the govt.
    http://www.abc.net.au/news/stories/2009/08/03/2643705.htm
    The whole idea that it ‘costs’ the bank $30-40 dollars when you overdraw even 5c is ridiculous.

    I believe in the UK overdraft fees have been found to be illegal.
    http://news.bbc.co.uk/2/hi/business/7364422.stm

  18. Riggsveda

    I belong to PSECU, the PA state employees credit union, and I thank God every day for it. They are a truly decent entity. Long ago they stopped allowing members to use the credit card as a debit card. Although the ATM cards require a PIN, they can be used as debit cards, which prompted us to write on them in indelible ink: “ASK FOR I.D.” (You’d be amazed how few merchants/clerks actually do.)

    On the rare occasions when we might go over our checking account limit, we have an arrangment that automatically taps our savings to cover the overdraw, which we are then responsible for replenishing at our leisure. PSECU also gives us a few free taps at “foreign” ATM machines each month, the very best financing rates, and during the budget freeze when we weren’t being paid, they offered every member a free loan of $1000 per pay that would accrue no interest until 2 months after we began to be paid. In addition, they have a sophisticated, hackproof banking interface on their website that allows us to do anything from getting a loan to rolling over an IRA, 24/7. I mention all this because it is proof that banking doesn’t have to be a dive into shark-infested waters. I only wish everyone could have access to something like it.

  19. Tom Womack

    My bank (Lloyds TSB) just sent me a new terms-and-conditions form; for a fee of ten pounds a month they will graciously consent to refusing payments which take you overdrawn, rather than to charge for creating an unauthorised overdraft facility and then a usurious interest rate for it.

    I once went overdrawn unexpectedly – a cheque cleared before the deposit to cover it did; the bank phoned and offered to cancel the fee if I went and talked to them in person, but I forgot the appointment. However, I immediately increased my authorised overdraft to a little larger than any payment I normally make; I don’t know how ready banks are to do that now.

    Natwest have just advertised that they have reduced their ‘refused payment fee’ from £38 to £5; however, I am fairly sure that this only works if you tell them to refuse payments rather than to create unauthorised overdrafts, and presumably they’ll charge you for that service.

    Moneygrubbing scoundrels, the lot of them.

  20. someofparts

    Okay. Here’s why I choose to use a debit card. First, I refuse to carry a credit card and pay to spend what is ultimately my own money, so the debit is my only way to have plastic. Second, I bank only with credit unions who don’t play the overdraft games that banks seem to run. If I am out of money the card just won’t dispense anything.

    I need some kind of plastic to do limited online shopping. I can’t resist buying the occasional book at Amazon. I also prefer to buy gas with a card to save a walk into the store to hand some cashier folding money. Otherwise I only use the card as an ATM.

    I also separate my money into two accounts. There is the main one for paying the major household bills. I have neither a debit nor an ATM card on that one. An account that can only be accessed by check is not only relatively secure, it is ridiculously easy to monitor.

    The account with the debit card is my itty-bitty petty cash account, which only gets tiny weekly deposits from my side job. Even if someone took the card, damage would be limited. I would also spot any problem in a flash because I check that account every day, since it takes constant vigilance to live on a microscopic income.

    Overall it sounds like using credit unions instead of banks is a good solution for me and my simple finances. Maybe I’m just a rube, but none of the credit unions I do business with seem to hustle me relentlessly the way banks do.

  21. Praedor Atrebates

    I have a debit card because I don’t like writing checks. I don’t fear my wallet being stolen because:
    1) It doesn’t get stolen. You can’t pick my pocket to get it; and 2) even if it were stolen, my CREDIT UNION that issued the card is diligent about watching the activity on my debit. If they see “suspicious” activity with the card, they immediately call me to ask about it. If the activity is illegitimate, then they kill the card and protect my account.

    I SOMETIMES use it as an ATM card but would rather not in most cases: ATM fees when using non-native ATMs when out of my local area.

