Last month, a representative from Visa offered to answer a few questions for Consumerism Commentary readers about debit cards. It many ways, I find debit cards to be inferior to credit cards, but Visa claims the cards linked directly to bank accounts have some redeeming qualities. Here are three additional questions I asked Visa and the company’s responses.

What are your thoughts regarding Visa’s “defense” of debit cards?

Question 4: When using debit cards, do consumers generally spend more than they would
with cash?

Response: Debit cards offer a convenient, secure way to access funds that are already available in your checking account – which means you’re spending the money you have. You also get a record of all purchases so you know where the money went.

Paying with a debit card can actually a great way to manage your spending. Just last year we conducted a consumer survey and found that cash expenditures can be harder to keep track of than those on cards. We asked more than 2,000 U.S. adults about their cash spending habits and almost half of respondents admitted they suffered from “mystery spending” or cash they spend but have no idea where it went.

The results also showed that 48 percent of Americans surveyed who use cash say they can’t account for almost one-third of it, spending an average of $120 in a typical week, but losing track of $45. In fact, more than half (59 percent) of respondents who say their mystery spending is out of control feel it would be worse without using a debit card. Among debit cardholders we surveyed, the majority (64 percent) believe their debit card helps keep mystery spending to a minimum and four out of five say a debit card helps them track their spending. This feedback supports that debit cards can definitely be used as a money saving tool.

My comments: Keep in mind that this research cited by Visa compares using debit cards with using cash for payments. Also note that the survey asks about what consumers believe about their spending patterns, were they to opt with cash rather than debit cards, but doesn’t measure actual behavior. Many studies have shown that people spend more with plastic than they do with cash, even if cash expenses are often “mystery.” The company did a good job of not really addressing the issue raised in the question.

In November, I conducted a experiment to compare my spending with a credit card with my cash-only spending. Even though some of my cash transactions were not tracked to the cent, I spent a significant amount less than I did when I was using a credit card. I continued the experiment into December, and although I now I’ve ended the experiment and use my credit card, I am much more conscientious about my excess spending.

Question 5: One popular feature of credit cards is the availability of rewards, such as cash back bonuses, airline miles, etc. I have seen very few similar offers for debit cards. Are issuers interested in offering rewards to debit card customers?

Response: About 85 percent of U.S. households participate in at least one rewards program. Increasingly, consumers are looking for rewards and value for the transactions they make every day, like paying bills, buying groceries, or filling up their gas tank. As consumers turn to debit cards for these types of purchases, instead of cash and checks, more financial institutions are introducing debit rewards programs.

Often, issuers will pair up with a partner like an airline or hotel to give you the ability to earn points on a debit card toward rewards you care about. Some financial institutions also offer the ability to earn points for qualified purchases that can be redeemed through an online catalog, for items like gift cards, airline vouchers and hotel accommodations.

Many financial institutions also reward their debit cardholders for other relationships they have with the institution like a car loan, savings account, mortgage, etc., giving those customers the ability to earn additional points or other benefits.

It’s important to understand how you can earn points toward rewards: what purchases qualify, whether you earn points when you enter a PIN or sign for your purchases, etc. Make sure you ask these questions of your financial
institution, as policies may vary.

My comments: Reward programs are becoming more rare among credit cards, and even more so among debit cards. This is due to the state of the banking industry. I expect that once we definite signs of an economic recovery, and banks are concerned with making huge profits rather than avoiding bankruptcy, we’ll start to see more debit card reward programs. Until then, consider yourself lucky if you have a rewards program that you use to its fullest extent. Remember, banks that offer rewards programs do so to foster loyalty and above average use.

Question 6: To what type of consumer would you recommend debit cards over cash?

Response: Really, debit cards are a great tool for every one with a bank account. Some
of the benefits of debit over cash include:

• Money Management and Control. Debit transactions are deducted directly from a checking account and recorded in one place on a monthly statement. This allows cardholders to easily track where every penny is going and better spend within their means.
• Security. Debit cards offer better protections than cash or checks, and Zero Liability means consumers pay nothing for fraudulent purchases.
• Acceptance. Debit cards can be used at millions of locations worldwide, and can be used over the phone and on the Internet.
• Convenience. Debit card transactions are quick and simple, getting you out of the store faster; automatic bill pay via debit eliminates worries about missed payments.
• Rewards. More debit cards are also offering rewards so purchases earn points toward travel, merchandise or even cash.

My comments: Visa is clearly focusing on the benefits of debit cards over cash, but the true showdown for those who use plastic is between debit cards and credit cards. The set of above reasons for choosing debit cards is a subset of the reasons for choosing credit cards over cash — and credit cards offer more protection, tougher security, broader acceptance, and more attractive rewards.

“Zero Liability” is a good policy, but if your debit card is stolen and used, your bank account can be overdrawn at a moment when you most need your balance to be there, like when your mortgage or rent check is cashed. Then you’re dealing with overdraft fees or bounced check fees and possibly other penalties. This is a deal breaker for me. I use debit cards occasionally, but I will avoid using a debit card as my main payment method.

I appreciate the representative from Visa taking the time to answer these questions. Are you convinced? What do you think about debit cards?

Photo credit: DeclanTM

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