Contemporary Bank Check Alternatives
Consumer-to-Business (one-time): Debit Card
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- 5.1 How It Works
- 5.2 Underlying Technology
- 5.4 Commercial Success Thus Far/Future Prospects
- 5.5 Similar Products
5. Consumer-to-Business (one-time): Debit CardConsumer-to-Business (one-time) transactions consist primarily of one-time payments for goods and services. Examples might include:
In the past, bank checks and later credit cards were the only options for such transactions. In 1989, debit cards first became available with the introduction of the VISA debit card [12]. Debit cards are similar to bank checks in that money is withdrawn directly from the user’s bank account. However, convenience, transaction time, and transaction cost have greatly improved. 5.1 How It WorksDebit cards are issued by private banks to customers. The conditions and methods by which they are issued vary from bank to bank. However, all debit card holders must have a bank account established with their card issuer. When a customer initiates a transaction, money is debited directly out of his/her account and transferred to the counterparty of the transaction. Unlike credit cards, there is no check to send in at the end of the month and nothing for the customers to sign off on. Instead, the process is automatic. Customers can choose to have monthly statements mailed to their houses for record keeping purposes. Some of the larger banks allow customers to access account information over the internet as well. Two types of transactions are possible with debit cards. On-line transactions require the user to enter a pin number at the POS and off-line transactions require the user to sign for the transaction. These are commonly known as debit and credit transactions, respectively. Some smaller banks currently charge customers a flat fee per on-line transaction. This is to encourage customers to instead make use of off-line transactions since banks receive a far larger commission for these types of transactions. 5.2 Underlying TechnologyThe technology underlying such transactions was described in detail in section 2.2. 5.3 Advantages and DisadvantagesBecause debit cards have been designed to replace both credit cards and bank checks, their advantages and disadvantages will be discussed in comparison to both alternatives. Bank Checks Obviously, from a societal standpoint, debit cards are preferable to standard bank checks. The incredibly costly bank check processing is eliminated. In this process, bank checks are physically shipped from location to location and the contents of the checks are read by hand. Debit card transactions replace this with a completely electronic form of processing. From the consumer standpoint, the net result from a debit card transaction is the same as that of a bank check transaction. Money is automatically debited out of the consumer’s bank account and the transaction counterparty is automatically paid. However, debit cards are far more convenient in that the book keeping is automatically handled by the consumer’s bank. There is no checkbook to balance and no individual checks of which to keep track. Receipts are stored in either case.
One of the primary advantages of debit cards over credit cards is the ease of use. Consumers are not required to repay their card debt by mail in check on a monthly basis as they are with credit cards – the money is automatically deducted from their accounts. Additionally, obtaining a debit card is far easier than obtaining a credit card. In fact, many banks do not even perform a credit check on customers before issuing debit cards. Because the money is deducted directly from the customer’s bank account, there is a limited amount by which customer’s can overspend. On the downside, customers are in fact able to spend money that is not in their bank account. On-line transactions do not allow this since they involve a real-time connection to the customer’s bank’s computer systems. However, off-line transactions have no such connection and thus customers are able to spend money with debit cards that is not actually in their account. This is particularly dangerous with debit cards since customers think of them as drawing money directly from their accounts. When this occurs, it is known as an overdraft and the bank pays the customer’s counterparty but charges the customer a thirty dollar fee per overdraft transaction [12]. Another potential downside is debit card’s protection in case of fraud. Federal regulations specify that maximum fraud liability on credit cards is fifty dollars, but it is five hundred dollars with debit cards [12]. 5.4 Commercial Success Thus Far/Future ProspectsDebit cards were originally created as a method by which banks could avoid bank check processing costs [13]. Since then, their use has exploded to the point where in 2001, consumers made over 10 billion debit card transactions amounting to over 400 billion dollars. In fact, in the first quarter of 2001, a greater percentage of purchases were made using debit cards than credit cards, 26 percent versus 21 percent [14]. However, all is not rosy in the world of debit cards. There is currently a battle occurring between retailers on one side and Visa and MasterCard, the card associations that issue debit cards, on the other. Due to the greater fees earned through off-line transactions, fees have been levied on consumers by issuing banks for on-line card transactions to discourage their use. In turn, retailers have taken steps to encourage consumers to use debit cards for on-line transactions rather than off-line transactions. This has resulted in a lawsuit by retailers that MasterCard has since settled but that is still pending for Visa. Some are worried that the fees and controversy will eventually drive consumers away from debit cards altogether and back to the costly arena of paper bank checks [13]. 5.5 Similar ProductsCredit cards are the commercial product most similar to debit cards. Both user interaction and underlying transaction processing is nearly identical. However, with credit cards, a running debt is established with the credit card company. The customer is given the choice of either paying the debt off on a monthly basis with no penalty, or delaying payment of the debt at high monthly rates. Directory: profit -> htdocs -> thesis thesis -> Design and Implementation of Fisheye Routing Protocol for Mobile Ad Hoc Networks by profit -> Extra Titles profit -> P. O. Box 210108 Tucson, az 85721-0108 profit -> Three Trends Dealerships Must Not Ignore in 2016 Download 131.07 Kb. Share with your friends:
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