  22. Siggy

    I prefer Credit Cards. I see Debit Crads as being a Merchant/Bank Delight in that the debit card replaces a check. As to ATMs, don’t use them. Need a little cash, go to the bank/branch.

    All the fees, simple don’t overdraw. Deposits taking too long to clear, find out why, find a better bank.

  23. Fraud Guy

    Saw this one coming years back.

    For purposes of this discussion:

    ATM–card with access to your bank account, requires PIN to use for transactions.

    Credit–card tied to a line of credit as opposed to a bank account, no PIN required.

    Debit–card tied to your bank account; requires PIN for ATM-like transactions (cash withdrawals, deposits, etc.), but no PIN required for purchases (unless you choose that option at point-of-sale)(POS).

    I have worked at US card processors back to 1992, and saw the debit card start to increase back in ’94 or so.

    At first, the push was for ATM transactions, but this was unwieldy for merchants (having to add a PIN pad to their terminal set up) and not very profitable for the banks. ATM transactions were also not very profitable; whereas banks would collect their 1.6% or so for in-store sales + fees, they would only collect (IIRC) a max of $0.67 for an ATM transaction, and only on certain networks–some capped out around $0.25, split between the network, issuing bank, and acquiring banks. For banks, however, ATM transactions were less risky, because they were tied to funds in an account.

    Then someone hit upon the idea of tying bank accounts to credit card transactions. Banks loved this idea. They were able to charge full interchange (now around 1.8% + fees) to the merchants, and also had the low risk of account-linked limits. Consumers were at first lukewarm to the idea, but then banks started selling it. Big time, if you recall the commercials and bank ads from the late ’90s and early ’00s. Banks started to routinely replace ATM cards with their new “Visa debit” and “MasterMoney” cards without account holder request at time of renewal. And they filled the heads of their branch employees (and people still trusted their tellers, then) with the benefits of “convenience” and “financial control” that debit cards brought. And since the vast majority of consumers and front-line bank personnel are not financially literate about the transaction costs, they went along.

    (I recall several conversations with bank personnel explaining the detriments of debit transactions for the consumer as they cheerfully tried to make me accept my new LaSalle MasterMoney card in place of my old ATM card. Eventually I convinced them it was what I wanted, and they asked why, if it was so bad, were people getting them. “Because they make your bank more money.”)

    Not everyone bought the concept. There was the big Wal-Mart suit which settled in 2003 (IIRC, may be off a year or so) which caused Visa/MasterCard to lower interchange rates for debit cards; the net effect I observed was to lower costs about 10% for those transactions. This was nothing to sneeze at for high-volume businesses, but it didn’t really erode the profit. How do I know this?

    Sometime in 2003-2005, depending on your industry, debit cards overtook credit cards for volume of transactions. Banks are still pushing them big time, with the same arguments–convenience and control.

    Debit cards are more convenient that straight ATM cards. Many big retailers will take ATM, but it is a crapshoot at small and mid-sized retailers, including gas stations (Shell is the only local one for me that routinely has ATM capability at the pump). However, you can easily choose when/where to purchase using ATM so as to maximize the benefit, and have a credit card for that shopping you must do at non-ATM accepting stores.

    Debit cards and control, not so much. Yes, you can have all of your transactions on one statement, to better manage your finances, if that works for you. Since most consumers don’t read their statements beyond “that’s about right” there’s no real benefit for them.

    And then there’s the debit downsides.

    Yes, you can overdraft your debit account. Many banks, allow you to overdraft so that they can collect their fees (and they will time daily posting of drafts so that they can collect the largest overdraft fees possible). Chase, as an example from my own experience, will not allow you to turn this “feature” off (they call collecting overdraft fees a benefit for their customers).

    Plus, while most banks will cover non-PIN debit transactions like credit card transactions for fraud claims, they are not required to. Debit and credit are covered under different Fed regs, E and Z, respectively, and while consumers have more absolute protection under E ($0 liability if report w/in 3 days), the time frames are much tighter, and the time for bank response is much longer (up to 30 days).

