Ask The Expert
Bruce Cundiff
Javelin Strategy & Research

Paying and Accessing Your Money with Debit: A Safe and Convenient Alternative to Cash

The debit card has emerged as a payment method of choice for many American consumers, with 72 percent using debit cards for purchases in the past 12 months, according to Javelin Strategy & Research1. In 2007, there were nearly 31 billion debit transactions at the point of sale, totaling purchase volume of $1.2 trillion2. These statistics highlight consumers’ preference for using debit cards when making purchases at the point of sale, and with good reason. Debit cards provide a safe and efficient method of payment with multiple benefits over more traditional types of payments such as cash and checks.

Recent media coverage of debit card use among consumers has focused largely on the perceived lack of security when using debit cards. This article provides a factual source of information to enable consumers to make informed choices and make the most of their debit cards.

Safe and Secure Access - Reducing Fraud at the Point of Transaction

Debit card fraud is not spiraling out of control, as many in the media would have consumers believe.

Debit card networks, financial institutions that issue debit cards, ATM owners, and merchants that accept debit cards at their points of sale, are constantly making improvements to ensure that debit card transactions are secure, and that they quickly and efficiently remedy any issues that may arise - fraudulent transactions or otherwise. Despite reports to the contrary, fraud rates for debit cards remain relatively low. According to the 2008 Debit Issuer Study, commissioned by the PULSE® ATM/debit network, debit card fraud losses at ATMs were, on average, 2.5 cents per transaction in 2007. The fraud-loss rate was lower at the point of sale, with an average fraud loss of 2.1 cents per transaction when the cardholder used a signature and even lower - only half a cent - when the cardholder used a personal identification number (PIN) to complete the transaction.

Fraud Prevention and Assistance

Should consumers become victims of debit card fraud, however, financial institutions work hard to ensure that the cardholder is made whole again. Limited liability was developed with consumer protection in mind. Unlike with cash, limited liability means that if a consumer’s debit card is lost or stolen, consumers have a chance to get their lost funds back. With stolen cash, once it’s gone, there is little chance of recovering it.

The amount consumers are liable for depends on how quickly the financial institution is informed of the illegal activity. Consumers should check with their individual financial institution for specifics on the level of protection provided.

In most cases, debit card issuers often limit consumer fraud loss exposure to $50. Javelin’s Identity Safety Scorecard, a survey of the security mechanisms the top U.S. financial institutions have in place, indicates that most issuers effectively have a "zero liability" policy. This means that consumers are not responsible for any fraudulent transactions initiated on their accounts3, as long as they report the transactions within a given time frame - usually within 60 days of when the fraudulent transaction was discovered.

Limited liability highlights the benefits of debit over cash. With limited liability for a lost or stolen debit card, consumers have a measure of protection as compared to the "final" nature of lost or stolen cash - once it’s gone, there is little chance of recovering stolen cash.

Debit Cards as a Financial Management Tool

Given the current economic climate, consumers are increasingly seeking assistance from their financial institutions for help with financial management and spending control. Debit cards offer an element of control for consumers in that the money spent in a debit card transaction is drawn from existing funds in their account. Account holders often view debit cards as a vehicle to control their finances and spend responsibly. Since the funds from debit card transactions come out of a bank account or credit union and are not borrowed from a line of credit, it is important to keep track of account balances and how much is being spent to avoid overdrafts and associated fees.

With debit cards, though, keeping track of balances is easier than ever. In addition to available balance information provided on many ATM transaction receipts, online banking allows consumers to check balances and transactions 24/7. Many financial institutions also offer e-mail alerts that can be set up to notify consumers when their balances reach a certain threshold - often defined by the consumers themselves.

There are instances when using a debit card will cause a hold on funds in the account to cover the anticipated amount of the transaction. Financial institutions can place a hold on an account as a means of ensuring payment to the merchant. This "preauthorization" has attracted a significant amount of attention recently as consumers use their debit cards more frequently at gas stations, where holds are common. With gas prices rising dramatically over the past year, merchants are now submitting a preauthorization request to confirm that funds of $50 to $100 are available to cover the cost of a tank of gas.

Financial institutions that issue debit cards are responsible for actually applying the hold, as well as setting the length of the hold, which varies depending on how the debit card is used (PIN or signature transaction). The amount of money in the account available for use during the hold period is reduced by the amount of the hold. To avoid potential overdraft fees that could arise from a hold at the point of sale, consumers should check with their financial institution to determine its policy on the length of debit holds. If a hold lasts longer than an hour for a PIN transaction, or a few days for a signature transaction, ask why.

A Small Price for a Great Convenience

Contrary to some inaccuracies that have been reported, there is rarely a service charge passed on to customers when using debit cards to make purchases. In fact, less than 1 percent of cardholders in the U.S. are charged a fee by their financial institutions for using a PIN-based debit card for purchases.4

While some financial institutions are adding surcharge-free ATM access, most ATM owners charge a fee of $1 to $3 for withdrawing money from an ATM not owned by the account holder’s financial institution. This charge, like the premium paid for valet parking or to drive tollways, is for the convenience of getting cash from an ATM owned by an organization other than the debit cardholder’s financial institution.

To avoid the surcharge fee, consumers can use the cash-back option at available merchants or get cash from their financial institution’s ATMs.

Bruce Cundiff is Director of Payments Research and Consulting with Javelin Strategy & Research - a leading provider of nationally representative, quantitative research focused exclusively on financial services topics.