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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Fundamental Issues With Debit Cards And Their Impact to Savers


Do you now use debit cards more than credit cards? For savers who depend on the high interest rates of reward checking accounts, you probably make more purchases with debit cards. Before reward checking, I only used credit cards. I considered credit cards to be safer and I received cash back rewards. Recent security breaches in the news are showing why credit cards are safer. In terms of rewards, new regulation will likely make debit cards less rewarding than credit cards.

Security Issues

The latest security breach happened at the arts-and-craft chain, Michaels, which reported that stores in 20 states had tampered PIN pads at checkout terminals. According to this Chicago Tribune article:

The scope of the crime has surprised security experts and exposed the vulnerabilities of debit cards

The problem with debit cards is that money comes right out of your checking account. With credit cards, you can dispute fraudulent changes without any affect to your bank account. This ABC News article about debit card security includes a quote from Frank Abagnale, a former fraudster turned security consultant who was the inspiration for the film "Catch Me if You Can."

"I don't have a debit card. I believe it's one of the worst financial tools ever given to the American public,"

The article lists 8 reasons to worry about debit cards. The risks include losing account access and unlimited liability if you wait too long to report the fraud.

Interchange Revenue Issues

The other major issue with debit cards may impact the rewards. When you make a purchase with a debit card or credit card, the retailer pays an interchange fee of between 1% to 2% of the cost of the purchase. Most of that fee goes to the bank that issued the card, and many banks return some of that money to their customers in the form of rewards. For credit cards, cash back is the most common type of rewards. For debit cards, in addition to cash back, there's high interest rates and ATM fee reimbursements of reward checking.

The interchange fees that banks receive from debit cards are in jeopardy due to the Durbin Amendment that was part of last year's financial reform. It requires the Federal Reserve to implement caps on debit card interchange fees. That regulation is scheduled to take effect this July 21st. The Durbin Amendment exempts small institutions with less than $10 billion in assets. However, there are complications with implementing this cap, and this isn't the only risk to small institutions. One of my contacts in the industry warns that there's another part of the regulation that covers debit card transaction routing, and this part of the regulation could also hurt the interchange revenue for small institutions.

These are the reasons why credit unions are against this regulation. Both banks and credit unions have been pushing for the passage of bills in Congress that will delay the implementation of the Durbin Amendment.

The latest news on the interchange regulation is that it's likely to take effect this year. According to Capitol Hill observers quoted in this Digital Transaction article, the regulation will take effect, possibly a little late with modified caps. The legislation to delay the regulation faces a lot of headwinds for it to make it through Congress.

If the interchange regulation does take effect, it may take a little while before its impact to small institutions become clear. Nevertheless, based on the concerns from credit unions and small banks, interchange revenue from debit cards will be hurt. So this might cause banks and credit unions to cut back on their debit card rewards which would likely include lower reward checking interest rates.

Reward Checking Without Debit Cards?

It is possible that reward checking can survive even if the interchange regulation does take effect. This regulation only affects interchange fees from debit cards. It does not affect credit card interchange fees. Perhaps banks and credit unions will offer reward checking accounts that have credit card usage requirements instead of debit card usage requirements?

The company that created the reward checking model, BancVue, may have something in the works. BancVue will be involved in meetings at an upcoming banking conference, and on the agenda is the following topic: Why Credit Cards Make Even More Sense for Community Institutions, Especially To Help Overcome The Reduction In Debit Interchange. I don't know if there are complications with replacing the reward checking debit card with a credit card, but it would seem to be the perfect solution to these two major debit card issues.

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Anonymous   |     |   Comment #1
My credit union started doing this in November 2010.  3.5% for 12 credit card transactions $25,000 max.
Anonymous   |     |   Comment #2
What credit union is that?
adityanm   |     |   Comment #4
RCAs already use credit card network by using pinless transactions.
dunker   |     |   Comment #5
If you use your debit card as a pinless credit card, does the bank get the credit card interchange fee or just the smaller debit card interchange fee?
dcurrey   |     |   Comment #6
My credit union requires 12 non-pin credit card transactions for the RCA.   Hell I don't even know my PIN.  So if this is for PIN debit card transaction the new rules shouldn't effect it. 

Now I am somewhat confused.

moneysaver   |     |   Comment #7
Ken, I'm trying to understand the credit card scenario you're speculating about: one bank issues me a credit card, and then I also have a separate checking account with them. If I use the credit card X times per month, perhaps with a certain value of transaction, then the bank would pay me interest on the balance in my checking account up to some set balance cap. Is that the general idea?

I guess the banks might like that because in addition to getting the interchange fees, they'd also get interest paynents from that portion of people who would sometimes carry over a balance on their credit card. Yet, when I think about the RCAs I've known, most of those banks or CUs haven't been in the credit card business, perhaps because that's the terrain of the "big boys"

It's an interesting idea, though the devil will be in the details. It certainly would be nice to get a card alternative that has the better fraud and dispute resolution features of a credit card. However, it may be all academic, unless something happens to get RCA and other interest rates up off the floor. I'd go out of my way to earn 4 or 5% on a $25K balance RCA account. But I'm not going to jump thru so many hoops for 2% or less.

