FROM: Jim Bramer, Retired
RE: Debit (eCHECKS) Card Matters - or Primer ORIGINATED: August 2004
Somewhere recently I read the following: Using your Plastic Debit Card (or eCHECKS) is
- Safer than carrying cash and getting coins/currency for change ,
- More convenient than writing a check, and
- Faster and more efficient than making a trip to the bank.
Below is a slightly edited version of an Internet Publication on this topic.
AN OVERVIEW OF DEBIT (eCHECKS) CARDS:
For some time, experts on payments systems have forecast the imminent arrival of a completely electronic, paperless payment system where we would replace paper transactions with faster, more efficient electronic payments. The centerpiece of this new payment world is the Debit Card, a magnetically encoded plastic card that would eliminate the use of cash, checks, and even credit cards by consumers in most retail transactions.
In the United States, the first Debit Card pilot program was initiated by the Bank of Delaware in 1966. Several other banks experimented with pilot programs through the mid-1970s, but serious efforts to launch Debit Cards on a large scale did not develop until recently. Despite recent rapid growth in availability and use of Debit Cards, they overall still remain a minor part of the payments system.
TYPES OF DEBIT (eCHECKS) CARDS:
Debit Cards are machine-readable, magnetically encoded plastic cards, similar in appearance to Credit Cards or cards used to access Automated Teller Machines (ATMs). In fact, it is common for ATM cards to function as Debit Cards -- meaning that they can be used to make retail payments as well as to access ATM machines. As a generic term, �Debit Card� includes three distinct transaction technologies as detailed below: On-line Debit Cards, Off-line Debit Cards, and Prepaid Debit Cards.
ON-LINE DEBIT (eCHECKS) CARDS:
Most Debit Cards are on-line cards, meaning that when a consumer makes a purchase using the card, funds are immediately deducted from the consumer�s Bank account. The immediate reduction (debiting) of the consumer�s bank account distinguishes the on-line card from both checks and credit cards, which involve delayed payment. Because there is no extension of credit with an on-line card, it can be offered to anyone with a Bank account.
However, since the on-line feature allows direct access to this Bank account, the customer must personally authorize each transaction. Thus, a second distinguishing feature of on-line cards is the use of a specialized card reader with the ability to accept a personal identification number (PIN). ATM cards generally function as on-line cards.
OFF-LINE DEBIT (eCHECKS) CARDS:
The distinguishing feature of off-line Debit Cards is delayed settlement. When a customer uses an Off-Line card to make a purchase, the transaction is authorized electronically as with a Credit Card. The customer�s account is then automatically charged and the merchant�s account is credited after a delay of two to three days from the time of purchase. Because of this delay, use of an Off-Line Debit Card is similar to the use of a Check or Credit Card in that the customer receives a short-term extension of credit. Consequently, the Off-Line card can be offered only to bank customers with good credit records.
PREPAID DEBIT (eCHECKS) CARD (2):
The third type of Debit Card, the Prepaid card, comes in two forms, a "special purpose card" and a so-called �smart card.� Both types of Prepaid Cards share a common feature that distinguishes them from On-Line and Off-Line cards: namely, they are not directly linked to a card holder�s Bank account. When the consumer uses the Prepaid card to make a purchase, the card reader deducts the amount of the transaction from the Prepaid electronic balance shown on the card. Thus, for a Prepaid card, the card and not the customer�s bank account is reduced at the time of the transaction.
The two forms of Prepaid Debit Cards differ in the type of technology used in their construction and in their range of uses. The "special purpose card" uses a magnetic strip that is programmed to report a balance that is prepaid by the customer to the issuer of the card. This technology is similar to that employed on Credit Cards and ATM cards. The limiting feature of this technology is the relatively small amount of information that can be stored on the magnetic strip.
In contrast, a "smart card" employs a micro chip that is capable of being programmed to hold considerably more information. "Special purpose cards" also tend to have a more limited range of uses than "smart cards". Generally, issuers of special purpose Debit Cards are providers of a specific service; examples are:
>> local mass transit,
>> self service photocopying, or
>> long-distance telephone calls.
These cards are usually used to purchase only these specific services. In contrast, "smart cards" can generally be used in any retail location that is equipped to accept Debit Cards. At present, "special purpose cards" are only in limited use in the United States. Smart cards are more common in some European countries.
HOW DEBIT CARDS (eCHECKS) WORK (1):
Both On-Line and Off-Line cards require the coordination of a number of parties to complete the transaction. The simplest example involves five parties: the retail customer, the merchant, the customer�s bank, the merchant�s bank, and the operator of an electronic network linking the banks to the merchant�s Debit Card reader. In a typical On-Line Debit Card payment, the merchant enters the amount of the sale into a keyboard and swipes the Debit Card through a terminal with a magnetic code reader, which records the customer�s bank and account number. The customer then enters his PIN number into a keyboard connected to the terminal to authorize the transaction. The terminal transfers this information to a computer, which relays the information to the appropriate electronic network linking the merchant�s bank with the bank that issued the customer�s Debit Card. This network, which in most areas is a regional ATM network, contacts the customer�s bank and verifies that there are sufficient funds in the account to honor the payment. If there are, a transaction approval is relayed to the merchant�s terminal, the customer�s bank debits his account for the amount of the purchase, and the merchant�s bank credits the merchant�s account. Despite the large number of parties involved, the electronic technology employed makes the transaction instantaneous.
