Academic journal article ABA Banking Journal

Debit's Downside: Defrauded Debit Card Users Are Made Whole in Most Cases, but Is That Enough to Justify Maintaining a 30-Year-Old Technology That Underpins an Increasingly Popular Payment Option?

Academic journal article ABA Banking Journal

Debit's Downside: Defrauded Debit Card Users Are Made Whole in Most Cases, but Is That Enough to Justify Maintaining a 30-Year-Old Technology That Underpins an Increasingly Popular Payment Option?

Article excerpt

Boot up your web browser and go to the Mapquest home page, www.mapquest.com. You'll probably stumble across this ad:

Graphic: A man looking like he's having a good time somewhere. Text: "He's On An All-Expense-Paid Vacation.

"The Trouble Is He's Paying For It With Your Money."

Clicking on the ad brings you to the American Express TravelFunds Card page. TravelFunds, launched late last year, is the travelers check of the future. For a one-time fee of $14.95, you can load--and reload--cash value into the card. You can use that card anywhere that American Express cards are accepted.

The TravelFunds page has a lot to say. But consider these fragments--emphasis added:

"This prepaid, reloadable card is a smart alternative to carrying cash or debit cards when traveling."

"It's not linked to your bank account. Losing a debit card when away from home can be a real problem. But if your TravelFunds card gets lost or stolen, you don't have to worry about your funds at home. It's prepaid and not linked to a bank account."

When American Express introduced the card last October, it specifically noted increasing public worry about identity theft. A spokeswoman declines to reveal how many such cards are out there, but says the company has had a good response.

The growing debit-card pie

Bankers should be concerned that American Express is implying, in this marketing, that ordinary debit cards pose a risk that travelers must consider before hitting the road. Is the implication warranted?

Consider some recent statistics about debit usage.

First, take the findings of a consumer study released in January by the ABA and Dove Consulting. The Study of Consumer Payment Preferences found the following:

1. Between 1999 and 2003, the number of consumers using debit cards to make in-store purchases increased from 48% to 57%, for PIN-based transactions.

2. In the same period, consumers using the cards increased from 42% to 54%, for signature-based transactions.

3. Nowadays, 94% of debit card holders have a card with either a Visa or MasterCard logo, and most consumers report using both PIN and signature debit capabilities. The study found that 45% prefer using a PIN, while 38% prefer to sign.

4. Debit is eroding the use of cash and checks. In 1999, cash and checks accounted for nearly 60% of in-store payments, and debit for only 21%. In 2003, cash and checks dropped to a 47% share, with all the growth in share going to debit, at 31%.

5. The study concluded that for a growing number of consumers, debit cards are the payment method of choice. As younger consumers age and represent a larger portion of the market, the study projected that debit usage would grow by a double-digit rate.

Bolstering these findings is a June announcement by Bank of America, one of the top U.S. check card issuers, with more than 22 million. B of A reported a 23% increase in volume--65 purchases with a debit card every second. And Visa reported that more than half of its volume worldwide in 2003 was on debit cards, and that 2003 volume in the U.S. was up 17% from 2002.

Unfortunately, with the good comes the bad. Fraudsters have also taken a liking to debit cards.

"There is an element of society that is drawn towards stealing data, whether it is PIN data or card data," says Susan Zawodniak, vice-president and executive director of NYCE Corp., one of the nation's largest ATM and POS network operators. The appeal? "Debit cards provide the ultimate fencible material," says Zawodniak. "Cash."

With the increasing number of debit cards out there, and their increasing usage, "the opportunity for loss is greater than it has ever been, and the numbers are larger than they've ever been," says Rob Evans, director of industry marketing, NCR Corp.

Debit "chips" versus credit "chips"

All plastic cards are susceptible to fraud--indeed, some players in the card business decline to differentiate between debit and credit card fraud because they feel a card is a card is a card. …

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