Tuesday, June 10, 2008

Debit Card Use, Particularly PIN Debit, Rising Sharply

According to the latest survey and analysis the use of debit cards for point-of-sale purchases is rising sharply, while cardholders continue to prefer PIN debit over signature debit, according to a study released recently by the Star electronic funds transfer network, a unit of Denver-based First Data Corp. (As always, click the graphic to enlarge to full size)

The study is the latest in a series of annual debit reports the network has sponsored since 2002.

Among consumers surveyed for the study last fall, some 74% reported having used a debit card for a POS transaction within the past 30 days, up from 70% in 2006 and 62% in 2005.

The increase in POS usage was most pronounced among consumers who earn $100,000 or more, with three-quarters reporting usage within the previous 30 days compared with 69% in 2006.

By age, the increase was greatest among those in the 25-to-41 group, where the usage rate rose from 77% to 82%. (See Chart on Right)

At the same time, reasons for not using a debit card for purchases are weakening, according to the survey. Only 48% of respondents said they preferred other means of payment (cash, credit card, or check) in 2007, down sharply from 62% in 2006.

Again, these preferences depend critically on income. Nearly two-thirds of those earning $100,000 or more per year preferred other means, with a strong preference for credit cards. By contrast, just 38% of those earning under $50,000, and 51% of those in the $50,000-to-$100,000 range, had a similar preference for other payment methods.

The study also asked those respondents who had not used their debit cards for POS purchases within the past 30 days what features would encourage them to start using their cards at the cash register.

Scoring highest on this list was fraud protection and assurances of no liability for fraud (70%), followed by ease of use (68%). The lowest scores were registered by avoiding pocket change (34%), attraction of the latest technology (32%), and family-member sharing of cards (26%).

As has been the case since 2002, consumers preferred PIN debit in the latest survey over signature debit, with 54% opting for PIN, 38% for signature. Some 6% said they like both equally or don’t care about the matter. This mirrors the results in 2006 and shows a significant increase for PIN since 2005, when 45% opted for that method of authentication.

The leading reason consumers give for preferring PIN is their perception that PINs offer greater security, with 44% citing this reason. This result has changed little over the years, despite news stories over the past year or so in which criminals have gained access to PINs with rigged devices and used the data along with fake cards at ATMs to loot consumer accounts.

Overall, respondents report making on average 24.6 POS transactions in the previous 30 days, flat with 2006. Of these, 13.6 transactions were performed with PINs and 11 with signatures. While PIN-only users made fewer transactions (12.2) than exclusive signature users (16.9), those who use both methods tended to use PINs more often than signature (23.3 total, with 14.3 using PINs and 9.1 signature-based).

For the latest report, which Star calls its “Consumer Payments Usage and Segmentation Study,” the network sponsored a survey of 3,523 consumers age 18 or older, conducted in a random phone canvass between Oct. 31 and Dec. 2 last year.

You can find the links to First Data/Star's three reports, including the Full Study below:

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Use PIN Debit to Buy Gas and Save Big!!!

Editors Note: The following may sound crazy, but it's happening more and more every day, especially with rising gas prices. If you use your debit card to make a gas purchase, DO NOT pay at the pump! Pay INSIDE and use your PIN number.

Otherwise...the higher price of gas has resulted in both account freezes and a windfall of overdraft charges for banks.

Consider the following scenario: You have $100.00 in your checking account. Early one morning on the way to work, you make a $25 dollar gas purchase with your debit card and pay at the pump. You have $75.00 left. However, unbeknownst to you, the gas station implements a $75 dollar hold on your checking account.

Now it's lunchtime and you buy lunch at McDonalds ($5.00). You have $70.00 left right? On the way home, you decide to buy a pack of smokes ($5.00), you have $65.00 left in your checking account, right? You pull in the driveway and the wife sends you out for Milk and Bread ($5.00) You have $60.00 left in your account right? WRONG!!!

Reality Check: The $75.00 hold triggers a $35.00 overdrawn checking (debit) account fee on the $5.00 McDonald's purchase. Same result with the pack of smokes. Ditto on the $5.00 Milk/Bread purchase. You now have $105.00 in overdraft fees. When the $75.00 hold is lifted early the next morning, the three $35.00 overdrawn fees (or $105.00) are applied to your account, but you only have $65.00 so you're left with a negative balance -$-45.00 instead of +$60.00.

End result? The $25.00 gas purchase cost you $130.00.

Want to avoid this scenario? Pay the attendant inside with your debit card and enter your PIN number. PIN based transactions involve no hold because the amount is deducted immediately. This can save you BIG headaches.

Here's an article from The Charlotte Observer regarding this subject:

‘Freezes' by service stations above what's paid for gas can unpleasantly surprise people with low balances.

Some drivers paying for gas with a debit card are experiencing a different kind of pain at the pump. Gas stations concerned about collecting on automated debit-card transactions are freezing large amounts of money in consumers' checking accounts, causing financial headaches for some drivers who carry low balances.

In the past, when gas cost $2.00 per gallon, when a consumer swipes a card at a gas pump, most gas stations froze $1 as a confirmation that a valid checking account exists. That hold usually lasted for a few hours, but can stretch for a couple of days. The station later debits the actual amount of the gas purchased from the account. But as gas prices soar to record heights this week and fill-ups reach into triple digits, some stations in the Charlotte area and around the country are freezing much higher amounts, some local bankers say. Some of the consumer complaints have centered on Shell and Exxon stations, which are usually independently owned, though the practice could include other local stations. The consumer protection division of the N.C. Attorney General's Office has received more complaints this year about the practice, said spokeswoman Jennifer Canada.

