How Your Debit Dance?

Did the debit dance?

Actually I am talking about debit cards, sort of like the docile sibling of the credit card.. There was a story in the New York Times (NYT) recently that caught my eyes.

Your debit card is essentially your ATM (automated teller machine) card. You can use them to pay for things at the mall and the money comes from whatever money you can have in the bank. When you use a credit card, you use money that you don’t have. In other words, borrowings.

But what is happening in the US is quite amazing. The banks are allowing customers to pay for things with debit cards and they can still pay even if they don’t have enough money in the bank. For example, if you are on a hot date and you’re using a debit cards to pay for two movie tickets that cost RM80 (yes, they’re expensive, but heck you date is hot) but you only have RM50 left in the bank, the bank doesn’t reject you. The bank pays for you transaction and charges you a fee, obviously. This in the U.S. Banks in Malaysia can’t do that. If you don’t have enough money, you just cannot pay with you debit card. Common sense would tell us that this is the right way. Debit card teach you to be smart with money, live within your means and it’s a lot cheaper than the credit card.

But US banks now have to figure out way to make profits since they can’t do what they did before, which was mainly to gather loans, pack them up nicely, and sell them to other investors. So, someone smart found a way to make more money from debit cards.

And the fees for overspending on your debit card is hefty. NYT cited one Peter Means who bought coffee at Starbucks and watched a movie, all on debit cards. The coffee was less than US$5 (US$1=RM3.49), but the fee for overspending came up to US$34. he was charged that same amount each time for seven different transactions in one day. The best part was that he didn’t even know because the bank only told him afterwards.

Charging a fee for overspending on debit cards is big business. This year alone, it would bring it bring in about US$27 billion for US banks, the NYT said.

What really bothered me was the fact that the customer didn’t know. How can that be good business if five years down the road your customer is bankrupt because he cant pay the fees? What about his right to know all there is to know before signing up for the service?

NYT explained that bankers see it differently. Banks think that a person is ultimately responsible for their own finances and the fee is for the convenience of not being embarrassed.

In a way, that also makes sense because if you’re always sure of your bank balance, you wont be caught short. But there must also be rules to protect consumers, a merchanism to keep society in balance. This would be the best solution to the problem. I think that charging a fee on debit card over-spending could have it place, but a customer needs to know well in advance. A college student from a well-to-do family might sign up as he doesn’t want to be embarrassed on dinner dates.

But I think that US banks know that when they tell a customer they will have to spending on something as small as US$5, not many people will sign up for such a service. And that is why having ignorant customers is bliss for bankers.