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Financial Fitness: The Scoop about Debit Cards

Debit cards have been in the news quite a bit over the last couple of years, beginning with fee increases made by banks in 2011 as a response to the Dodd-Frank bill. More recently, publicity surrounded hackers who exploited security failures inherent in some prepaid debit cards to extract $45 million dollars from ATM’s around the world using hacked cards. What is the story of debit cards, and how did they become such a staple of current-day banking?
 
Prior to the late 1970’s debit cards were a little-known benefit extended to the "best” banking customers. They were introduced as a cost-effective alternative (for the bank) to checks, even before ATM’s were widespread. In the beginning, they also functioned just like checks, where the cash is not extracted from the bank account at the time of the transaction, but instead went through a process that could take several days and was costly to the banks.
 
As ATM machines began to pop-up around the country and around the world, debit cards primary usage became the ability to extract cash from ATM machines easily, saving a trip to the bank. The first ATMs were few and far between, but became more and more common through the 80’s and 90’s. Long lines were quite common, especially on Friday afternoons as bank customers raced to withdraw cash for the weekend. It was also quite common for the ATM machine to run out of cash on those same Fridays...  But they were still far more convenient to banking customers, and also cut down on lines at bank branches, saving the banks money as their staffing needs diminished.
 
Technology advanced through the years, as did possible uses for debit cards. Grocery stores and soon after, other retailers, began accepting debit cards as a method of payment. Many even offered a "cash-back” option where you could skip a trip to the ATM and instead, easily get cash from the grocery cashier over your purchase amount. Soon, debit card transactions became real-time, with funds being withdrawn from the connected bank account instantly at the time of the transaction. This advancement made them preferable to check transactions for merchants, and point-of-purchase debit card acceptance increased even more. Debit cards are very convenient for bank customers who would prefer to keep a tight rein on their budget as, unlike credit cards, they are limited by the funds available in the bank account.
 
In recent years, the availability and usage of prepaid debit cards has greatly increased. A prepaid card does not require a bank account, and can be procured from any number of sources, many online. They can be issued by merchants, with the prepaid balance being available to purchase goods from that merchant. These are available at many department and grocery store checkout areas. There is a difference between prepaid cards where funds are "reloadable”, and gift cards that hold a specific value, similar in concept to a gift certificate. Reloadable cards are those that are the target of hackers, with the goal being to hack the magnetic stripe on the card that holds the balance information, increasing available cash and daily withdrawal limits.
 
Reloadable cards can also function just like a bank-account-linked debit card, with the balance being available at any merchant that accepts debit cards, and the funds also being available via ATM machines. This is the type of card that was recently exploited by the hackers.
 
Bank-issued debit cards such as those offered by Texas Gulf Bank have the backing of strict banking security guidelines, and therefore the advantage of being able to track and predict consumer behavior. Their fraud departments employ state-of-the-art technology to try and avert fraudulent usage of their cards. They can pinpoint usage that does not match customer purchase habits and can take steps to instantly shut down illegal usage. This security is expensive to maintain, as hackers try to devise innovative ways to steal through debit card processing. The result of top-notch bank security for consumers is a secure, more convenient method of accessing and using cash.With prepaid debit cards, security is more difficult. Even when the issuing and processing companies utilize high-end security measures, they lack the bank’s ability to predict behavior; each new card is a brand new customer with unpredictable habits.
 
Debit cards have evolved and are now firmly rooted in everyday life, both in the U.S. and globally. Future innovations should bring increased security and ever-expanding usage opportunities for debit card users.
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