A debit card (also known as a bank card, plastic card or check card) is a plastic payment card that can be used instead of cash when making purchases. It is similar to a credit card, but unlike a credit card, the money is immediately transferred directly from the cardholder’s bank account when performing any transaction.
Some cards might carry a stored value with which a payment is made, while most relay a message to the cardholder’s bank to withdraw funds from a payer’s designated bank account. In some cases, the primary account number is assigned exclusively for use on the Internet and there is no physical card.
In many countries, such as most of Western Europe, the use of debit cards has become so widespread that their volume has overtaken or entirely replaced cheques and, in some instances, cash transactions. The development of debit cards, unlike credit cards and charge cards, has generally been country specific resulting in a number of different systems around the world, which were often incompatible. Since the mid-2000s, a number of initiatives have allowed debit cards issued in one country to be used in other countries and allowed their use for internet and phone purchases.
Debit cards usually also allow instant withdrawal of cash, acting as an ATM card for this purpose. Merchants may also offer cashback facilities to customers, so that a customer can withdraw cash along with their purchase.
Types of debit card systems:
There are currently three ways that debit card transactions are processed: EFTPOS (also known as online debit or PIN debit), offline debit (also known as signature debit), and the Electronic Purse Card System. One physical card can include the functions of all three types, so that it can be used in a number of different circumstances.
Although the four largest bank card issuers (American Express, Discover Card, MasterCard, and Visa) all offer debit cards, there are many other types of debit card, each accepted only within a particular country or region, for example Switch (now: Maestro) and Solo in the United Kingdom, Interac in Canada, Carte Bleue in France, EC electronic cash (formerly Eurocheque) in Germany, UnionPay in China, RuPay in India and EFTPOS cards in Australia and New Zealand. The need for cross-border compatibility and the advent of the euro recently led to many of these card networks (such as Switzerland’s “EC direkt”, Austria’s “Bankomatkasse”, and Switch in the United Kingdom) being re-branded with the internationally recognized Maestro logo, which is part of the MasterCard brand. Some debit cards are dual branded with the logo of the (former) national card as well as Maestro (for example, EC cards in Germany, Switch and Solo in the UK, Pinpas cards in the Netherlands, Bancontact cards in Belgium, etc.). The use of a debit card system allows operators to package their product more effectively while monitoring customer spending.
Online debit system:
Online debit cards require electronic authorization of every transaction and the debits are reflected in the user’s account immediately. The transaction may be additionally secured with the personal identification number (PIN) authentication system; some online cards require such authentication for every transaction, essentially becoming enhanced automatic teller machine (ATM) cards.
One difficulty with using online debit cards is the necessity of an electronic authorization device at the point of sale (POS) and sometimes also a separate PINpad to enter the PIN, although this is becoming commonplace for all card transactions in many countries.
Overall, the online debit card is generally viewed as superior to the offline debit card because of its more secure authentication system and live status, which alleviates problems with processing lag on transactions that may only issue online debit cards. Some on-line debit systems are using the normal authentication processes of Internet banking to provide real-time online debit transactions.
Offline debit system:
Offline debit cards have the logos of major credit cards (for example, Visa or MasterCard) or major debit cards (for example, Maestro in the United Kingdom and other countries, but not the United States) and are used at the point of sale like a credit card (with payer’s signature). This type of debit card may be subject to a daily limit, and/or a maximum limit equal to the current/checking account balance from which it draws funds. Transactions conducted with offline debit cards require 2–3 days to be reflected on users’ account balances.
In some countries and with some banks and merchant service organizations, a “credit” or offline debit transaction is without cost to the purchaser beyond the face value of the transaction, while a fee may be charged for a “debit” or online debit transaction (although it is often absorbed by the retailer). Other differences are that online debit purchasers may opt to withdraw cash in addition to the amount of the debit purchase (if the merchant supports that functionality); also, from the merchant’s standpoint, the merchant pays lower fees on online debit transaction as compared to “credit” (offline).
Electronic purse card system:
Smart-card-based electronic purse systems (in which value is stored on the card chip, not in an externally recorded account, so that machines accepting the card need no network connectivity) are in use throughout Europe since the mid-1990s, most notably in Germany (Geldkarte), Austria (Quick Wertkarte), the Netherlands (Chipknip), Belgium (Proton), Switzerland (CASH) and France (Moneo, which is usually carried by a debit card). In Austria and Germany, almost all current bank cards now include electronic purses, whereas the electronic purse has been recently phased out in the Netherlands.
Prepaid debit cards
Prepaid debit cards are reloadable and can be also called reloadable debit cards.
The primary market for prepaid debit cards has traditionally been unbanked people; that is, people who do not use banks or credit unions for their financial transactions. But prepaid cards also appeal to other users attracted by their advantages.
Advantages of prepaid debit cards include being safer than carrying cash, worldwide functionality due to Visa and MasterCard merchant acceptance, not having to worry about paying a credit card bill or going into debt, the opportunity for anyone over the age of 18 to apply and be accepted without regard to credit quality, and the option to directly deposit paychecks and government benefits onto the card for free.
If the card provider offers an insecure website for letting you check the card’s balance, this could give an attacker access to the card information. If you lose the card, and have not somehow registered it, the user likely loses the money. If a provider has technical issues, the money might not be accessible when a user needs it. Some companies’ payment systems do not appear to accept prepaid debit cards.There is also a risk that prolific use of prepaid debit cards could lead data provider companies to miscategorize a user in unfortunate ways.
