Why Banks Push Debit Cards

The Wall Street Journal reporters at FiLife started a series of “Why Don’t They …” blog posts making suggestions about services and practices which seem to make sense to the customers but not offered by the financial institutions. I gave a one-word answer — economics. If you think they should do something but they are not doing it, first think about the economics. More likely that not, it’s because they make more money by not doing it. Companies are driven by ROI — return on investment. They also compete with each other. The companies are NOT stupid. If something provides a benefit to the customers and it delivers a good ROI, you bet some companies will do it. If you don’t see it happening, it means there is no good ROI or they are pursuing something else with a better ROI.

In Why Don’t They… Let Me Have an ATM card that Isn’t a Debit Card?, Ron Lieber asked why the banks give their customers a debit card bearing a Visa or MasterCard logo (also known as a Check Card) instead of just a plain ATM card which can also be used as a debit card but only with a PIN. In a follow-up post, Ron found out that many large banks actually do give out plain ATM cards but they don’t make it the default option. Nor do they make it apparent that the customers have that choice. You have to specifically ask for it. It goes back to my previous post Opt In or Opt Out: The Power of the Default Option. The default choice is designed to benefit the business offering the choices.

A Visa/MasterCard debit card can be used with or without a PIN. When you use it with a PIN, it’s called “PIN debit.” When you use it without a PIN, it’s called “signature debit.” If you lose the debit card, whoever found it can use it in any store by doing signature debit. The cashier is supposed to check the signature but we all know they don’t do a good job at that. A plain ATM card can only use PIN debits. Therefore it’s more secure. If you lose it, nobody can use it without a PIN. You would think the banks should prefer a more secure card, but they don’t. They push for the less secure card because they make more money if you use signature debit instead of PIN debit.

According to this article on MSNBC, for a $100 purchase, the bank can earn $1.48 if you use signature debit, $0.20 if you use PIN debit. Guess which button the banks want you to push? If you are a bank, which card do you want to send to your customers, a debit card that can do signature debit or a plain ATM card that can be used only with PIN debit? No contest. The banks make all kinds of efforts to push their customers to use signature debit instead of PIN debit. Examples:

- Wells Fargo gives ~0.25% reward for using their check card. Only signature debits are eligible. PIN debits don’t count. In some areas, Wells Fargo charges $1 in any month you use PIN debit at least once. No charge for signature debits.

- U.S. Bank charges customers in some states $0.25 for each PIN debit. Ouch! That sting will sure train the customers well not to push that debit button or say “debit” ever again. No charge for signature debits.

Another reason the banks push debit cards is that the customers are more likely to generate overdraft fees that way. When the customers switch from writing checks to using debit cards, they often also ditch their check register. It becomes harder to track the purchases. Before you know, small purchases add up and you will bounce a check or scheduled draft.

If you like using a debit card instead of a credit card, and you care about security, ask your bank for a plain ATM card. You don’t get it unless you ask for it. Avoid banks that punish you for using PIN debits.

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Comments

  1. Anonymous says

    One benefit to the consumer that you omit is that almost all retailers accept the Visa/MC debit cards. Not all accept ATM debit cards.

    Also, there is the convenience factor for the consumer. Doesn’t it make sense that the bank is compensated for handling the transaction.

    Ted

  2. clicclic says

    Dude, this is a great blog. I’ve been following mymoneyblog for several years and this blog may be a tinge better. The jury’s out. I love Jonathan (sorry if I spelled it wrong J!), but your blog is just great.

    I really really appreciate you talking about Government Sponsored Enterprise (GSE) bonds or “F-bonds” back in July:

    http://thefinancebuff.com/2007/06/agency-bonds-for-higher-yield-over.html

    I keep getting those stupid “Do what Senators do and invest in F-series bonds” things in the mail (great kindling) and was wondering what all the fuss was about. Thank you so much for covering this.

    We’d all love to find a safe vehicle that pays close to double the U.S. gov’t's announced inflation numbers (total B.S. numbers by the way). I guess I need to keep looking…

  3. clicclic says

    Oh, sorry about the last off-topic rant.

    The solution to this sig debit vs PIN debit is simple: Don’t use Debit cards!

    You are essentially unprotected should someone get hold of your debit card and go to town on it. Your money is gone, and you won’t get it back until you’ve proven it was stolen.

    Just use plain-old boring credit cards. Debit cards are a young fool’s game. These kids don’t get how easy it is to steal from a debit card.

