Academic journal article Texas Law Review

Safe to Swipe?: Why Congress Should Amend the EFTA to Increase Debit Card User Protection*

Academic journal article Texas Law Review

Safe to Swipe?: Why Congress Should Amend the EFTA to Increase Debit Card User Protection*

Article excerpt

I. Introduction

Outdated 1970s federal legislation governs the most popular form of noncash payment in the twenty-first century, the debit card.1 As of 2009, debit card usage nearly exceeded that of credit cards and checks combined,2 and industry experts predict a continuing increase in this trend.3 Meanwhile, debit card fraud is rising by 30% each year.4 Unfortunately, current law exposes debit card users to expansive liability in the event of fraud, even though it provides credit card users with broad protection. The different legal protection for debit and credit card users is a consequence of two distinct legislative acts: the Electronic Fund Transfer Act (EFTA), which regulates debit card use,5 and the Truth in Lending Act (TILA), which governs credit card use.6

This Note argues that Congress should amend the EFTA to increase debit card user protection. The EFTA should provide debit card users with, at a minimum, the same legal protection it affords credit card users because the distinctions between debit and credit cards do not warrant disparate legal treatment. In addition, placing the majority of fraud losses on card issuers results in the most efficient allocation of losses. Although many issuers currently provide debit card users with more protection than the EFTA requires, issuers can change these policies at any time because they are only voluntary. Therefore, increased legal protection is necessary in order to fully protect debit card users.

Part II of this Note presents a broad overview of the debit card, including the debit card's history, function, and industry structure. Part III highlights the key differences between the EFTA and TILA. Part IV discusses why increasing debit card user protection is necessary. Part V proposes several ways in which Congress can amend the EFTA to increase debit card user protection, and Part VI concludes.

II. An Overview of the Debit Card

A. History

For many years, the paper-based check was the predominant method for authorizing a person or entity to withdraw funds from a bank account.7 In the late twentieth century the United States payment system began to change with the advent of the debit card.8

The debit card's history is closely tied to the development of the automatic teller machine (ATM) in the late 1960s and early 1970s.9 To withdraw money from an ATM, users were required to use a card with a coded magnetic strip, the predecessor of today's magnetic-stripped debit and credit cards.10 For the first several years, consumers primarily accessed ATMs with credit cards.11 However, in 1972 a Cleveland, Ohio bank issued an ATM card with only a cash-withdrawal function, a central feature of the modern debit card.12

The lack of electronic payment terminals at merchant locations hindered widespread debit card use in the 1970s.13 This began to change in the early 1980s as many large gas station chains began to use electronic payment terminals.14 Yet, conflicts between merchants and banks over transaction fees impeded widespread debit card use until the mid-1990s.15

Debit card use rapidly increased once merchants and banks began to agree on transaction fees. The number of debit card transactions increased from comprising 1% of all transactions in the United States in 1994 to over 25% in 2009, exceeding both checks and credit cards.16 Excluding cash from the sample, debit card transactions comprised 35% of all transactions in 2009,17 which in monetary terms equaled 37.7 billion debit and prepaid card transactions valued at over $1.45 trillion-an average of $38.58 per transaction.18 This expansive growth has turned the debit card into the most popular noncash payment form in the United States.19

The debit card's prevalence becomes even clearer when analyzing the percentage of households owning a debit card, which increased from 20% in 1995 to 71% in 2007.20 The number of debit cards in circulation has also grown by a staggering amount, from 235 million in 2000 to an estimated 585 million in 201121-a more than twofold increase that reveals the pervasiveness of the debit card in the modern United States payment system. …

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