Anonymous   |     |   Comment #8
some debit transactions are processed as ATM if not careful especially at gas stations,
when given a choice of debit or credit, always chose credit when asked that question.
Anonymous   |     |   Comment #9
Debit cards are indeed the worst financial tool that has ever been perpetrated on the American public.   What your article does not talk about is "prepaid debit cards".  These are even worse .  They are barely regulated and the big banks put all sorts of fees on these so that they can transfer your money to their profits.  There are a couple of articles today about them today in the Wall Street Journal and their egregious fees.  Ken should write an article on these and we should all lobby the Congress to regulate them if not outright ban them.
adityanm   |     |   Comment #10
Prepaid debit cards are rip offs like Travellers checks. You not only loan your money to bank for free but also pay a fee for your stupidity. Nothing beats a free credit card.
glxpass   |     |   Comment #11
I don't debate that credit cards are safer to use than debit cards, but it's important to realize that the Michael's problems involved theft of both the debit card information *and* it's PIN.  That made it possible for the scammers to go to ATMs and make cash withdrawals from the victims' bank accounts at possibly $500 per incident.  Using the debit cards as credit cards, i.e. as signature-based transactions, would have avoided the PIN theft.

There are precautions one can take to minimize the chances and/or impact of debit card thievery:

1.  Use your debit card as a credit card, e.g. never enter your PIN, say "credit" when offered the choice between "credit" and "debit."  As a matter of fact, the zero liability protection that MasterCard and Visa have for their debit cards doesn't apply to PIN-based transactions, only signature-base ones.

2.  Only use your debit card when necessary, such as to meet your RCA's transaction requirements.  I keep my RCA debit cards at home and use online transactions at familiar web sites to meet my RCAs' transaction requirements.

3  If your bank allows it, lower the maximum transaction size on your debit card.

4.  Using a tool such as online banking, review your checking account transactions daily, looking for any transactions that are not legitimate.

Ken, you said:

"The Durbin Amendment exempts small institutions with less than $10 billion in assets. However, there are complications with implementing this cap, and this isn't the only risk to small institutions. One of my contacts in the industry warns that there's another part of the regulation that covers debit card transaction routing, and this part of the regulation could also hurt the interchange revenue for small institutions."

Please explain the complications with implementing the $10 billion cap, the additional risks to small institutions, and the part of the regulation covering debit card routing hurting the interchange revenue for small institutions.  Thanks!
Sandra   |     |   Comment #12
I have a bank card that has the words "DEBIT VISA" on it. Can I use that for signature-based transactions, or would it be PIN-based only? Anybody know? Is it safe to use this card?
darkdreamer4u   |     |   Comment #13
Sandra, yes, you can use that card for sig-based transactions. And safe is a relative term, especially with debit cards.
Anonymous   |     |   Comment #14
debit cards are not safe. Credit cards are safe.
adityanm   |     |   Comment #15
Many smaller cc transactions now do not even require signature with card swipe terminals.  Therefore if you lose your card some one can use it with impunity till you report as stolen.
Anonymous   |     |   Comment #16
They may use it with impunity, but with a credit card you don't have any downside risk if someone steals and uses your credit card
Jeanne   |     |   Comment #17
Thanks, GLXPASS, good tips.
moneysaver   |     |   Comment #18
I'm sorry, but it's silly and uninformed to argue that credit cards are safe and debit cards are not... They both have risks, and perhaps the risk is a bit more for debit cards... But debit cards also carry consumer protections provided by federal law... The main difference with a debit card in the event of fraud is your account is going to be debited for the fraudulent activity for a week or two until you go thru the fraud reporting process and get the funds restored.

See the Federal Trade Commission's summary of consumer protections for debit cards:

ATM or Debit Card Loss or Fraudulent Transfers (EFTA). Your liability under federal law for unauthorized use of your ATM or debit card depends on how quickly you report the loss. If you report an ATM or debit card missing before it's used without your permission, the EFTA says the card issuer cannot hold you responsible for any unauthorized transfers. If unauthorized use occurs before you report it, your liability under federal law depends on how quickly you report the loss.

For example, if you report the loss within two business days after you realize your card is missing, you will not be responsible for more than $50 for unauthorized use. However, if you don't report the loss within two business days after you discover the loss, you could lose up to $500 because of an unauthorized transfer. You also risk unlimited loss if you fail to report an unauthorized transfer within 60 days after your bank statement containing unauthorized use is mailed to you. That means you could lose all the money in your bank account and the unused portion of your line of credit established for overdrafts. However, for unauthorized transfers involving only your debit card number (not the loss of the card), you are liable only for transfers that occur after 60 days following the mailing of your bank statement containing the unauthorized use and before you report the loss.

If unauthorized transfers show up on your bank statement, report them to the card issuer as quickly as possible. Once you've reported the loss of your ATM or debit card, you cannot be held liable for additional unauthorized transfers that occur after that time.

As stated above, one of the best ways to protect against debit card fraud losses is to have your bank lower the daily POS purchase limit on your card to $500 or less. Often, the default limits that banks set for POS transactions are $1000 or more.

Lastly, note above that the requirement for reporting the loss of a card is within two days of when YOU DISCOVER it missing. If someone can't manage to contact their bank within two days of discovering the loss of a card, they're asking for a bad result.


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