December 02, 2008

life in financial markets: debit you lose!

The hypocrisy of corporate and financial institutions is to be experienced to be believed! Take the instance of the issue of banks in India giving no option to customers to manage the risks of fraud on their savings. This is happening through the forced issue of ATM-cum-debit cards. Visa is the main culprit here because it is pressurising the banks in India to issue debit cards to millions of bank customers in India. Visa knows that ATM transactions are inevitable for bank customers, so why not thrust a ATM-cum-VisaDebit card on them.
For over a decade banking technology has been such that customers can not imagine living without the 24-hour-a-day convenience of automated teller machines (ATMs) for withdrawals, deposits or other transaction purposes. In the last few years, however, almost all the banks in India have stopped giving ATM-only cards and instead offer only debit-cum-ATM cards.

Visit any bank's branch, read any bank's savings account opening form, browse through any bank's website and almost nowhere is they are any option given to customers to choose between a debit-cum-ATM card and a ATM-only card. Majority of the debit cards are of Visa and some are of Mastercard.

Since a debit card is linked real-time to a savings or current account the potential amount of loss due to shopping payment fraud on a debit card is higher because the entire savings account balance is available to a fraudster. If one were using a credit card for availing of the convenience a plastic card provides then one has the ability to set a much lower credit limit than one is eligible. Interest cost is easily eliminated in a credit card since outstandings can be effortlessly paid back fully before the due date through a direct debit on the savings account if the customer is banking with the same bank.

By not giving the choice to opt out of a debit card banks are increasing the risk of customers. This is ironic in a day and age when risk management is the buzzword in financial management for everyone including individuals. The biggest risk in all plastic cards, debit or credit, arises when a customer loses the card and his/her signature is there on the card to be easily forged and mis-used at merchant shops. Customers therefore need to be given enough flexibility to mitigate their risks based on their personal preferences.

Banks tend to justify the ATM-cum-debit by highlighting debit cards' benefits like freedom from carrying physical currency, special offers at merchant shops and so on. "Based on these benefits our front end tries to ensure that maximum savings account customers are carded with debit cards," is the line that banks would take.

This is the reasoning made by all the banks. But shopping on a debit card is not a core banking feature which attracts customers to bank with banks. "As a policy the right to choose should always be given to the customer," feels professionals working in the corporate consultancy industry.

The banking regulator, Reserve Bank of India (RBI), has so far left it to the banks to decide on what cards they can issue. Visa and Mastercard point out they are not responsible for the banks' policies. But, Visa, the largest card payment company in the world, does use the transaction value figures arising out of ATM withdrawals by customers from their savings or current account using their debit-cum-ATM cards in all their performance statistics.

Banks in the developed markets such as the US and the UK give their customers the freedom to choose between a debit card (or a checking card as it is known in the US) and a ATM-only card. In emerging markets such as India and Thailand the choice is not given. Visa's statistics brings out the effect of this. Cash withdrawals from ATMs are reflected in debit card cash transactions and there is a clear divergence in the usage trend in US an non-US countries. (see graph below 'Debit you lose, credit you gain').

HDFC Bank and ICICI Bank are perhaps the only banks in India that will give a ATM-only card only if the customer forcefully asks for it. For the rest, the choice is non-existent no matter how much you fight for it. This writer has approached, without success, Yes Bank, Corporation Bank, State Bank of India and Punjab National Bank for the opening of a savings account asking for a ATM-only card to be issued and not an ATM-cum-debit card. It is high time the RBI sit up and take notice of such regressive attitude of banks.

Visa also needs to answer a couple of pertinent questions. The banks are members of Visa network and Visa can very well mandate them not to indulge in the above unethical practice. Since customers are forced to opt for the ATM-cum-debit cards, even the normal banking transaction withdrawals from their own banks' ATMs get used by Visa in its statistics as we saw above. Technically, these transactions would not be Visa's if the customers were given a choice to opt for pure ATM cards and any of them would opt for it. Isn't this clearly a fraudulent accounting practice by Visa?

Individual customers, till such time as the regressive practices of banks and Visa or Mastercard come to an reduce or at least reduce, can also take one or two precautionary measures. For one, they should not be tempted to use the debit-cum-ATM for merchandise or internet shopping. This should be done through their credit cards where they should set a credit limit, lower than they are actually eligible for, and which is comfortable for them to bear in case of a fraud on their credit cards.

Simultaneously, they can mitigate the risk of fraudulent use of their debit cards by simply crossing out the signature strip. This way they would not leave behind their signatures for any fraudster to forge in case they lose their cards to such a fraudster. When this frauster goes to any shop, say a jeweller's shop, to swindle your money, he has to sign at the transaction slip of the shop. The shop manager has to match this sign with that on the card and when he sees the crossed area on the signature area he will get alert and reject the transaction and perhaps apprehend the frauster.

But some shop managers do not even bother does the basic matching and the fraudster can still get away with a fake signature (the fraudster won't know your real signature and will try to fake it by signing it his way using your name). Even then you can seek protection against a payment obligation arising out of such a fraudulent transaction by pointing to the difference between the fraudster's signature on the transaction slip (that will lie with the shop or the bank) and your real signature in the bank's records.

Secondly, since debit cards are linked to savings account then SMS-based alerts on debits in our savings account can help. So, if your bank is offering SMS alerts on your savings account you should opt for it. This way, a fraudulent transaction on your debit will throw a SMS to you which you can see to be one not authorised by you and take action immediately. Here, however, there is no guarantee of the frauster being caught.

The RBI will be forced to shake off its lethargy in checking the banks' forcing of debit-cum-ATM cards on customers, if enough customers complain to RBI. Go to and register your complaint about the banks' unscrupulous practices. The RBI will be forced to sit up and take notice.

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