Why Aren’t Debit Cards Credit Cards
Payments News reported on a piece in the Detroit Free Press regarding thoughtful use of one’s debit card. The gist is that one may over draft their account by using a debit card for purchases, resulting in one incurring overdraft fees. Here’s a thought: why can’t debit cards become credit cards when there is no more money in the account?
According to the story:
…in the last few years, banks and credit unions began allowing more debit card purchases to go through at checkouts as a convenience to consumers, even if there is not enough money in the checking account.
Source: Detroit Free Press
Of course you question the “convenience” when you hear anecdotes in the same article outlining how a $5 overdraft caused by a debit card purchase ultimately resulted in $350 worth of banking fees. The article goes on to discuss the “tricky” rules that surround overdraft, consumer groups advocating better fee disclosure, legislation, etc. They even have a section with useful tips to avoid big bank penalties. Here is my favourite:
Don’t pull out your debit card to buy small stuff that you can buy with cash. It’s hard to keep track of those small purchases…
Source: Detroit Free Press
That’s funny: I thought the whole point of debit cards was to avoid the need to carry cash!
Anyway, isn’t this all just begging for a new product - one that ties a credit card to one’s chequing account? It would work something like this: Your debit card turns into a credit card once you run out of money in your chequing account. Put another way, why not turn overdraft protection into a credit card product. A lot of debit cards (in the US anyway) already clear though the credit card networks.
When you finally join the rest of the world and migrate to chip cards, this will be a standard feature (combo cards)…
Yes that would help, but assumes that either the card itself is smart enough to know when the “debit card” component of the chip card would put the bank account it is linked to into overdraft because of the purchase transaction or that the bank decline the transaction alerting the user to try the “credit card” component of the chip card to complete the transaction. The first would require the POS chip card terminal to query and receive bank account balance information (that seems like a security issue to me), and the second would require banks to decline the “debit card” transaction, which, as the post points out, they obviously don’t want to do (see
here for more on this). I think the bank account balance would have to be stored on the chip card for this to work in a seamless way (which I assume is possible) - can you comment on the mechanics of how this feature is actually implemented in the rest of the world?
Lastly, I guess I was hinting at a new type of chequing account with (short term) credit features, but certainly what you point out could meet the same goal.
MasterCard Canada has a very similar product which is essentially a combination of a debit and a credit card on the same piece of plastic. First Calgary Savings is offering such a card (Global Payment Card) to its member-owners.
What I think can and should entirely replace credit cards is a debit card with a competitive loyalty program and a line of credit attached to it, which is naturally has a much lower interest rate than a typical credit card.