Prepaid cards vary by the issuer company: key and niche financial players, (sometimes it can be collaborations between businesses), purpose of usage (transit card, beauty gift cards, travel card, health savings card, business, insurance, others), and regions.
Some of the first companies to enter this market were: MiCash, RushCard, Netspend, and Green Dot who gained market share as a result of being first to market. However, since 1999, there have been several new providers, such as TransCash, 247card, iKobo, Ripae Card, Argent Card, EuroPYM, AsiaPYM, & DrawPay Card. These prepaid card companies offer a number of benefits, such as money remittance services, card-to-card transfers, and the ability to apply without a social security number.
In 2009 a company called PEX Card launched a corporate expense card service aimed at business users.
As of 2019, many other companies also offer the cards.
As of 2013, several city governments (including Oakland, California and Chicago, Illinois are now offering prepaid debit cards, either as part of a municipal ID card (for people such as illegal immigrants who are unable to obtain a state driver’s license or DMV ID card) in the case of Oakland, or in conjunction with a prepaid transit pass (Chicago). These cards have been heavily criticized for their higher-than-average fees, including some (such as a flat fee added onto every purchase made with the card) that similar products offered by Green Dot and American Express do not have.
The U.S. federal government uses prepaid debit cards to make benefits payments to people who do not have bank accounts. In 2008, the U.S. Treasury Department paired with Comerica Bank to offer the Direct Express Debit MasterCard prepaid debit card.
In July 2013, the Association of Government Accountants released a report on government use of prepaid cards, concluding that such programs offer a number of advantages to governments and those who receive payments on a prepaid card rather than by check. The prepaid card programs benefit payments largely for cost savings they offer and provide easier access to cash for recipients, as well as increased security. The report also advises that governments should consider replacing any remaining cheque-based payments with prepaid card programs in order to realize substantial savings for taxpayers, as well as benefits for payees.
Impact of Government-provided bank accounts
In January 2016, the UK government introduced fee-free basic bank accounts for all, having a significant impact on the prepaid industry, including the departure of a number of firms.
Consumer protections vary, depending on the network used. Visa and MasterCard, for instance, prohibit minimum and maximum purchase sizes, surcharges, and arbitrary security procedures on the part of merchants. Merchants are usually charged higher transaction fees for credit transactions, since debit network transactions are less likely to be fraudulent. This may lead them to “steer” customers to debit transactions. Consumers disputing charges may find it easier to do so with a credit card, since the money will not immediately leave their control. Fraudulent charges on a debit card can also cause problems with a checking account because the money is withdrawn immediately and may thus result in an overdraft or bounced checks. In some cases debit card-issuing banks will promptly refund any disputed charges until the matter can be settled, and in some jurisdictions the consumer liability for unauthorized charges is the same for both debit and credit cards.
In some countries, like India and Sweden, the consumer protection is the same regardless of the network used. Some banks set minimum and maximum purchase sizes, mostly for online-only cards. However, this has nothing to do with the card networks, but rather with the bank’s judgement of the person’s age and credit records. Any fees that the customers have to pay to the bank are the same regardless of whether the transaction is conducted as a credit or as a debit transaction, so there is no advantage for the customers to choose one transaction mode over another. Shops may add surcharges to the price of the goods or services in accordance with laws allowing them to do so. Banks consider the purchases as having been made at the moment when the card was swiped, regardless of when the purchase settlement was made. Regardless of which transaction type was used, the purchase may result in an overdraft because the money is considered to have left the account at the moment of the card swiping.
Debit cards and secured credit cards are popular among college students who have not yet established a credit history. Debit cards may also be used by expatriated workers to send money home to their families holding an affiliated debit card.
Issues with deferred posting of offline debit
The consumer perceives a debit transaction as occurring in real time: the money is withdrawn from their account immediately after the authorization request from the merchant, which in many countries, is the case when making an online debit purchase. However, when a purchase is made using the “credit” (offline debit) option, the transaction merely places an authorization hold on the customer’s account; funds are not actually withdrawn until the transaction is reconciled and hard-posted to the customer’s account, usually a few days later. However, the previoce[clarification needed] applies to all kinds of transaction types, at least when using a card issued by a European bank. This is in contrast to a typical credit card transaction, in which, after a few days delay before the transaction is posted to the account, there is a further period of maybe a month before the consumer makes repayment.
Because of this, in the case of an intentional or unintentional error by the merchant or bank, a debit transaction may cause more serious problems (for example, money not accessible; overdrawn account) than a credit card transaction (for example, credit not accessible; over credit limit). This is especially true in the United States, where check fraud is a crime in every state, but exceeding your credit limit is not.
Debit cards may also be used on the Internet either with or without using a PIN. Internet transactions may be conducted in either online or offline mode, although shops accepting online-only cards are rare in some countries (such as Sweden), while they are common in other countries (such as the Netherlands). For a comparison, PayPal offers the customer to use an online-only Maestro card if the customer enters a Dutch address of residence, but not if the same customer enters a Swedish address of residence.
Internet purchases can be authenticated by the consumer entering their PIN if the merchant has enabled a secure online PIN pad, in which case the transaction is conducted in debit mode. Otherwise, transactions may be conducted in either credit or debit mode (which is sometimes, but not always, indicated on the receipt), and this has nothing to do with whether the transaction was conducted in online or offline mode, since both credit and debit transactions may be conducted in both modes.