A debit card is a plastic card which provides an alternative payment method to cash when making purchases. Physically the card is an ISO 7810 card like a credit card; however, its functionality is more similar to writing a check as the funds are withdrawn directly from either the cardholder's bank account (often referred to as a check card), or from the remaining balance on a gift card. Additionally, many merchants offer cash back facilities to customers, where a customer can withdraw cash along with their purchase. The use of debit cards has become wide-spread in many countries and has overtaken the check, and in some instances cash transactions by volume. Like credit cards, debit cards are used widely for telephone and Internet purchases.¹

A consulting firm, Novantas projects that the debit card will be used for more than 22% of U.S. personal consumption expenditures by 2015, for example, up from roughly 12.5% in 2005 (see chart "Electronic Payments: More Than Individual Products"). Much of this growth will come at the expense of paper checks and cash, which will fall from roughly 52% to roughly 31% in the household payment mix. Automated Clearing House payments and prepaid card payments also will undermine paper.²

Several factors are contributing to this explosive growth. One is the proliferation of electronics at the POS. With the dramatic drop in telecommunications costs and the growing presence of the Internet, card-capture capabilities now are feasible at many additional POS, where installations previously were uneconomical.

Meanwhile, the debit card is enfranchising a substantial portion of the banking population that either doesn't want or cannot obtain a credit card. As part of the nationwide rollout of free checking, millions of people gained debit-based electronic payment functionality when they opened their accounts. Now they have a card for personal identification, on-site payments and also online payments.

The debit card is also riding the crest of an overall shift to electronic commerce. For those who prefer cards and online bill pay to cash and checks, debit is a welcome addition to the new order. This segment already encompasses perhaps 20% of the population and represents an even larger share of debit card usage.

Furthermore, there’s an entire base of loyal credit card users who typically pay off their balances each month and just use plastic for the sake of payments functionality and to earn rewards. With rewards increasingly offered for debit, an equivalent payments vehicle, customer loyalty to the credit card is being challenged, shifting transactions to debit cards from credit cards.

Banks, companies and entrepreneurs are looking at innovative ways of transforming the debit card with models like FSAs.  But FSAs are not the only innovative ventures in the debit card space, PayPal, for instance has a debit card and is moving to secured cards, meanwhile, driver’s licenses may soon have the dual function of a debit card.³ See the business model section for more on trends with some insight from Novantas consultants.

¹ http://en.wikipedia.org/wiki/Debit_cards

² http://www.bai.org/bankingstrategies/2007-jan-feb/debitcards/

³ http://www.businessweek.com/smallbiz/content/may2007/sb20070515_503926.htm?chan=smallbiz_smallbiz+index+page_top+stories

An FSA Debit Card is a special type of debit card issued in the United States to access tax-favored spending accounts such as flexible spending accounts (FSA) and health reimbursement accounts (HRA), and sometimes health savings accounts (HSA) as well.¹

All such cards to date bear the Visa or MasterCard brand and operate through their main networks; thus all FSA debit card transactions are of the offline variety (also known as "signature debit" or, inaccurately but commonly, "credit"). This can create confusion at merchants such as Wal-Mart that attempt to "steer" debit cards to online debit (aka "PIN debit" or just plain "debit"); FSA debit cards will not work that way.

Though these cards can be issued with HRAs and HSAs as well as FSAs, the FSA is the oldest and most common of these accounts; therefore, for simplicity these cards are often referred to as "FSA" debit cards. Walgreens and drugstore.com have "FSA stores" designed for use with these cards, whether tied to medical FSAs, HRAs or HSAs.

Though a few FSA debit cards are also issued for dependent care and transportation expenses, most are issued for medical expenses.

Traditionally, to meet Internal Revenue Service (IRS) substantiation requirements, FSAs were accessed only through claims for reimbursement after incurring (and usually paying) an out-of-pocket expense, often after deductions were already made from the employee's paycheck to fund the FSA; this is commonly known as "double-dipping". This, along with the so-called "use it or lose it" rule (i.e., all funds not spent are forfeited), has long been seen as one of the problems minimizing utilization of FSAs.

The FSA debit card was developed to avoid this problem by allowing users to access their FSA directly without "double-dipping", and also (where possible) to provide methods for automating the IRS substantiation requirements which often require substantial paperwork and manpower. Substantiating an FSA debit card transaction without paperwork is known as "auto-adjudication".

HRAs, which were introduced later, technically don't involve "double-dipping" because they are funded by employer funds, not by employee funds; however, they are subject to the same IRS requirements as FSAs, and thus are generally accessed only by paper claims or debit cards just like FSAs.

