The coming tide - consumers may be charged for the use of debit cards.

Last updated June 2006

When I entered college in 1979, getting a checking account was a rite of passage. In those days, I wrote checks for just about everything for which I didn't pay cash. But checks were a pain, they required writing out the check, two forms of ID and sometimes even the store manager knowing you. They didn't have electronic readers which verifying funds in an instant like they do now.

I distinctly remember the day that I got my first VISA debit card around 1981. I proclaimed to all my friends that it was the best invention, ever. Now I could essentially "write a check" at restaurants and any other place where they took credit cards without all the hassle.

Right now, some banks are starting to charge for the use of debit cards using your PIN. And it's not just the little banks.

According to an April 2006 study performed by the Federal Reserve, 87% of those studied had a checking account. But how often do you actually write a check? When's the last time you actually saw someone pay with a check at the grocery store? If you're like me, you find yourself using a debit card when in stores and you pay most of your bills online. I was just thinking the other day that checks are fast becoming a thing of the past.

The Federal Reserve data indicates annual debit card transactions at the point of sale have been growing at over twenty percent per year since 1996 and now exceed credit card transactions. In sharp contrast, the volume of checks has decreased dramatically since the mid-1990’s and is currently falling at three to five percent per year.

The stats:

• Eighty-eight percent of households reported having a checking account or a similar transaction account at a depository institution
• About 52 percent of households (60 percent of households with a checking account) have a debit card
• Approximately 45 percent of households (86 percent of households with a debit card) reported having used the card to purchase items at stores in the twelve months preceding the survey.

Though the average consumer is vaguely aware of this merchants pay for the privledge of consumer convenience,of using a debt or credit card. What they are probably unaware of is that the cost of debit vs. credit and even the company processing the payment varies dramatically.

Merchants are starting to push back on this; witness Walmart's participation in civil suit against the card associations’ rules on credit and debit card acceptance, and the US Justice Department's investigation into the practices at Visa and Master Card.

Here in Phoenix, I can think of 3 companies who eliminate some of fees of credit card use. One is AM/PM gas stations and convenience stores who does not take credit cards, only debit cards. The other: my favorite breakfast place, the Original Pancake House (a chain), who ONLY accepts cash and checks. The other is the giant Cosco, who only accepts debit cards and American Express. None one of these businesses seem to be lacking in customers. In a 6/2/2006 article, USA Today reported that some gas stations are offering as much as 4 cents off the price of a gallon of gas to cash-paying customers.

In general, transaction fees for credit cards are higher than transaction fees for debit cards. And PIN transactions (transactions authorized via the customer's personalized identification number) are more less expensive than signature-based transactions. Counter-intutively, banks are starting to charge for PIN-based transactions.

Currently, merchant surcharges for credit or debit card use are not common practise in the US. In other words, if you use a debit card to purchased something, you are not charged a extra fee. But if you pay cash, you might get a "discount", as in the gas station report above. Where some consumers ARE charged a fee, is at the bank for the use of debit PIN transactions. Some banks are charging fees to use debit cards, with the average price being 75 cents. The study did not address whether the banks charging transaction fees mostly served people with poor credit or have an unfavorable rating in ChexSystems, though one assumes this is the case. With all the banking choices out there, why would someone with excellent credit choose to pay more for spending their own money?

Hello? Of course they would. If you get cash of an ATM, depending on the bank and whether or not you bank there, you are charged a fee, sometimes as much as $4 ($2 from the ATM, $2 from the who supplies the cash.) While the behavior of the consumer when faced with extra fees is predictable, there was no actual data to support it until the April 2006 study. Not surprisingly, the Federal Reserve Study shows a substantial reduction in the likelihood of using an ATM if a transaction fee is involved, based on banks that are charging extra fees for the use of debit cards.

Well, why does anyone do anything? Usually because it's to their advantage. In this case, if you use a PIN-based transaction, the merchant has the chance to tack on a fee.

Here are some banks that charge PIN-based fees:

• Riggs Bank based in Washington, D.C.
• Chase Manhattan in New York.
• Minneapolis-based TCF Financial Corp. charges 50 cents in a few states.
• Cleveland-based National City Bank charges 25 cents per transaction for excessive PIN-based use by people with low balances. ("Excessive" means more than 25 checks, ATM withdrawals and PIN-based transactions per month.)
• Apple ($1.50 per purchase)
• Bank of New York (50 cents)
• Emigrant ($1).

Source: AllBusiness.com, Senate Report from Charles Schumer (D-NY).

In a 2003 , the New York Public Interest Research Group (NYPIRG) study found that 47 percent of 31 New York banks surveyed charged fees that averaged 86 cents per purchase, with some as high as $1.50.

It's not always easy to tell. Unlike ATM fees which tell you ahead of time, these fees are not given to you until after the transaction. How do you know if you've been charged a debit-card fee? It should show on the card reader when you punch in your PIN number, or on the receipt you get from the merchant, says Elizabeth Costa, a director in the financial services group for Boston-based Dove Consulting.

1. Ask the merchant if there is a fee to use a PIN-based debit card
2. Get all your cash from free usage of your bank's ATM. Some merchants charge a fee for cash back.

In 2004, Senator Charles Schumer (D-NY) introduced legislation to make advance notice to consumers of the costs of PIN-based transactions, much the way ATM fees are given. Nothing was passed.

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