Monday, January 21, 2008

5MT: Why US Debit Cards are Bunk

I was reminded yesterday about how bad debit cards are here in the US. Let me count the ways thee make me mad. Firstly is thine insistence on being a "visa" card. This is particularly bad because credit cards do not require online verification. Clerks are supposed to compare signatures to card signatures, but I rarely see this happen. It is totally possible for a fraudster with just your card number (maybe even guessed?) to create a new fake card and run some off-line transactions.

Secondly is thine non-credit card status. There are laws that protect credit card holders from fraud and limit their liability to $50. While most banks are fully willing to refund and replace money promptly when fraud amounts are low, they generally take a bit longer when the amounts are significantly high. Most credit card companies can take upwards of 90 days to resolve fraud charges in the $3-5000 range.

The root of the problem is banks are not liable for fraud on credit cards. The responsibility lies completely with the merchant. In addition to the 3% transaction fees they pay, card companies regularly "charge back" to the merchant. Charge backs can be as high as 5% of the transaction cost. So now your cost of doing business is 8% - and there is no easy way to increase security.

The solution? Turn debit cards in to real debit cards that only take online PIN-authenticated transactions. This will reduce costs for everyone since the 3% credit card charge is built in to all prices even if you pay cash.

My friend Sacha points out that PIN transactions are not immune from professional fraudsters. This reminds me that the problem with "secure" systems that really aren't is convincing the powers that be of the legitimacy of your fraudulent transaction. A real life example is the "anti theft" car systems that aren't undefeatable - despite manufacturer claims. At this point you are in an uphill fight to regain your week's meal money.

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