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Use your debit card!

paymentmethods.jpgEver wondered how your Visa card works? Andrew Martin has you covered:

While Visa may be among the best-known brands in the world, how it operates is a mystery to many consumers.

Visa does not distribute credit or debit cards, nor does it provide credit so consumers can buy flat-screen televisions or a Starbucks latte. Those tasks are left to the banks, which owned Visa until it went public in 2008.

Instead, Visa provides an electronic network that acts like a tollbooth, processing the transaction between merchants and banks and collecting a fee that averages 5 or 6 cents every time. For the financial year ended in June, Visa handled 40 billion transactions. Banks that issue Visa cards also pay a separate licensing fee, based on payment volume. MasterCard, which is roughly half the size of Visa, uses a similar model.

Given that a credit card transactions cost a store a bit of money while a debit card transaction costs a lot less, I've always wondered why there's not a more aggressive effort to push consumers toward their debit cards. Ikea, for instance, does this by promising you a coupon for a percentage off your next purchase, which is brilliant, given that virtually no one saves a coupon for a single percentage point of their next purchase at a store they rarely patronize. But the little supermarket in my neighborhood doesn't even mention that it has a preference, nor do most companies.

Image credit: New York Times

By Ezra Klein  |  January 7, 2010; 3:24 PM ET
 
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Comments

I always assumed it was for security issues. If someone racks up some illegitimate charges on my VISA card, I call up the bank and have them reversed.

If someone clones my bank card and cleans out my checking account, I'm, well, f-ed.

I've heard many, many horror stories about debit cards used at gas stations. May be apocryphal; any chance you could address this issue? I'd love to use my debit card for purchases.

Posted by: antontuffnell | January 7, 2010 3:35 PM | Report abuse

Bottom line, there's no limit to your losses on a debit card. By law one can only be held responsible for $50 in bogus credit card charges.

More here:

http://www.pirg.org/consumer/banks/debit/debitcards1.htm

(Link to PIRGs, so YMMV...)

Posted by: antontuffnell | January 7, 2010 3:38 PM | Report abuse

Ok, not trying to monopolize the conversation here (What conversation?), but it sounds worse than my initial impression:


===============================

WHAT CAN CONSUMERS DO TO LOWER DEBIT CARD RISK?

(1) If you don't want a debit card, demand a plain old ATM card.

(2) If you do want the convenience of a debit card, lower the risks:

-- Never use a risky debit card on the Internet. Only use a credit card for Internet transactions. In addition to greater legal liability protection with a credit card, you have greater legal protection if goods are defective or don't arrive.

-- Use a debit card only with merchants you trust. It is also a good idea never to let it leave your sight-- it's one thing to watch a clerk "swipe" it right in front of you at the cash register and hand it back to you. It's another story when you hand it off to a potentially unscrupulous waiter or waitress who could have an illegal card "skimmer" (the size of a pack of cards) in their pocket and copy your information after they walk away with it.

-- Just as you wouldn't use it on the Internet, don't use it to call info-mercial 800#s off the television. If you have a dispute over double-billing or products that don't arrive from a sleazy info-merchant, remember-- you'll be fighting to get your own money back, and that could take ten days or more of arguing with your bank.

(3) Complain to Congress! Urge Congress to enact legislation to change the Electronic Funds Transfer Act law so that debit card liability is legally the same as credit card liability. Not surprisingly, the banks oppose it. No matter what card you use, you should be equally protected.

(4) Send comments of any complaints about unfair treatment by your bank of your debit card dispute to uspirg@pirg.org.

Posted by: antontuffnell | January 7, 2010 3:45 PM | Report abuse

Ezra, you might want to read the article a bit more carefully. Short story is that while PIN debit cards save money (and are more secure), Visa has actually built the market on signature cards which cost considerably more. And they've done this using marketing tactics that are ethically questionable, to say the least. See also Kevin Drum and Yves Smith on this.

Posted by: wheatthink | January 7, 2010 3:53 PM | Report abuse

I'd add, use your debit card from a local bank. The Bankopolies (i.e. Chase, BoA, etc.) are part of what's wrong with this country and there's no need to subsidize their lawless greed with your hard earned cash.

Posted by: leoklein | January 7, 2010 4:02 PM | Report abuse

Many gas stations in the Detroit area have lower prices for paying via cash/debit vs. credit cards. On the order of 5-10c per gallon.

Posted by: donhalljobs | January 7, 2010 4:03 PM | Report abuse

I'm pretty sure if I use my debit card as a ATM card I pay the fee. If I use my debit card as a Visa the store pays the fee. I think it works this way for a lot of stores. That's why newer gas pumps now ask you if your using a debit card, they want to pass the fee to you. I could be wrong about this. I think once you use your PIN, the fee's on you.

Posted by: obrier2 | January 7, 2010 4:13 PM | Report abuse

As a consumer, debit cards, cash, and checks make no sense. You are only liable for up to $50 in fraudulent charges on a credit card--unlimited liability on a debit card, cash, or checks that are stolen. Plus, pick the right credit card and you get 2-5% cash back on your purchases each month. You've just got to pay the bill off each month. I make hundreds of dollars a year this way.

Posted by: AuthorEditor | January 7, 2010 4:18 PM | Report abuse

Most of my customers pay with credit cards, and I have a couple of points to make.