A typical Off-Line Debit Card transaction follows a similar procedure with three exceptions. First, as with a Credit Card transaction, the customer generally signs a paper slip to authorize the purchase rather than entering a PIN number. Second, in order to approve the transaction, the network checks whether the customer�s total purchases over the previous two or three days are within some preset limit, rather than verifying that there are sufficient funds in the customer�s account to cover the payment. Third, the customer�s account is debited and the merchant�s account credited two to three days after the purchase.
The mechanics of Prepaid Debit Cards are considerably simpler. Indeed, for the above "special purpose cards," all that is required is a terminal to dispense cards and a merchant base with specialized card readers. Banks need not be involved since the cards are Prepaid and the card, rather than the customer�s Bank account, is charged at the Point of Sale. When the balance on the card is depleted, the consumer may dispose of the card or, in some cases, may be able to replenish the balance by paying an additional fee.
Banks are typically the issuers of the above "smart cards". Card holders commonly load value to their card by withdrawing funds from their bank account at an ATM machine. When the card holder makes a retail purchase, the merchant�s card reader electronically reduces the balance on the card and transfers the amount of the purchase to the card reader for later deposit into the merchant�s bank account.
DEBIT (eCHECKS) CARDS AND CHECKS:
Debit Cards also have a number of advantages and disadvantages compared to checks. Some consumers may find the Debit Card more convenient than checks since it means that they do not have to carry checkbooks. The checkout time with a Debit Card can also be faster than the checkout time with a check, particularly where use of a check requires approval. Alternatively, some consumers may prefer checks since an on-line Debit Card transaction results in an instant reduction, or debiting, of their Bank account, while a check payment usually will not clear for about three days. For consumers with account balances near a bank-specified minimum balance level or near a zero balance at the end of the pay period, a three-day delay could be significant.
Checks also permit more detailed record keeping, since the check writer can note the purpose of the payment or other such information on the face of the check. Thus, for most consumers, the choice between On-Line Debit Cards and checks may come down to weighing the delayed payment of checks versus the time saved using Debit Cards. While there is less of a tradeoff between an off-line Debit Card and a check, since both involve delayed payment, many consumers will not have access to an Off-Line Debit Card.
DEBIT (eCHECKS) CARDS AND CREDIT CARDS:
For most consumers with Credit Cards (Click Here for some info about prudent use of Credit Cards), Debit Cards are less likely to be an attractive alternative. Consumers who use Credit Cards for the Line of Credit aspect are unlikely to be interested in a Debit Card. Some convenience users of Credit Cards could find advantages to the Debit Card, however. Since the consumer�s account is automatically debited in the case of Debit Card payments, the consumer would not need to write a check at the end of the month to pay off the Credit Card balance.
PERSONAL USE OF DEBIT (eCHECKS) CARDS:
Some might find it easier to enforce personal budgets with the Debit Card since it limits them to spending what they have in their Bank account. In addition, many food markets and some other retail stores permit Debit Card users to obtain cash at the Point of Sale. This is rarely permitted with Credit Cards. On the other hand, Credit Cards generally offer convenience users interest-free grace periods of about a month and do not limit the consumer to spending only what is in their Bank account. While the Debit Card is likely to offer some convenience advantages to almost all consumers, it could be particularly useful for those consumers who do not have access to the complete range of existing payment services. A Debit Card could free those without Credit Cards from the occasional need to carry large amounts of cash for major purchases where checks are not accepted.
There are other reasons that consumers may continue to favor cash. They might value the anonymity of cash payments and some may find it easier to budget their expenditures with cash by following simple rules of thumb, such as restricting themselves to withdrawing $100 a week from the ATM. For those without a Bank account, a Prepaid Debit Card account could provide relatively inexpensive payment services that are more secure than cash transactions.
The Debit Card does have some potentially serious security concerns for consumers. If cash is stolen, the consumer�s loss is limited to the amount stolen. If a credit card is stolen, the consumer�s loss is limited to $50. But, unauthorized use of a Debit Card could lead to greater liability. The consumer�s loss is limited to $50 only if the loss is reported within two business days. If the loss of the card is not reported within two days, maximum liability increases to $500. And, if notification is not given to a financial institution within 60 days after receiving a statement showing unauthorized withdrawals, the consumer may be liable for all unauthorized use after the 60th day.
SUMMARY re Debit Cards (eCHECKS)
Debit Cards (eCHECKS) have begun to turn the corner of consumer and merchant acceptance. Debit transactions have increased rapidly in recent years, stimulated in part by a rise in the number of retail locations accepting Debit Cards as a means of payment. Debit Cards now appear well on the way to moving beyond its traditional geographic and specialized merchant base. Thus, after years of unfulfilled promise, the Debit Card revolution may finally be at hand. Some impediments to Debit Card growth remain, however. In particular, the competitive pricing of Debit Cards relative to alternative payments methods is likely to be the biggest hurdle to widespread Debit Card acceptance. It is suggested that Debit Cards is most likely to grow rapidly where consumers find it more convenient than other payment options, and where merchants find it cost effective. In addition, those consumers without full access to existing payment methods may find Debit Cards particularly attractive.
This was UPTD: August 15, 2010
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