Debit cards: A good deal gets better

By Bankrate.com

With no fees for transactions, no debt added to high-interest credit cards, "zero liability" fraud protection and new rewards programs, the debit, or check, card is proving to be a grand slam for consumers.

Debit card fees for transactions, whether PIN or signature, have nearly disappeared, according to Bankrate.com researchers who surveyed the 10 largest banks and thrifts in each of 10 top markets. Only seven of the 100 institutions charge a point-of-sale fee for PIN transactions. Five of those charge per transaction and two charge a monthly fee.

The public loves them

Debit cards have become nearly universal. Of the 100 banks surveyed, only three do not offer them. Of those that do, only two banks, Bank of the West in San Francisco and Firstrust Bank in Philadelphia, charge an annual fee to have a card.

This is very good news for consumers, who have embraced debit cards as their preferred purchasing plastic. According to the Federal Reserve, since 2003, debit cards, which draw money from your checking account, have been used to make more purchases than credit cards, which are used to borrow money.

"The competitive environment for banks demands that they position themselves to the consumer as offering low-cost checking accounts," says Tim Sloane, the director of the Debit Advisory Service at Mercator Advisory Group, a payments-industry research firm. "Core to the value proposition for consumers is debit cards. The once-common practice of charging transaction fees on debit cards has disappeared."

Greg McBride, a senior financial analyst at Bankrate, agrees.

"Point-of-sale fees for PIN-based debit card transactions appear to be more myth than reality," McBride says. "Nonetheless, cardholders should always verify the terms with their issuers to avoid being surprised."

For signature transactions, only Wells Fargo has a fee, and that is $1 per month for some customers, regardless of the number of transactions. "Some customers -- depending on account type and applicable waivers -- are charged a $1 usage each month in which they make a purchase using their check card or their ATM card," says Lisa Westermann, a spokeswoman for Wells Fargo. "The fee is charged for unlimited PIN-based and signature-based point-of-sale transactions and is only charged if either card has been used for point-of-sale purchases during the statement cycle."

Convenience and security

The rise of debit card use is attributable to several factors, primarily money management, convenience and security. "Significant awareness was raised about the high interest rates charged by credit cards and the fees for late payments," Sloane says. "Consumers have been educated about the benefits of debit cards. Consumers see it as a way to budget their money more effectively."

"The No. 1 reason consumers are using debit cards is convenience," says Nancy Krattli, the vice president of consumer debit products at Visa. "They provide convenient money management -- you don't have to carry cash, have exact change, and there is no record-keeping because it's on the bank statement."

She says Visa's cardholder surveys indicate that people choose debit for day-to-day transactions such as gas, groceries and drugstore purchases. But, increasingly, they're using them for smaller-ticket transactions such as fast food, coffee at Starbucks, even parking. "The average ticket has gone down," Krattli says. "In 2004 the median was $24, and it has come down to $22 now."

A Visa survey from August 2006 showed that 55% of debit card holders use their cards for purchases of less than $25, and 86% cited convenience as their primary reason.

The rise of Gen P

The same survey showed that Generation P (for "Plastic" users 18 to 25 years of age) are driving debit card usage, with 60% reporting they use the cards for purchases for anything from digital content and vending machines to parking and newspapers.

In a 2006 presentation to the Philadelphia Federal Reserve, Ronald Congemi, head of First Data, a company that processes credit and debit card transactions, said that debit card use now "cuts across all age and income demographics."

Krattli concurs: "The heaviest user skews female, but Generation P is aggressively using it. And seniors are embracing it, too."

Another driver in the use of debit cards is reward programs. Bankrate's research showed that of the 97 banks that offer debit cards, 47 have reward programs.

"Fourteen of Visa's top 15 issuers have reward cards," Krattli says. "People like to be rewarded for what they do every day.

"Debit is replacing cash and checks," Krattli says. "With cash, you have no features or benefits. With checks, people like to be able to write down the transaction, but it has no benefits. People expect to be rewarded from credit cards and it has migrated to debit, too."

Rewards a mixed bunch

Though not as robust as reward programs on credit cards, debit card reward programs are still a good thing for those who use debit as an alternative to credit cards, cash or checks.

For example, the Citi ThankYou program awards one point for every $3 using a PIN and one point for every $2 spent for a signature transaction. The ThankYou program with the Citi Diamond Preferred Rewards Card gives five points for every dollar spent at grocery stores, gas stations and drugstores, and one point per dollar at every other type of retailer, including online and phone purchases.

Comerica Bank's World Perks travel rewards program has two tiers: For a $20 annual fee, cardholders earn one mile for every $2 spent, and for $55 annually, they earn one mile per dollar spent.

The variety of rewards is also broad. Washington Mutual's free checking account gives 3 cents on every purchase up to $250 per year. It also offers "WaMoola for Schools," which earns a point per purchase for the designated school. Points are converted to cash once a year and donated to the school.

Chase has three types of debit card awards. Debiters can earn miles with a Continental Airlines Banking Card (two tiers: $25 annual fee equals one mile for every $2 spent; $65 annual fee brings one mile per dollar) or a United Mileage Plus Check Card ($25 annual fee, one mile per $2 spent). Or they can sign up for free for Chase Visa Extras, which gives one point for every dollar spent on qualifying purchases.

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