First, 5 or 6 cents per transaction is way off the mark. In my case it's about 2.5 to 3% of the transaction amount. No doubt Walmart gets a better rate, but it's still got to be a lot more than 5-6 cents on their average ticket. Generally my rate for debit transactions is a flat fee, so that for a large ticket it's a huge savings. By the way, the rate for American Express is substantially higher than Visa/Mastercard, which is why a lot of merchants won't accept Amex.

Second, those super-double-bonus miles/reward cards carry an even higher rate for merchants. I'm noticing that more and more of my customers are using those cards, but I'm sure they have no clue that they cost me more. In fact, occasionally I will mention that we get a better rate on debit cards, and they are always astounded by that information.

Oh, and one more thing. I had a dispute with a vendor on an invoice that I paid with a debit card. My (LOCAL) bank was completely responsive on resolving the dispute and refunding the full amount, so I question some of the comments above on this issue.

Posted by: adagio847 | January 7, 2010 4:30 PM | Report abuse

Adagio is right- the fees are much higher, and often include a fixed cost in addition to the percentage, which is why you will see many merchants with a $10 or $20 minimum on credit purchases. Most of these fees go to the merchant servicer, not to Visa itself which does not directly market to most small merchants. American Express actually charges more than Visa...so all of you cash and debit purchasers that aren't getting a discount are indirectly subsidizing the people with rewards cards.

Some merchants have foolishly agreed to arrangements where they aren't allowed to charge less for non-credit purchases. On the other end of the spectrum you have Costco, which forgoes Visa altogether for an exclusive deal with American Express.

Posted by: staticvars | January 7, 2010 4:43 PM | Report abuse

I usually use my credit card not because Visa is my favorite charity, but because if I pay with a debit card I incur a $1 ATM fee each time. That's a powerful incentive. Not that Visa aren't jerks; I have no reason to believe that.

Posted by: csdiego | January 7, 2010 4:45 PM | Report abuse

There is another security reason for not using debit cards. You have to punch your PIN number into those little console things which are usually in full view of whoever happens to be standing around. That's why I almost always use my credit card at the supermarket - I only have to sign. I use my debit card mainly for ATM withdrawals.

However, I've never heard of a $1 fee for using a debit card - which crappy bank is doing that? I use Wachovia, and they certainly don't charge anything just for using a debit card for purchases. The only time you get charges is other banks' ATMs and international transactions.

Posted by: Virginia7 | January 7, 2010 4:56 PM | Report abuse

Same point generally as AuthorEditor, but with different numbers. Nowadays you're looking at more like 2% cash back for purchases. That still adds up. A few months ago I got a credit card after living a Klein-like life of debit, mostly to build a credit rating. The small perk of cash back has let me game my spending for small, but real benefits. I just wish I could pay off my rent or my student loans with a credit card.

Also, I'll second the call for a push towards local banks. It's the free market way to punish irresponsible big banks.

Posted by: etdean1 | January 7, 2010 4:58 PM | Report abuse

Ezra-

Consumer protections are considerably more robust when you use your Visa check card as a "credit" transaction, rather than "debit." I know its more expensive for stores so for small mom and pop shops where I frequent, I will use debit. Otherwise, I always use credit. Using your Visa check card as a debit (pin entry) exposes you to risks. Someone could get your pin and clean you out and you'd be fairly unprotected. No so with "credit" transactions

Posted by: mawst95 | January 7, 2010 5:18 PM | Report abuse

Ikea might give you a coupon for 1% off your next purchase if you use a debit card or cash, but my credit card will give me 1%-2% cash back, or its equivalent. So what do you think I'm going to do?

I have an ATM card that can be used only as an ATM card, not as a credit card. I do this so that I don't have to face credit card fraud problems by having someone use my debit card to make a bunch of false charges than get taken right out of my bank account.

I've had a credit card since I was 18, and I have almost always used it as a charge card, paying off the bill each month. I have also used the card to get points which I have used as frequent flier miles or for gift cards at places I shop. And I didn't have to worry about not having a credit history when I applied for a mortgage.

Just because you just happened to, when you were 18, opt to go the debit-card-only route and never switched to using a credit card doesn't mean you made some kind of insightful financial decision. It means that you made a choice by coincidence, and it was a choice that doesn't necessarily carry any important benefits. So don't pretend otherwise.

Posted by: constans | January 7, 2010 5:18 PM | Report abuse

For the question regarding why many stores don't mention they have a preference, it's somewhat mixed. A few years ago Walmart stopped accepting debit cards from one of the big networks (Visa or Mastercard) unless you use a PIN transaction. I imagine many vendors are also worried about MFN clauses, just as most aren't allowed to charge fees to customers for accepting a credit card. But the economist would say that's inefficient - it costs the vendor more - if you the consumer prefer using your credit card, you should pay more for it instead of passing on the cost to all customers, including those willing to use cheaper methods.

Posted by: GrandArch | January 7, 2010 5:46 PM | Report abuse

I believe in NY it is illegal to charge a surcharge for using a credit card. They are accepted just about everywhere these days, and some stores like CVS and my local grocery chain don't bother with a signature if the bill is under about $20. It is faster than using cash, you get the 2% rebate, and it is safer. By they way, I think England is outlawing the use of paper checks within a few years, and I suspect we may see the end of cash in some of our lifetimes.

Posted by: AuthorEditor | January 7, 2010 9:34 PM | Report abuse

Also note that debit cards are subject to those wonderful "overdraft-protection" fees, so if your bank is one of those that likes to play games with crediting of deposits a few minor purchase will leave you $100 or so poorer.

Posted by: paul314 | January 8, 2010 10:12 AM | Report abuse

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