Debit and ATM Cards
Debit cards are associated with an existing transaction account at a financial institution. The card enables consumers to access their accounts for a variety of transactions. Debit cards are either online (i.e., PIN-based) or off-line (i.e., signature-based).
- Online (PIN-based) debit cards have been available for several decades and have seen significant growth since the early 1990's. Online debit cards use a PIN for customer authentication and online access to account balance information. At present, financial institutions authenticate customers by matching the PIN with the account number directly through a merchant's terminal. Debit card transactions are authorized in real time at the POS using the same electronic funds transfer (EFT) networks that handle ATM transactions and are typically settled at the end of the day using the ACH network. Customers may also receive cash at the POS because messaging between the financial institution and the retailer confirms funds availability. Merchants prefer PIN-initiated card transactions as the processing fees are substantially lower. Also, credit risk is shifted to the customer as the merchant's responsibility for authentication is greatly reduced.
- Off-line (signature-based) debit cards were introduced in the late 1980's by Visa and MasterCard. Consumers are using them increasingly at merchant locations that accept bankcards. Off-line debit card systems authenticate consumers through a written signature or other authenticating action. The transactions are processed in batch mode through the same bankcard networks as credit card transactions and typically settle at the end of the business day. Generally a cardholder can use an off-line debit card anywhere that accepts a similar online transaction.
The use of biometric technology as a means to authenticate payments is also growing because of its convenience and perceived security features. Available technologies allow customers to pay for purchases by placing a finger on a sensor, which links the image to the customer's account using a simple method of finger scanning at check out. Societal implications and security concerns surrounding the use of biometric identification may act as impediments to market acceptance.
Financial institutions issue ATM cards to consumers to provide online access to account information and to allow consumers to make withdrawals and deposits at ATMs. Consumers typically enter a PIN for authentication at an ATM, although other authentication methods such as biometric technology are available. Consumers may use an ATM deployed by other financial institutions or third parties but typically will pay fees to the ATM owner and their own financial institution. Many financial institutions now offer ATM cards that can also be used as debit cards for POS transactions at participating merchants.
Decoupled Debit Cards
Decoupled debit cards permit a financial institution to issue a debit card to consumers regardless of where their demand deposits or other transaction accounts are held. The term "decoupled" is derived from the separation of the traditional relationship between the debit card issuer and the financial institution that provides the transaction deposit account. The decoupled debit card transaction between the consumer and merchant is processed through one of the card-branded networks or an alternative proprietary network. Instead of using the EFT networks used for debit card products, the issuer uses the ACH network to debit the consumer's account for settlement.
By decoupling the debit transaction from the bank where the consumer has the depository relationship, the intermediary can capture the interchange revenue from the card transaction. A part of this product's initial appeal was the cost efficiency derived from bundling transactions prior to entry into the ACH network for settlement. However, a recent NACHA Rule Interpretation issued on November 9, 2007 NACHA Rules Interpretation: Proper Use of SEC Codes and Aggregation of Transactions, Issued November 9, 2007, effective: August 4, 2008. This interpretation provides that transactions may not be aggregated unless specific circumstances exist; specifically, they must be aggregated under the WEB or PPD codes if the transactions are accumulated in an account for more than 14 days. prohibits the aggregation of individual debit transactions prior to settlement through the ACH, and instead requires the issuer to pay ACH origination fees on each discrete transaction conducted during the course of a day. The interpretation was issued in response to concerns that bundling transactions through the ACH might mask risks that are transparent in individual transactions and unintentionally subvert risk management tools used by financial institutions that receive payment through the ACH. Decoupled debit card programs that rely on transaction bundling may need to be re-engineered to comply with the new interpretation.
The risk profile for decoupled debit card issuers differs from a debit card program because payments are settled through the ACH, creating a delay from the time the card transaction is initiated and exposing the issuer to credit risk. With a traditional debit card, a financial institution can verify the availability of funds before the transaction is authorized. With decoupled debit transactions, credit risk exposure may arise from faulty account verification or insufficient deposit account balances. Financial institutions that issue decoupled debit products should implement risk management programs to mitigate and control these new risks associated with the nontraditional customer relationship.
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