    What does this mean? If your debit card is used (someone skims it, or finds it through a random generator), the money comes out of your bank account. Until you find out about it, you may not have sufficient funds to cover your other expenses paid via check or direct payment, causing those payments to bounce. Say you contact your bank w/in the three days. They take their full 30 to investigate your claim. There goes your mortgage/rent, car payment, etc., and then the bank decides that there was fraud, and reinstate your balance, crediting you their overdraft fees.

    That, however, does not protect you from the late/bounced check fees from your mortgage/rent, car payment, etc., and does not prevent them from reporting that to the credit agencies. They may decide not to, but you don’t have control over that decision.

    I advise people that there are three courses to take with debit cards.

    First, don’t have them. That’s my preference.

    Second, if you need one (i.e., it’s the only V/MC branded card you can get, and you need that), keep it tied to an account that only has sufficient balance for its uses (groceries, gas, etc.). All other major bills should be paid from another account that does not have automatic overdraft to your debit account (banks will try to sell you this, and charge a fee for the “benefit” of overdrawing both of your accounts).

    Third, for the OCD sufferers out there, you can check your account balance on your debit account on a regular basis, at least once daily, to monitor for unauthorized or irregular transactions.

    Oh, and Riggsveda; do not write “check ID” on your cards in the signature panel. You are liable for fraud on your card it it stolen and recovered and your signature is not on the card. You are violating your card agreement by not signing it. You’d be surprised, however, at how many law enforcement and bank personnel suggest this. Fraudsters don’t want to take the time to learn how to copy your signature, so they will hit stores where signatures aren’t checked and transactions will be processed quickly.

  24. Moopheus

    My debit card requires either a pin or a signature (if used like a credit card). Mainly I use it because it isn’t debt. When I use it, the thing is paid for. But my preference is always cash. I don’t want a paper trail, and I don’t want to be tracked by marketers, banks, or anyone else. I don’t want to pay fees or let banks get fees. Yes, it’s true, they are somewhat less secure than credit cards, so you have to be careful. Banks do offer some protections, but you can get screwed. The real question for the guy paying $30 for his coffee, is why are you using plastic for a $3 transaction?

  25. Derrick

    You are not liable for your Signature POS transaction. Debit the term, which I have seen misused, because the merchants call it that is has actually nothing to do with how you process the transaction and more with the mere fact it is accessing a DDA or Savings.

    Pinned Debit transactions are Debit transactions.

    While Signature Debit carries with it a slightly more risk, they offer higher rewards and better security guarantees from the affiliated networks, Visa and MasterCard, than Pinned POS transaction networks.

  26. jest

    i routinely use 2 debit cards, one from a credit union, another from ING. I’ve never had a problem with either. I keep a small amount of transactional money on them (i.e. pocket cash) so I don’t worry about having my account drained, since most of my cash is in a linked savings account.

    that being said, i did have ID theft occur on my credit union debit card. i called them up, and they were reasonable. they reimbursed my account within weeks. it was only $250, because most of my cash wasn’t in the savings account.

    on the other hand, i had a similar problem on my BofA credit card. i called them up, and months later: denied. they wouldn’t give me my cash back; on top of that they charged late fees and penalties b/c i did not pay back the stolen money!

    oh, and a few months ago, they cut the limit from $10,000 to $500. then weeks after that rescinded my fixed rate (8.99%). the truly amazing thing is if i cancel this POS, my FICO score will go down even further.

    long story short: credit cards ain’t all that better either. i’d wager i’d spend well over $250 in fees if i used credit cards vs. a debit card, the p/l has worked out for me.

  27. rj

    I have one debit card, and I use it to get the cash at the ATM and to buy gas now that I’m required to pre-buy. That’s about it unless I don’t have enough cash on me.

