Debit card use is expected to surpass credit this year…
With credit limits being cut and new lines of credit even harder to come by, consumers are looking for ways to ride out the economic storm. Debit cards are increasingly becoming one of the solutions since no credit is necessary. According to The Nilson Report, a leader in news and proprietary research on consumer payment systems, debit card purchases are expected to rise by 13% in 2008 compared to a 3% rise in credit card transactions. Visa, the world’s largest payments company, expects debit spending to surpass credit spending this year.
The trend has mixed results for banks and lending institutions. On the plus side, borrowers cannot fall behind on their payments when using a debit card. The down side is that profits aren’t as high with a debit card because there is no interest to collect. Issuers make most of their money from fees, which pale next to those on credit cards. Retailers, for instance, fork over 1.6% of credit purchases to banks – three times the amount on debit transactions.
Overdraft fees fill in the gap left when consumers rein in their credit card spending. More than 90% of banks now approve transactions that until recently would have been denied – accounts without the necessary funding. In the past, customers had a few days - the time it takes for debit transactions to clear - to deposit cash. But now many banks hit them with fees as soon as purchases are made, charging a fee of up to $29 for exceeding the available funds, just like a bounced check. “Banks have turned to this as a major source of revenue,” says Jean Ann Fox, director of financial services at the advocacy group Consumer Federation of America. “There’s a balancing act to ensure folks who do need to occasionally go over the limit have [the protection] while having a deterrent in place for people who abuse it,” says Doug Johnson, a policy adviser at the trade group American Bankers Association.
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