Unlike other debit cards, the IRS only allows FSA debit cards to be used with certain "merchant category codes" or "merchant type codes" assigned by Visa and MasterCard:

• Medical providers such as doctors and hospitals.
• Merchants with an inventory information approval system (IIAS). In an IIAS, a merchant flags "FSA-eligible" items in its point of sale database so they can be separated from all other items by its scanner (brick-and-mortar) or shopping cart (online); it then permits only the "FSA-eligible" items to be charged to the card, with another form of payment required to purchase all other items.
• Until December 31, 2007, all grocers, discounters, and online pharmacies. These merchants must install an IIAS to accept the card after this date.
• Until December 31, 2008, all "true pharmacies" (i.e., those not located inside grocery or discount stores and not online). They must install an IIAS after this date, unless 90% or more of their sales are of FSA-eligible items (prescriptions or over-the-counter items).

If a charge is not substantiated by auto-adjudication or receipts, the FSA provider must recoup the charge and suspend the card until it is recouped. In addition to voluntary methods of recoupment, employers commonly use payroll deduction, as well as offsetting the recoupment against future paper claims. If all else fails, the employer may add the amount of the charge to the employee's W-2 as taxable income.

¹ http://en.wikipedia.org/wiki/FSA_debit_card

PayPal debit card is financially similar to a debit card, deducting purchases directly from your PayPal account balance, but can also be used as a credit card anywhere MasterCard is accepted. If there is not sufficient funds in your account, the sale will be denied, assisting you in the process of refraining from spending money you don't have.  

Requirements to Get the Card There are several prerequisites to requesting a PayPal debit card. In order to request a PayPal debit card you must be a PayPal user for at least sixty days and must have a premier or business account. There is no charge to upgrade your account, but, unlike a personal account which can accept non-credit card payments free of charge, you will be charged the standard PayPal fee of $0.30 + 2.9% of the transaction amount to accept funds (both credit card and non-credit card) from other users. In addition, you must register a credit card with your account. The statement for this card must be sent to a physical street address, not a P.O. box. Finally, your account must be verified by linking it to your bank account.

The Debit Card The PayPal debit card works just like a normal debit card issued by your bank. Funds can be withdrawn from your PayPal account via any ATM with the Cirrus logo at a cost of $1.00 per withdrawal, plus additional bank ATM fees if applicable. You can also make debit purchases with a PIN. You may request up to two debit cards per PayPal account. The PayPal debit card carries no annual fee and there is no fee to request an addition card.

A MasterCard in Disguise The PayPal debit card doubles as a MasterCard Premier BusinessCard. The card can be used anywhere MasterCard is accepted and works in the same fashion as a standard credit card with the exception that the funds are deducted directly from your PayPal account. It is possible to overdraw your account, however, if the merchant does not request the full amount of your transaction to be immediately debited from your PayPal account. For example, when you purchase gas, a $1.00 "hold fee" will be billed to your account when you swipe your card before you pump. A few days later, this charge will be removed and the full charge will be posted. It's critical to track outstanding purchases in order to avoid overdrawing your account.

PayPal Preferred Program – Get 1.0% cashback Another feature of the PayPal debit card is the ability to receive cashback on your purchases. Any purchase in which the card is used as a credit card is eligible for cashback. While an eBay account is not required in order to sign up for PayPal and the debit card program, if you are an active seller on eBay with at least one listing every three weeks, you are eligible to receive 1.0% cashback on purchases processed from your debit card as credit card transactions. If your eBay sales drops below the minimum requirement, PayPal indicates they will notify you that your preferred status has been suspended until you list another auction. (Note that this does not suspend your debit card, but simply the ability to receive cashback.) Alternatively, you can achieve PayPal preferred status by incorporating PayPal into your e-commerce website. You must also list PayPal as the only accepted online payment option on either your eBay auctions or your website. Once enrolled in the "PayPal Preferred" program, you will begin receiving 1.0% cashback on all purchases involving your debit card in which you select "Credit" rather than "Debit" at the checkout process.

Security Measures In order to provide security to your account, your debit card has daily withdraw limits of $3,000.00 for purchases and $400.00 for ATM cash withdrawals. If you decide to request an additional debit card, this limit applies to your account and is not a limit per card. If you use PayPal extensively to accept payments online, the PayPal debit card is a convenient means to spend the funds directly from your account. Even if you don't receive many PayPal payments, you can still transfer funds from your bank account in order to receive 1.0% cashback on all of your purchases. While other credit cards offer cashback rates of greater than 1%, it is important to note that the PayPal debit card does not require a credit history since it is a debit card in reality.¹

¹ http://www.associatedcontent.com/article/10712/a_look_at_the_paypal_debit_card.html

Maestro is an international debit card service owned by MasterCard. Maestro cards are obtained from associate banks and can be linked to the cardholder's current account, or they can also be Prepaid cards. The cardholder presents the card at the Point of sale (POS) and this is swiped through the terminal by the assistant or the customer or inserted into a PINpad. The payment is authorized by the card issuer to ensure that the cardholder has sufficient funds in their account to make the purchase and the cardholder confirms the payment by either signing the sales receipt or entering their 4 to 6-digit PIN.