The office doesn't keep statistics on the specific complaint, but “as gas prices rise, gas stations tend to do this more,” she said. For instance, one consumer reported to the Observer that she purchased $25 of gas using her debit card at the Shell station on Gold Hill Road in Fort Mill, S.C. But she had $90 frozen in her checking account for several hours, along with the $25 for the purchase.

The manager of the station did not immediately return a message. And several other managers reached at various gas stations said they didn't know what amounts were being held or how it was determined. Despite the big-time names, most gas stations that sell Shell, Exxon and other brand names are independently owned.

Hotels have been placing extra holds on debit and credit cards for years in case customers run up extra expenses before checking out, such as for telephone calls, mini-bar items or other services.

But it has been happening at stations because some fear banks won't cover increasingly large gas purchases if the money ends up not being in a consumer's checking account, said Red Gillen, an analyst with Celent, a Boston-based financial services research firm. Because there's a time lag between pumping and paying, there's a lot of money at risk. You're going to see more and more gas stations doing this,” he said. The hold policies can cause financial headaches for consumers in several ways, said Nathan Tothrow, director of marketing for Charlotte Metro Credit Union: A debit-card transaction might be rejected even though drivers have enough money in their accounts for the gas they want to purchase. “They have enough money for the gas, but not for the hold,” he said.

The holds can tie up cash that can't be used for at least a few hours. Unsuspecting consumers can have other transactions incur an overdraft fee since there's a danger that the holds can stay on for longer than a few hours, which can result in other transactions causing an account to be overdrawn, triggering fees. Tothrow said the credit union has received complaints about excessive holds. The bank investigated and found several gas stations were freezing $75 and $90. “For a lot of folks, a $90 unexpected hold can cause a problem,” he said. “I really don't like that they are doing it to our members.”

The way to avoid holds is to use the debit card with a gas station attendant and enter your PIN number because there are no holds involved and the account is charged immediately for the exact amount, the N.C. Attorney General's Office says.

Most gas stations and merchants send in charges as one bundle at the end of the day, after most holds have fallen away, Tothrow said. But some stations have started sending in the charge for pumping gas quicker, even before the hold has worn off. That can put double financial pressure on a checking account, at least for a few hours.

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Discover Seeks $6 Billion in Damages from V/MC

June 9 (Bloomberg) -- Discover Financial Services is seeking $6 billion in damages from Visa Inc. and MasterCard Inc. in an antitrust lawsuit accusing the bigger credit-card rivals of squashing competition.

The damages, which may be tripled, were included in confidential filings unsealed today in federal court in the Southern District of New York. Visa said today the amount was ``dramatically overstated'' and MasterCard called the suit ``baseless.'' Both companies fell in New York trading.

"The numbers on potential damages Discover is seeking are large,'' Sanjay Sakhrani, an analyst at KBW Inc. in New York, said in an interview. ``However we think a settlement for a meaningfully smaller amount still remains a likely scenario.''

Discover, the fourth-largest credit-card network, filed a lawsuit in October 2004 against Visa and MasterCard, claiming the two largest networks broke the law by barring member banks from offering rival cards. Visa agreed last year to pay $2.25 billion to American Express Co. in a settlement of a parallel suit, an amount Discover Chief Executive Officer David Nelms called ``cheap.'' MasterCard dropped $1.42 to $294.31 at 4 p.m. in New York Stock Exchange trading and Visa fell $1.51, or 1.8 percent, to $82.14. Discover fell 37 cents to $15.33. No Improvement Visa and MasterCard issued separate statements saying Discover's credit and debit businesses haven't benefited much since the ban was lifted, letting banks issue Discover cards along with Visa or MasterCard cards.

"Discover has not seen any increase in its overall percentage of the credit-card volume share'' after the policies were changed, Sharon Gamsin, spokeswoman for Purchase, New York- based MasterCard, said in the statement.

Visa, based in San Francisco, set aside $650 million for a possible Discover settlement from the $3 billion fund established after its record March initial public offering. The funds come from IPO proceeds of banks that owned the network, and the companies are obliged to pay for a larger Discover settlement if needed.

MasterCard didn't set up a similar system when it went public, which means shareholders may be affected by future settlements, Sakhrani said. He rates Visa and MasterCard ``outperform'' and Discover ``market perform.''

`Appropriate Settlement'

The documents had been filed under protective order since the case began. The lawsuits by Discover and American Express follow a U.S. Supreme Court ruling that Visa and MasterCard violated antitrust laws in competing against smaller companies.

I was a little surprised that AmEx settled as early or as cheap as they did,'' Nelms said in a Jan. 29 conference call with analysts. ``If we had an appropriate settlement at an appropriate time, we would consider that.''

Like New York-based American Express, Discover extends credit and runs a network that processes transactions for other lenders. Visa and MasterCard only operate networks and don't make loans to consumers.

Discover shares have declined 47 percent since the company was spun off a year ago by Morgan Stanley as the U.S. housing slump hurts consumers' ability to repay debt of all kinds. The company's market valuation is about $7.6 billion, according to Bloomberg data.

MasterCard shares have almost doubled in the past year and Visa shares have surged 84 percent since its IPO. The companies, which sidestep the rising customer defaults of lenders, capitalize on consumers' increasing preference for using credit and debit cards over cash and checks.

Visa's IPO raised $17.9 billion on March 18, the most for a U.S. company, and the tally passed $19 billion after more shares were sold to satisfy demand. It was the world's second-largest public offering after Industrial & Commercial Bank of China Ltd.'s $22 billion debut in 2006.

The case is Discover Financial Services, Inc. v. Visa U.S.A., Inc. et al, 04-CV-7844, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

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