The Downsides of Debitby Tim Manni
We write about credit cards a lot in this blog. We’ve covered the credit card reform pretty closely, documenting many of the “unintended consequences.” However, today we want to address a different form of plastic: debit cards.
While we’ve encouraged consumers to some degree to focus on debit as opposed to credit in order to help keep spending under control, that doesn’t mean that debit is perfect. Like most things, it has flaws. Today, we want to examine some of the possible downsides of debit.
Profits: The fact that our society is quickly transitioning to a cash-less one, banks have been able to profit on the new wave of electronic banking by charging fees for such things as over drafting:
Banks may impose a $35 fee for “overdrawing” on a $3.50 fast-food purchase — and have vigorously fought efforts to provide electronic warning of the debit card overdraft at the point of sale. The equivalent interest rate for your $3.50 lapse: 1,000%.
Part of our ongoing discussion on credit cards has involved the banks’ lack of ability to charge fees due to the new rules instituted by the credit card reform. With a new-found crimp on their profits lines, banks have been looking for a new outlet in which to make money. The unprecedented occurrence of Americans using their debit cards more than their credit cards over the past year has made finding this new fee outlet relatively easy:
“The rules have changed for debit cards,” said Gerard Cassidy, managing director of bank equity research at RBC Capital Markets. “What banks have to figure out is how to maintain revenue growth of this product under the new rules and conditions we have to operate under.”
Banks, as a result, have little choice but to pick on the already squeezed consumer.
And pushing debit card loyalty programs might just be the most painless means of doing so.
Protection: Banks are less likely to take a vested interest if someone has used your debit card for fraudulent activity than if it had happened with your credit card. Why? For banks, the money in your debit account is yours, the institution stands less to lose if your debit is lost or stolen:
The reason: It’s the lenders’ money on the line with a credit card transaction — and just our hard-earned savings with debit card fraud. They’ll absorb the cost of investigating and prosecuting theft of their money, but they don’t want to pick up the cost of policing the theft of ours — by identical means through their very same hands.
Credit card borrowers are never out more than $50 regardless of when they discover potential fraud. Debit card holders’ liability is limited to $50 only if they report perceived fraud within two days; the liability jumps to a maximum $500 from that point to 60 days and is unlimited thereafter.
For more on the “downsides of debit,” be sure to read the Dolan’s “3 Debit Cards You Should Never Use.”