Debit Card Confusion
Debit Card usage has increased dramatically in recent years. Nearly 1 out of 3 in store purchases are now made with a debit card ( 13). In 2003 Visa and MasterCard branded debit cards generated more than $576 billion in purchases and cash advances, a 16% increase over the previous year. (14) A debit card allows the customer to avoid hand writing checks and allows a merchant to automatically deduct the cost of a purchase directly from a customer's checking account. Also, debit cards are issued with a Visa or MasterCard logo that allows customers to make purchases like a credit card. However, the transaction amounts are automatically deducted from the consumer's checking account. There are two types of debit card purchases. One type is an 'online' transaction. This type of transaction occurs when a customer swipes their card in a point of sale (POS) machine and is required to enter their Personal Identification Number (PIN). The second type of transaction is an 'offline' transaction. This transaction is treated like a credit card transaction. The customer signs for the purchase and the amount is deducted from the customer's checking account in a day or two. ( 15) Our 2004 survey shows that debit cards often have hidden fees and other pitfalls. Our survey shows that 89% of the banks surveyed are charging customers POS fees if the transaction requires the customer to enter a PIN number. These fees can be as high as $1.50 per transaction (the average debit card POS fee assessed by the banks in our survey was 70¢). However, if the transaction is put through as a credit then no fee is assessed ( 16). Also, benefits that customers may receive if they use their debit card depend on how the transaction is processed. For example, the Citibank AAdvantage customer can only earn frequent flyer miles when the customer signs for the transaction. (17)
This can lead to 'Debit Card Confusion' where two consumers could have the same type of bank account at the same bank, have debit cards that look identical, use those cards at the same stores and purchase the same exact items and, in the end, have drastically different results. As with foreign ATM fees, banks receive fees for debit card transactions. These fees are paid by the store merchants that have either a POS machine or a credit card transaction machine. For an online transaction the bank receives a flat fee of 7.5 to 10 cents from the merchant. For an offline transaction the bank receives of up to 2% of the transaction. ( 18) In recent years, banks have been heavily promoting debit cards. For instance, a recent promotion by Citibank offers customers the ability to earn frequent flyer miles with American Airlines with their Citibank AAdvantage Debit Card ( 19). JP Morgan Chase Bank has also has introduced and promoted a debit card that allows users to earn frequent flyer miles named Chase/Continental Airlines Banking Card ( 20). This type of aggressive debit card promotion has resulted in huge increases in consumer debit card use. In 2003 Wal-Mart and other major retailers including such as Sears Roebuck and Co. and Payless ShoeSource, Inc., reached settlements with both Visa and MasterCard regarding a class action lawsuit filed in 1996 claiming that Visa and MasterCard violated federal antitrust laws and had been charging excessive fees for processing debit card transactions. The lawsuit also alleged that retailers were forced to automatically accept Visa and MasterCard logo debit cards if they already accept Visa and MasterCard logo credit cards. ( 21) Introduction | ATMs-Always Taking Money | Debit Card Confusion | Pre-paid Cards-The Priciest Plastic of All |
The Credit Card Trap
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