In Australia, Maestro is part of the Eftpos program and is most commonly issued by the Commonwealth Bank.

In Europe, Maestro is, de facto, the successor to the Eurocheque system, since most European banks issued Maestro cards after the eurocheque card has been discontinued. In the United Kingdom, the former Switch debit card system has been rebranded as Maestro and now uses chip and PIN technology.  In Ireland, customers of AIB are receiving a new AIB Maestro debit card which is to replace the current Laser card. The new card which uses Chip and PIN technology, can be used for all POS transactions that accept Laser or Maestro. The card can also be used at ATMs that accept Link, in addition to the Maestro supported machines. Most Laser cards issued by other banks also have the Maestro logo and function as Maestro cards. In Belgium, the existing Bancontact/Mister Cash system will be phased out in favor of Maestro. This is directly in line with the European directive requiring member states to adopt a common payment system by 2010.

In Brazil, Maestro has acquired the existing Redeshop service and is in the process of rebranding it as Maestro. Brazilian Caixa Econômica Federal is currently the major Maestro issuer in the world, with over 34,000,000 cards issued as October 2006.  In Argentina, Maestro is the card used by the Banco de la Nacion Argentina, and others.

In the United States, Maestro is a PIN-based debit card network closely related to the Cirrus ATM network, also owned by MasterCard. Like other PIN-debit networks in the U.S., Maestro there relies solely on a standard card and PIN, without a chip; signature-debit transactions in the U.S. are handled through the main MasterCard network or the rival Visa network.

Because of its supposed global acceptance and the increase in Maestro based prepaid cards, a major advertising campaign in the UK by the company calls Maestro 'The New Cash.’¹

¹ http://en.wikipedia.org/wiki/Maestro_%28debit_card%29

When paying with a credit card, banks hold more of the risk than when paying with a debit card, because the money is spent at the point of sale and withdrawn from the consumer’s account.  The consumer is less protected than with a credit card. In many places, laws protect the consumer from fraud a lot less than with a credit card. Debit cards offer lower levels of security protection than credit cards. A consumer who is not credit worthy and may find it difficult or impossible to obtain a credit card can more easily obtain a debit card, allowing him/her to make plastic transactions.

Future Debit Card Models and Trends – Adapted from a Novantas Consultants’ article

In preparing for the future debit market, it's important to consider the changing economics and business model for this product. In what might be termed the "legacy" portion of the debit card business, signature-based verification generates a fee of roughly 180 basis points per transaction — not quite the level of credit cards but still healthy revenue — funded by the merchants who receive the payments.¹

Continued returns at that level would indeed foster a production approach, but the fact is that signature debit fees are under assault. Merchants dislike their growing outlays for debit transactions and are working to slash fees by any means possible, including filing lawsuits challenging interchange levels, exerting regulatory and legislative pressure, and scouring for payment alternatives. They also are coaching customers to use PIN debit, whose interchange fee is two-thirds lower, roughly 60 basis points.

Meanwhile, consumers have spontaneously embraced PIN debit. In fact, Novantas foresees PIN debit growing as much as 4.5% faster than signature debit over the next three years.

The upshot is that banks increasingly must look beyond merchant interchange fees for the revenues needed to sustain the debit business. And fortunately, debit card users present a number of potential sources of value independent of interchange. These include DDA balances, credit needs and demand for advanced fee-based services.

There is yet another imperative for debit programs: customer acquisition.  While product innovations typically are copied over time, progressive banks still can capture meaningful short-term advantages in the debit arena. Some of the new ingredients for debit innovation include:

• Additional reward features, such as "instant rewards" at the point of sale;
• New access vehicles, such as cell phones with card-swipe capabilities;
• Promising new authorization processes that let users set criteria for payments, such as a particular person, location, time and type of merchandise.
  

These new capabilities can be combined in new payment products that meet a variety of convenience and security needs, and attract new customers. According to Novantas, six basic characteristics along which new products can be developed:

1. Certainty — Standby provisions that assure card payments will be made even if funds are not immediately present.
2. Control — Ability to restrict, monitor and control how funds are spent.
3. Identity protection — Authentication of the funds recipient and/or user of payment products.
4. Rewards — Ability to customize loyalty/reward characteristics of an electronic payment product.
5. Seamless bill pay — Integrate recurring billing into online bill pay platforms.
6. Customer-to-customer transfer — Ability to securely transfer funds to another person and/or electronic payment vehicle.

• Smoothing the Vicissitudes
• The debit card helps consumers from spending beyond their means while giving them an easier way to spend their money.