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Paying with Plastic

I can distinctly remember when Debit Cards started to become mainstream.  It was such a big deal I even remember a commercial promoting the Visa debit card. It showed a lady happily sailing down the escalators at the mall, thrilled with her newfound freedom. It no longer mattered if she ran out of checks because she had plastic! It used to be that plastic was reserved for credit accounts and money was debited from your checking account by CHECK, almost an anachronism these days. I’m trying to think of the last time I personally wrote a check. I’m 75% sure it was to buy Girl Scout cookies. (I’m 100% sure I won’t disclose how many boxes I bought.)

According to my extensive Google research the first nationwide debit system was created by a company called Landmark in 1984 and by 1998 debit card transactions exceeded check transactions.  In fact, it was only in the early 2000’s that it became standard practice for fast food places to accept plastic.  I know this because I can remember being glad I no longer had to scrape together $1.00 in change on my way home from class.

As time marches on the lines have become increasingly blurred between plastic and cash in terms of acceptance it’s all the same right? Actually, no, not from the merchant’s perspective. Perhaps the reason it took so long for all businesses to get on board with plastic are the fees. Typically, a small fee is charged to the vendor from the issuing bank and that charge is passed on, in some capacity, to the buyer. Originally the banks charged the vendor approximately 2 to 5% on small dollar purchases. This broke down to on average about .06 cents. According to Credit Cards. Com an Oct. 1^st ruling by the federal government increases the amount banks are allowed to charge to vendors to .21 cents. These rates, by the way, are called the ‘debit interchange rates,’ and are dependent on the card (Master Card, Visa, American Express) and the issuing bank. 

From the consumer’s perspective, a card that debits from your checking account and cash withdrawn from it are virtually the same. That is, until you lose it.  Anyone who’s ever lost cash (and haven’t we all?) knows the sheer agony of that missing paper. Setting aside all moral commentary on what should be done with ‘found money,’ there isn’t much chance that the $20 bucks you lost in the Target parking lot is coming back to you. On the contrary, there isn’t much that can easily be done with someone else’s debit card. If yours is lost, it can simply be canceled. It’s a pain, yes, but provided it was lost and not stolen relatively risk free.

And what about that dreaded event, the stolen card or card number?  When I first started using debit cards, I was reluctant to use it for on-line purchases in fear of the number being stolen. As it was connected directly to my checking account, I imagined I would have been out luck. In actuality, any debit card with the logo of a major credit card functions as an ‘off line debit,’ meaning they can be used like a credit card and the purchase will be pending but not fully go through for 2 to 3 days. According to the Federal Reserve debit cards that are reported stolen within two days, or before any transactions were processed, face zero liability for unauthorized charges.

In that case, the difference between debit and credit cards is down to spending power. Because the debit card is linked to your checking account, your available amount is just the amount you have in your checking account. A credit card allows you to buy items, “on credit.” You apply for the card and if approved are given a spending limit. In other words, regardless of the cash you have on hand, you can spend up to the available balance on your credit card and pay for the item later, with interest, of course.

-L. Steele (ExperienceCreditUnions.com Staff Writer)