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The Basics

How debit cards fleece consumers

A 1,000% fee just for buying a fast-food burger? In our shift to a cashless society, the banking industry has evolved from our financial servant to our master.

By Chris Pummer, MarketWatch

Born-again Democrats recently made a big to-do in reining in credit card industry abuses. To really safeguard our interests, the new U.S. Consumer Financial Protection Agency now needs to halt the banking industry's coup in progress and the means of its power grab: the debit card.

Being able to whip out a debit card for virtually any transaction is so convenient. Yet in promoting our evolution to a cashless society, banks have commandeered and privatized the nation's payment system, and they profit mightily on all types of purchases, down to buying a candy bar.

The industry's initial aim was to reduce cash-handling, check-clearing and accounting costs via electronic transactions, including direct deposit of paychecks and automatic withdrawals for bills and expenses.

Its ultimate windfall: While reaping those savings, it now generates billions in fee-based income -- and we've all sacrificed financial privacy in ways we've not yet even begun to fathom.

Used to be debit card purchases wouldn't go through without sufficient funds in a cardholder's account. Then opportunistic banks realized that, with direct deposit, they could recoup the overdrawn funds the instant their clients' next payroll checks rolled in.

The upshot: Banks may impose a $35 fee for "overdrawing" on a $3.50 fast-food purchase -- and have vigorously fought efforts to provide electronic warning of the debit card overdraft at the point of sale. The equivalent interest rate for your $3.50 lapse: 1,000%.

Here's more to consider:

The double standard on account theft. Credit card holders aren't on the hook for fraudulent use of their card numbers and can challenge charges on goods and services not delivered as promised. Debit card holders aren't guaranteed those same protections.

The reason: It's the lenders' money on the line with a credit card transaction -- and just our hard-earned savings with debit card fraud. They'll absorb the cost of investigating and prosecuting theft of their money, but they don't want to pick up the cost of policing the theft of ours -- by identical means through their very same hands.

Credit card borrowers are never out more than $50 regardless of when they discover potential fraud. Debit card holders' liability is limited to $50 only if they report perceived fraud within two days; the liability jumps to a maximum $500 from that point to 60 days and is unlimited thereafter.

Vanishing gift-card balances. When consumers buy gift cards, they essentially give retailers an interest-free loan until the recipient uses the card, rather generous when you think about it. Yet on many cards, in small print, is the caveat that the card's value is wiped out if not used by a certain date.

What the hell? Cash value should never vanish, whether in hand or in stored electronic chits. Whoever let our payment system get boarded by Somali pirates?

(This is already illegal in some states. See your state's rules.)

Video on MSN Money

The new credit card landscape © CNBC
The new credit card landscape
CNBC's Bertha Combs looks at the shock waves the new rules will send through the card industry.

How we got snookered

The Federal Reserve under Alan Greenspan championed the banks' aims, since it cost the Fed a nickel to process checks through its transfer system versus a penny for electronic transactions. To Greenspan, the cost savings for the Fed justified the unprecedented turnover of the payment system to the banks.

The IRS, meanwhile, loved the personal record the shift to a cashless society produces because it reduces the undocumented flow of cash through the "underground economy." We've improved the likelihood the government will collect on taxes owed, but at what societal cost?

Continued: The demise of financial self-discipline

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