    As far as “if it gets stolen”, well if you have one and keep it in your possession at all times, that’s not a problem is it?

    I have had a credit card number stolen, not the physical card mind you, that never left my possession, just the credit card number where the person got it from a hotel I stayed at and I know it was there because it was the only time that trip I used it, and a person ran up $800 worth of charges at a New Jersey gas station. Thankfully, the credit card company was easy to work with.

  28. asphaltjesus

    There’s too much misinformation in these posts.

    1. None of the debit/credit transactions are ‘free.’ They appear ‘free’ to you, but you pay more for everything. How much more? 2% is a wild guess. 2% doesn’t sound like much does it? 2% of all of your debit expenditures in one year is quite a bit of money. And once Visa/MC get beyond about 10,000 customers, that’s real money!

    2. You and I assume all of costs of fraud too. “But, the card issuer clears fraudulent transactions.” The fraudulent charges go right back to the merchant, who raises their prices to cover fraud costs. So, not only are they screwing you with ‘credit protection services’ you are assuming all the costs of fraud anyway.

    3. What about those ‘rewards’ cards? Retailer assumes the increased costs of those cards too. That means many of you pay for the luxury of a ‘rewards’ scheme for a few.

    What consumers utterly fail to comprehend is the vast amount of money being taken from them one penny at a time by the banks in the Visa/MC associations.

    Yves’ distrust of debit cards is warranted, but for different reasons.

    1. Fraud Guy

      asphaltjesus

      1. IIRC, the total cost of credit for cards is @ 1.8% on Visa/MasterCard for in store transactions, and as low as 2.25% for internet, for a largish business (about 3 years since I handled interchange). This includes monthly fees, transaction fees, interchange and discount. Because the monthly and transaction fees are more onerous for small merchants, your local non-chain store could be effectively paying 3-4% or more for their card processing.

      Amex add about 1% to the above, and Discover about 0.2%. If you do a lot of non-qualifying transactions (out of country, biz cards, and bad settlement handling), you could also add 1%.

      2. Merchants can fight back against fraud, especially on card-swipe transactions, but it is a hard battle. Even with all factors aligning, I won less than 30% of all disputes when I handled chargebacks, as merchants are on the bottom of the credit card totem pole:

      Visa/MasterCard
      Issuing banks
      Acquiring Banks
      Customers
      Merchants

      Based on their rights and recourse in the system.

      3. Ah, yes, the rewards cards, like Visa Signature and MasterCard World cards. They tack on a premium to the merchant to subsidize customer use of the cards; so as a business, I pay more to encourage people to use their cards more so that I can pay more (and generally these are people who would make purchases anyway, and with a card anyway–I have not seen any compelling evidence that rewards strongly drive incremental purchases by high volume card users, other than which card they use, to the bank’s benefit).

      Of course, merchants cannot always identify these cards, and can’t refuse them, so how do they make up the costs? They’re not allowed to surcharge the customers for using the cards; they’re not allowed to impose minimum amounts for card purchases; so TANSTAAFL, and we all pay marginally higher prices.

  29. rj

    “None of the debit/credit transactions are ‘free.’ They appear ‘free’ to you, but you pay more for everything. How much more? 2% is a wild guess. 2% doesn’t sound like much does it? 2% of all of your debit expenditures in one year is quite a bit of money. And once Visa/MC get beyond about 10,000 customers, that’s real money!”

    You mean we’re getting a service and we’re indirectly paying for it? That’s a shock.

    Next thing you know you’ll be telling me that I pay for the maintenance on the highways and interstates I drive on. ;)

    1. asphaltjesus

      You mean we’re getting a service and we’re indirectly paying for it? That’s a shock.

      If it were the case that the 2-4% of every purchase were some kind of bottom-of-the-barrel price per transaction, I’d agree that I’m making something out of nothing.

      Clearly, you don’t care about the extraordinary amount of money being taken from you for the benefit of the very few.

