Debit cards: get the flexibility of a credit card but avoid the debt

If you’re the kind of person who struggles to reign in your credit card debt each month, a debit card could be for you. Debit cards have all the functionality of credit cards – you can make purchases online or over the phone – but only let you spend money you actually have.

Recent reforms to debit card regulations make the transaction fees for debit card transactions uncertain, but debit cards are still a great option for lots of consumers, as evidenced by their rising popularity.

Debit cards gaining popularity in Australia

Visa International says the amount spent on debit cards worldwide is around $US2.2 trillion, or 55% of the market, with $US1.8 trillion spent on credit cards.

In Australia debit cards’ market share is much lower – around 33% - but spending on debit cards rose 13% last year, whereas growth in Visa credit cards was only 3.1%. This growth in popularity for debit cards is probably due to surcharges on credit card transactions, which are sometimes 3% or more.

Visa debit cards have been available for a number of years, but MasterCard has now entered the market with the launch of the BankWest MasterCard debit card in November 2005.

A number of institutions have recently released debit card products, including ANZ who launched their debit card in March this year, following the lead of St George with a debit card on offer since 2000, and Suncorp since the 1980s.

How do debit cards work?

Most debit cards have all the features of credit cards - you can make payments over the phone or internet, access your money overseas, or make purchases at “credit cards only” locations. The difference is, the money for these payments is drawn directly from your savings or transaction account, rather than as credit from the bank. This means you can monitor your account balance and see exactly how much money you have left to spend.

Debit card features

Some debit card accounts allow you to establish a line of credit, where you can overdraw your account up to a specified limit. This makes the card effectively like a credit card, however the overdraw fees can be very high.

Some debit cards offer a charge back feature similar to credit cards, where if goods are not delivered, or are of a substandard quality, you can officially charge that back against the retailer and get refund.

Similarly, some debit cards provide a guarantee for internet transactions, where you aren’t charged for unauthorised or fraudulent transactions if you report them to the bank in time.

Fee-free EFTPOS transactions?

Some financial institutions promote fee-free EFTPOS purchases when you select “CR” (credit) rather than “SAV” (savings) or “CHQ” (cheque) when making a purchase with your debit card.

Most everyday transaction accounts offer you a number of free electronic transactions per month, then charge you for excess transactions. Using your debit card and pressing “CR” could save you any transaction fees you might be charged over your free transaction limit. (Check your bank’s fee schedule to make sure this applies for you.)

However, this system could change with recent reforms introduced by the Reserve Bank of Australia (RBA).

Reserve Bank of Australia reforms to the debit card system

In April 2006 the RBA released a series of reforms to the Australian electronic funds transfer scheme that will impact on debit card transactions. These include:

Interchange fees cap: Previously if you made a purchase using an EFTPOS card, the institution that issued that card would pay around 20 cents to the merchant’s bank, whereas if you used a Visa debit card, the institution that issued the card would receive around 40 cents. This is despite the fact that both types of transaction are accessing your deposit account. The RBA reforms narrowed this difference in fees from around 60 cents to 20 cents. The RBA argues that narrowing the gap in these fees will create fairer competition between the EFTPOS system and Visa debit system.
Scrapping the “honour all cards” rule: Previously merchants who accepted Visa credit cards were also required by Visa to accept Visa debit cards. The RBA abolished this rule on the grounds that it was uncompetitive. The same rules will apply to MasterCard.
The RBA’s payment reforms have been plagued by controversy and lobbying from interest groups including retailers under the Australian Merchants Payment Forum, the Australian Bankers’ Association and the major card providers.

What now?

The challenges to the RBA’s reforms have included legal battles over some of the proposed changes which makes the future of debit card transaction fees slightly uncertain.

However, fees are unlikely to rise as a result of the changes, and regardless of whether or not they do, debit cards are still a good option for customers seeking the features of a credit card, without the risk of sinking into credit card debt.

Offshore Pro Group