  4. TFB says

    Ted,

    I’ve never seen a retailer accepting Visa/MasterCard but not accepting ATM debit cards. Visa itself operates a large EFT network which charges less than its credit card network.

    Clicclic,

    Thank you for your compliments. I read Jonathan’s My Money Blog too. It’s a good blog.

    Incidentally I just posted part two of the agency bond story:

    How a Callable Bond Worked

    Hope you find it helpful.

  5. Adeem says

    Interesting. Up here in Canada we have less complications. We have only the ATM debit cards (no debit cards with VISA or Mastercard) and regular credit cards.

  6. Dan L says

    I found a bank that is giving back to the customer for using their debit/credit card. I read about it first on clarkhoward.com. The website is smallenoughtocare.com. They offer a 6% checking account. Read all the fine print though. You must have ten point of sale transactions on your debit/credit card each month to get the high interest rate (and other requirements).

  7. says

    It seems to me that banks hold credits to debit cards for their investment purposes. People with low account balances are more plentiful than those with large accounts. Also people with big bank accounts probably never use a debit card. Debits show up against a person’s account immediately, while credits can take 10 days to appear even when bank personnel can see the credit sitting on the card, they claim they can not transfer the funds to the checking account. Apparently some guru on another planet must breathe on the account first. I am done with debit cards. What a scam. It may not be illegal, but it is immoral.

  8. Chris S says

    Bit different here in Britain. Over the last few years the push has been to do away with signature purchases in favour of chip and pin cards as these are seen as more secure and less likely to lose the banks money as result of fraud. Either way, however, the retailer pays the same fee per transaction, and the customer is not charged at all.

  9. Chuck H says

    Acutally, there is a bunch of material above that contridicts my experience using Debit cards almost exclusively. National City Bank Visa Debit Cards

    - It can take over a week before transactions post to the account. Not all transactions pull immediately. For example, it appears that for credit-style pulls (signature debits above), gas stations only request $1 from the card to prove it’s active. The actual sale amount usually takes days to appear.

    - Restaurants frequently take a long time to appear

    - Stores frequently take several days to appear

    - We had a debit card DUPLICATED! and used in a different state to charge $850 or so worth of goods. The bank caught the fraud and shit down the cards. When I finally called to see why the card stopped working, they told me about the fraud and within 24 hours (? memory) we had the money back in the account as a provisional credit, and it took them about 2 weeks to make it permanent. My wife’s card worked the entire time, so it was no big deal.

    - I LOVE my debit card – I get all of the convenience of a Visa card without spending money I don’t have. This has helped us cut our credit card debt to almost nothing, since the convenience is the same, but the account balance is the “credit limit” that controls how much we can spend.

    - We also have several checking accounts with the bank. The debit card is only hooked to the “Cash Account” which is NOT the account the paychecks are deposited in… It only has discretionary funds and items I pay on the card using pre-approved debits (such as day care).

  10. Junk Debt Collectors says

    I believe what is best is just to cut up your credit cards. When you stop using credit cards, you’re much more likely to keep from getting into credit debt. But I avoid a credit card, is it feasible to still get a home loan? Do you know?

  11. Sonya M says

    I think debit cards are great! I work at a bank so I understand the ends and outs of their use. Having said this, I think it is unethical how much money banks make off the use of signature based purchases. 1-3% fee income per transaction, turn around and give the customer .25% of the income via rewards. This encourages consumers to use it more more more to get the free rewards. I know I love the free rewards and have gotten all kinds of great gifts from money to gift cards and even have the option of millions of household goodies. BUT should our retailers have to pay for all of this? I don’t think so. It is just going to cause them to drive up their prices which will then cause shoppers without a rewards program to suffer the most. IT SHOULD BE ABOUT THE CONSUMER. Not about EXTRA profit that can be made by banks. I believe we need limitations on interchange fees. What about one fee regardless of the amount of transaction?

    Also, if you love using your debit card, be sure you bank somewhere that offers 0% liability on debit card fraud. Provisional credit is given almost immediately and unless they prove you were at fault, the refund will be yours to keep.

  12. M. Johnston says

    The “ins and outs” are about profits for the bank. Of course you like the rewards, that’s exactly why they’re giving them to you. But you pay dearly for them and don’t even realize it.

    My bank has been after me for months with numerous mailings, emails and phone calls to activate my debit card. I refuse to do so and am going to cut it up and throw it away. People are just too guilible…or lazy. Write a check for goodness’ sake and be grateful you have enough money to have a bank account to begin with.

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