  30. Mannwich

    Yves: Do you even have to ask why after all the idiotic things that we’ve seen people do in recent years? Why even bother asking why at this point? Nothing makes sense anymore.

  31. Camilla

    Wells Fargo has some of the most punishing overdraft policies and fees in the nation. I left them as a bank back in 2001 for a similar situation – once my account dropped below $50 (the minimum for this type of account), they started charging me fees, which kept driving the balance back below $50 again, leading to more fees. After several overdraft fees (due to the fees charged for the account balance dropping below $50), the balance quickly dropped to $0 (actually negative), and I wasn’t going to continue to pay them to take my money away.

    Several legal firms have looked into the question of whether Wells debits accounts in order of amount (e.g. withdrawing the highest amount first) rather than in the order in which the transaction was made. This conveniently increases the likelihood of an overdraft. (see http://www.courthousenews.com/2008/12/24/WellsFargo.pdf) They also reportedly take 48 hours to notify you of an overdraft, thereby increasing the chance that you will commit more overdrafts.

    1. Fraud Guy

      I know someone in IT who helped another bank design the algorithms that allow them to debit by order of size (largest first), followed by deposits, in order to ring up the highest number of overdraft fees. Apparently this is allowed by regulators as long as the bank is consistent in how they apply their debits/credits to customer accounts.

  32. anarkst

    Yes, not only is the banking system corrupt, but there’s no tooth fairy either. Sorry about that, guys.

  33. dzoner

    In answer to your question:

    Having a debit card allows me to shop on the internet without having to have a credit card. HATE credit cards.

    Small town, rural state, local bank = non-predatory practices. Word gets around and there are three banks in town and a credit union.

    I have an account solely for the debit card and transfer into it the needed amount immediately before I make my internet purchases. If the money isn’t in the account, the payment to the internet store simply doesn’t go through and there is no bank charge involved. There is also and specifically no ‘overdraft’ service on that account. I am allowed 5 free transactions a month on the debit card and am charged $1 per transaction above that. As I keep a $50 or so cushion in that account, that is almost certainly the maximum amount I would ever be ‘out’ if my debit card info ever got into the wrong hands.

    So there you have it, an instance of an all asset and no liability situation and in which a debit card is EXACTLY what the doctor ordered.

  34. Weevie

    No need to fight over debit card vs. ATM card. You can have a point of sale transaction limit of $0 put on your debit card – then it only works at ATMs.

  35. FrancoisG

    I use a debit card. It has pretty much the same protections as a credit card without disadvantages of credit.

    As for the fee, sorry BoA dings me anyway if I have less than $700 on my account. So I make sure this never happens.

    If you think banks make money from debit cards, look at how much they make out of credit cards. In fact just knowing that the money is not taken directly out of your account reduces the pain of spending and leads you to spend more. You don’t have this problem with debit cards.

  36. Richard Kline

    To me, this is a three-tiered question. Why do _most folks_ who use a debit card do so? Because most folks can’t be bothered to manage their cash flow, and in consequence have long since become dependent on overdraft protection which has made them complacent. As mentioned above, very few folks actually reconcile their ‘current account drafts’ on a regular basis. They depend upon looking up their current balance—which is totally inadequate, as it can take days for merchants to actually process debit transactions, and longer for checks to clear. So overdrafts by whatever means are going to be a regular phenomenon. Once on a time overdrafts were often free, and generally had low fees if you shopped a bit. Card holders were do damn grateful for the ‘convenience’ that they accepted a low fee. And that is not necessarily a bad tradeoff, I might add. Instead of sweating every expenditure, they figure they were paying $50+ bucks a year _not_ to sweat it. And that, frankly, was not a bad call. Many folks dislike paying interest on their credit cards, and so use debit cards as a ‘real money’ cash flow option, the equivalent of using an ATM card. And while in the states where you live it may have been different, in most of the states I live those early debit card transactions all required PIN activation, with signatures gradually making way. In that regard, you were actually a bit better protected from petty losses that with credit cards and those ubiquitous carbon copies with your numbers and signatures. Debit cards were mostly upside, in that configuration.

