Debit cards are also known as cheque cards. Debit cards look like credit cards or ATM cards but operate like cash or a personal cheque. Debit cards are accepted at many locations including grocery stores, retail stores, gasoline stations and restaurants. One can use his/her card anywhere. It is an alternative to carry a cheque book or cash. There is a difference between credit cards and debit cards. A credit card is a way to “Pay later” while a debit card is a way to “pay now”.
When one uses a debit card his/her money is quickly deducted from his/ her savings account. When one uses a debit card one is subtracting one’s money from his/her own bank account. Debit cards allow one to spend only what is in her/his bank account. It is a quick transaction between the merchant and one’s personal bank account. Obtaining a debit card is often easier than obtaining a credit card.
A debit card (also known as a bank card or check card) is a plastic payment card that provides the cardholder electronic access to his or her bank account(s) at a financial institution. Some cards have astored value with which a payment is made, while most relay a message to the cardholder’s bank to withdraw funds from a payee’s designated bank account. The card, where accepted, can be used instead of cash when making purchases. In some cases, the primary account number is assigned exclusively for use on the Internet and there is no physical card.
a) Prepaid Card : Debit card acts as a type of prepaid card. It is so, since it already has a sufficient amount of cash balance in its holder’s bank account. It permits to carry on the value of the transaction (i.e. purchases) to the extent of available balance in its holder’s bank account.
b) Nominal Fee : Bank issuing a debit card charges an annual fee for the issuance and maintenance of card. This fee charged is very nominal in nature. Generally, bank charges the fee on a per annum or yearly basis. Such a fee gets automatically debited (deducted) from the debit-cardholder’s bank account.
c) Alternative to Cash : Debit card acts as an alternative mode of payment for executing various cash-related financial transactions. It can be used for the purchases of goods and receipt of services. In its presence, there is no need to carry a large amount of cash. Thus, it helps to avoid carrying huge amount of cash while traveling and minimize risk of loss due to theft, damage, etc.
d) Immediate Transfer of Funds : Debit card ensures immediate transfer of funds in the merchant’s or dealer’s bank account. Such a transfer of funds takes place almost instantly at the moment of purchases of goods and receipts of services. With its use, there is no need to visit bank’s office premise and do a manual transfer of cash in the merchant’s or dealer’s bank account. Thus, it saves precious time and gives ease, safety, and comfort to its holder in his or her’s finance related activities.
e) Instant Withdrawal of Cash : The debit card facilitates instant withdrawal of cash from any nearest ATM. This helps its holder to avoid a personal visit to bank’s office premise and wait in a long time consuming queue. In short, it also acts as an ATM card to meet its holder’s cash-related needs, anytime and anywhere.
f) Easy to Manage : Debit card is very easy to carry, handle and manage while traveling to outstations or overseas. Being small, thin, flat and having a negligible weight it easily fits in any pocket. It can be handled very freely even with just two fingers. Managing it is also not a big problem. A cardholder must just take enough care to see to it that:
- Debit card is always covered with a thick plastic cover to avoid scratching of its sensitive surface.
- It doesn’t come in contact with contaminated water and heat.
- It doesn’t get folded accidentally; this helps to prevent its breakage.
- It is placed safely in a convenient location which one remembers. This helps to avoid it getting misplaced and lost due to negligence.
Earns Bonus Points : Now-a-days, the competition among debit card providers (banks) is challenging. Today, most banks offer bonus points to encourage their cardholders (customers) to make purchases using their debit cards. Banks are able to offer such points to their cardholders as it’s merchants and not them who actually run the reward program. After every successful sale, a merchant gives the bank a small cut-off or percentage as a commission. This commission is further shared or divided by the bank with its holder (as a reward) who did the original purchase. Thus, in return, it finally also helps the cardholder earn bonus points on selected financial transactions executed by him or her via a debit card.In this cycle, all, viz., bank, merchant, and cardholder are directly benefited. Bank offers an incentive like this to improve the sale of the products in the ordinary course of business and contribute in the economic growth.
Gifts on redeeming points : As we have seen above, debit card helps to accumulate bonus points through a reward program. These points can be redeemed by the cardholder (within card’s expiration date) at any merchant website and/or outlet that bank has already authorised. While redeeming accurred points, cardholder gets an idea of its worthiness in terms of amount, and so he/she proceeds to claim gifts nearly equal to that amount.
Free insurance coverage : Debit-cardholders also gets free insurance coverage. The bankers provide such insurance facilities to attract new customers and to maintain their current customer strength. They provide various types of insurances for free to their cardholders:
- Insurance on loss of debit card,
- Purchase insurance,
- Personal insurance,
- Accidental insurance,
- Travel insurance, and so on.
However, these types of insurances are given freely to cardholders depending on which type of debit card they have possessed.The cost of insurance premium is borne by the bankers who provide debit cards to their customers.
Miscellaneous advantages of debit card are as follows:
- Debit card acts as an alternative to a traditional cheque payment.
- It helps to budget one’s expenses and do a responsible spending of own money within account limits.
- Its holder uses his own money and not any borrowed (loaned) money. Unlike a credit card, here, no interest is charged. Hence, its transactions are interest free.
- It is accepted internationally, by e-commerce websites, and almost everywhere by merchants who display the logo of payment processing companies like VISA, Master Card, American Express, etc. This ensures making successful payments anywhere in the world with ease.
- It offers optimum levels of security. This greatly minimizes the chances of fraud, misuse and theft of money.
- Overall, it enhances the banking experience of a cardholder
A few disadvantages are also associated with debit cards. These are as follows :
- a) Unprotected against identity theft : Debit cards are protected only by an encrypted number, known as PIN. This PIN cannot give protection against identity theft. Anyone carrying the card can access the account fi the PIN is known.
- b) Incapable of business Transactions : In most cases, the issuing banks limit the maximum amount that can be withdrawn or transfered by the customer. This hinders business transactions where the volume and the value of the amount involved are considerably high.
- c) Terminal Dependent : Only merchants having an electronic terminal can perform transactions through debit cards. Moreover, a customer can access account only from the place where the issuing bank’s outlet terminal exists.