The Truth About Debit Card Usage
Debit card use is on the rise and banks stand to profit…
Debit cards are now the preferred method of payment according to a 2006 Federal Reserve Board report. Debit card use topped $1 trillion in 2006, with debit transactions outnumbering credit cards by more than 2 billion. Banks stand to make millions largely at the expense of consumers when they opt to use debit cards. The appeal to consumers is the convenience and safety of carrying plastic, and the ability to avoid credit card finance charges and fees. But why are banks encouraging debit card use vs. credit cards?
When you authorize a transaction by entering your personal identification number, or PIN, your bank account is debited immediately. This type of transaction has a low interchange fee– the fee paid to the bank by the merchant for the privilege of using plastic. However, the bank may charge a fee ranging from 25¢ to $1 for each PIN transaction. Retailers generally prefer this type of transaction since money is transfered immediately to their account.
Banks on the other hand, would rather you choose to authorize payment by signing a sales slip, as you would for a credit card. That’s because signature transactions are more profitable for banks. The payment is processed through a credit-card network and the actual withdrawal from your account occurs within a few days. This type of transaction pays a substantially higher interchange fee to the bank. All interchange fees ultimately are passed on to consumers in the form of higher prices.
A recent report by the Mercator Advisory Group, a research firm for the payment industry, shows that if an issuer can convince 350,000 customers to increase their use of signatures during payment from five to nine per month, they can increase interchange income by nearly $5 million annually. The research has also shown that debit card users are more likely to overdraw their checking accounts, resulting in banks reaping an additional $1 million from non-sufficient fund fees. Consumers who use debit cards more than 20 times per year pay an average of $233 in non-sufficient fund fees compared with $40 for those who don’t.
Up until 2003, it was common practice to deny debit card purchases or ATM transactions that would exceed the customer’s balance unless the account was linked to a credit card, savings account or line of credit to cover the overdrafts. According to the Center for Responsible Lending, a consumer advocacy group, over 80% of banks now use software allowing them to pay overdrafts without alerting the consumer that they’ve exceeded their balance.
Most customers don’t realize that they’ll be charged a non-sufficient fund fee averaging $30 when they overdraw their account. This fee is essentially a finance charge for a short-term overdraft loan, which the bank swiftly recoups from the account holder’s next deposit. When translated into an annual percentage rate, overdraft fees on debit cards can exceed 1,000 percent annually and mean huge profits for debit card issuers.
“You may use a debit card to avoid paying high interest on credit-card balances, but when you’re hit with what amounts to high-cost overdraft loans, your debit card can quickly become the most expensive credit card on the market,” says Eric Halperin, director of the Washington, D.C., office of the Center for Responsible Lending. The group also estimates that consumers pay $17.5 billion in overdraft loan fees annually–nearly half of which are triggered by debit-card transactions or ATM withdrawals.
