Card: Debit Cards

Card Programs

Debit Cards

Debit cards also known as a bank cards or check cards provide the cardholder electronic access to his or her bank account(s) at a financial institution.  Debit cards are similar to credit cards, except debit cards pull money out of an underlying checking or brokerage account.  Debit cards do not create or increase a loan like credit cards do.  However, debit cards do not help the cardholder build credit the way credit cards do.  Debit cards usually also allow for instant withdrawal of cash, acting as the ATM card for withdrawing cash.   Retail merchants may also offer cashback to customers, where a customer can withdraw cash along with their purchase.

Debit card transactions are automatically deducted from the checking or savings account and typically posted within 24 hours of the purchase.  Updated balance and transaction records are posted on the card issuer’s website or by phone.  The merchant must acquire an electronic authorization device at the point of sale (POS) and sometimes also a separate PINpad to enter the PIN.

MasterCard and Visa have introduced a debit card, which is widely accepted internationally.  International transactions are generally in the local currency, requiring a currency exchange by the card company to the currency of the primary account.

Processing

There are three ways that debit card transactions are processed…

1. EFTPOS (also known as online debit or PIN debit)… electronic funds transfer at point of sale) is an electronic payment system involving electronic funds transfers based on the use of payment cards, such as debit or credit cards, at terminals located at points of sale.  Since 2002 the use of EFTPOS has grown significantly, and it has become the standard payment method, displacing the use of cash. Now, “prepaid” cards can also be used.
2. Offline Debit (also known as signature debit), and
3. Electronic Purse Card System; one physical card can include the functions of all three types, so that it can be used in a number of different circumstances.

Security

Debit and credit cards are embossed plastic cards complying with ISO/IEC 7810 ID-1 standard.  Cards have an embossed bank card number conforming with the ISO/IEC 7812 numbering standard.

The branded Visa’s extra security protections include…

When the cardholder signs for purchases, the money comes directly from their checking account, but they also get security protections that help prevent, detect and resolve fraud, including:

• Visa’s Zero Liability Policy, which protects the cardholder from unauthorized charges. Any funds taken from the account due to fraudulent use will be returned to the cardholder.   However, this does not apply to ATM transactions, PIN transactions not processed by Visa, or certain commercial card transactions.
• Continuous fraud monitoring to detect and prevent suspicious activity on the debit card
• Access to Identity Theft Assistance to help the cardholder recover their identity and prevent further problems
• A 3-digit security code to verify the cardholder’s identity for (CNP) Internet and phone purchases.

Modes

Both credit and debit transactions may be conducted in both modes…

 “Debit” (PIN) – Online debit cards are generally viewed as superior to the offline debit cards because of their more secure authentication system and live status.  On-line debit systems use the normal authentication processes of Internet banking to provide real-time on-line debit transactions; the most notable of these are Ideal and POLl.

Merchants are charged a flat fee for each on-line (PIN based) debit transaction instead of a percentage rate (discount fee) plus transaction fee.  PIN based debits are not subject to chargebacks, the merchant enjoys immediate funding, and a low transaction fee.

“Credit” (Signature) – Offline debit cards are used at the point of sale like a credit card (with payer’s signature).  These transactions do not use a real-time payment processor.

This type of debit card may be subject to a daily limit, and/or a maximum limit equal to the current/checking account balance from which it draws funds.  Transactions conducted with offline debit cards require 2–3 days to be debited from the cardholders account.

Debit cards that have a VISA or MasterCard logo on them can be processed without entering a PIN code.  Cards that do not bear the Visa or MasterCard logo cannot be processed off-line and will not be approved.  These types of transactions are referred to as “off-line” debit transactions. In this type of sale the merchant accepts a debit card the same way in which they would accept a normal credit card. The card is swiped through the terminal and the consumer signs the receipt. As far as the merchant is concerned there is no difference in the way a credit card or an off-line debit card is processed. Funds are transferred from the consumers bank account just as in a PIN based (“on-line”) debit transation. However, the main disadvantage to the merchant is that the same discount fees charged to credit card transactions also apply to off-line debit transactions, increasing the expense of processing.  With signature-based debit, the merchant pays a little more to process a transaction, has no customer cash-back option, and receives little protection against potential chargebacks.

Online vs. Offline Fees

A “credit” or offline debit transaction is without cost to the cardholder beyond the face value of the transaction, while a fee may be charged for a “debit” or online debit transaction.  However, the merchant typically pays lower fees on an online “debit” transaction as compared to “credit” (offline)

Debit vs. Credit Cards

Advantages

• A check card can be used to avoid check writing altogether.  Check cards debit funds from the user’s account on the spot, thereby finalizing the transaction at the time of purchase, and bypassing the requirement to pay a credit card bill at a later date
• Like credit cards, debit cards are accepted by merchants with less identification and scrutiny than personal checks, thereby making transactions quicker and less intrusive. Unlike personal checks, merchants generally do not believe that a payment via a debit card may be later dishonored.
• Unlike a credit card, which charges higher fees and interest rates when a cash advance is obtained, a debit card may be used to obtain cash from an ATM or a PIN-based transaction at no extra charge, other than a foreign ATM fee.

Disadvantages

• Many merchants mistakenly believe that amounts owed can be “taken” from a customer’s account after a debit card (or number) has been presented, without agreement as to date, payee name, amount and currency, thus causing penalty fees for overdrafts, over-the-limit, amounts not available causing further rejections or overdrafts, and rejected transactions by some banks.
• Debit cards offer lower levels of security protection than credit cards.  Theft of the users PIN using skimming devices can be accomplished much easier with a PIN input than with a signature-based credit transaction.
• In many places, laws protect the consumer from fraud much less than with a credit card.  While the holder of a credit card is legally responsible for only a minimal amount of a fraudulent transaction made with a credit card, which is often waived by the bank, the consumer may be held liable for hundreds of dollars, or even the entire value of fraudulent debit transactions.  Because debit cards allow funds to be immediately transferred from an account when making a purchase, the consumer also has a shorter time (usually just two days) to report such fraud to the bank in order to be eligible for such a waiver with a debit card and recover the lost funds, whereas with a credit card, this time may be up to 60 days.

Internet Purchases

Debit cards are used on the Internet either with or without using a PIN.  Internet transactions may be conducted in either online or offline mode.  Internet purchases can be authenticated by the consumer entering their PIN if the merchant has enabled a secure online PIN pad, in which case the transaction is conducted in debit mode.  Otherwise the transaction is Card Not Present (CNP).