    Why would anyone use an automatic overdraft/mandatory high penalty fee debit card in a non-PIN/non-signature retail environment? Because they are, in a word, suckers. These are either low income folks constantly tight for money with poor credit histories who have no other options, or are folks with no idea what their cash flow is who have mid-four figures and up on their credit cards. For both of those groups, the home equity withdrawal was invented to help them manage their financial constraints, a statement I only wish was ironic.

    Why would I have and use a debit card (which I do)? For cash flow management. Most of my life I’ve been very poor, with little savings and cash-in-the-bank dropping under $50 at month’s end, often _well_ under. Knowing where the cash was going was not optional. And furthermore, cash in my wallet was spending money; didn’t matter how much it was, it didn’t sleep their longer than overnight. So unlike most folks, I keep all my debit card receipts and actually total _my own_ balance every few days, which has historically been better than what I’d get at the bank (though not without it’s own problems). I also reconcile my checkbook, an archaic science, though not as often as would be best; I’m due for it, but I also have larger cash flow now. I, too, think the $3 debit transaction is stupidity, and it makes for too much headache in the above system. So I habitually have all the cash on hand I need for daily transactions. And for large or merchandise purchases, I tend to use a credit card for exactly the consumer protections others have mentioned, which have saved my tokhus more than once.

    What I use the debit card for is purchases in the $40-$150 range; that would be for gas if I had a vehicle, and is always for groceries. For most of my life, I’ve lived in neighborhoods where the risk fo carrying significant sums of cash on your person was notably greater than the risk of someone trying to drain your bank account. In the only robberies I’ve been in where my wallet was compromised (including at the gym, a high risk area), the theives _took the cash but left the cards_, for exactly the reason that the criminal penalties for card fraud were and are higher than for the petty cash theft. Where I live, debit transactions have historically been and remain PIN and/or signature. That is true at most places I use my debit card, though pass-throughs are making inroads, and I’ll agree that I loath them and think they should be banned exactly because of the risk of fraudulent use. THIS to me is the point to really get exercised over. Then too, historically my debit card has had _no_ automatic rollover; transactions were refused as late as last year if I was NSF in the card’s account. Now, maybe my bank pulled a fast one, as I had a very low balance transaction clear last month. I was either in the place by under $5, or they’ll be feeing me; I’ll see when I get my statement, and if they’ve unilaterally implemented ‘overdraft fee extraction,’ changes may be in order in how I manage my funds. I would likely be a good idea for me to firewall my checking account funds a bit more from theft risk on the debit card. I have, in fact, had it skimmed by a pro: that one had to be a cashier at my food co-op who took the number, then used it twice weeks later and 150 miles away for modest sums, a loss I never recovered. The point is, you’re never 100% protected, it’s a question of how you manage your risks. Even if the account was drained, a major loss, I have funds available now that all regular payments would be met from cash in hand and segregated accounts.

    If you want to know where your money is going, and have the discipline to keep at it, a debit account can be a good tool. If you use one so that your spending is swipe-and-forget, you have only yourself to blame for your losses.

  37. Nick

    This past week my bank wells Fargo charged me 22 overdraft fees totaling $770. The thing that I can’t understad nor can anyone at the bank seem to answer is how a debit card could be negative for a week without being declined. What’s worse is I wasn’t made aware of the accounts condition not through the mail, phone, or e-mail. Of course when I pointed this out to them I found myself swimming in acsea of BS. Eventhough they couldn’t give me a call to let me know I was spending money daily on an account that was negative they had no second thoughts about calling me every few hours for the last two days. I finnaly answered the phone today to talk to a young lady on the other line screaming and threataning me. I can’t help but feel like somethings out of place here. But hey on the bright side I kno how my first pay check in six months is getting spent.

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