Better than Cash? Consumer Protection and the Global Debit Card Deluge

Debit cards, which include, among others, "ATM cards," "cash cards," "check cards," "payroll cards," and "smart cards," have surpassed credit cards and checks worldwide as the dominant non-cash consumer payment system. This article examines the implications of the skyrocketing use of debit cards by consumers, particularly in emerging economies where credit cards and checks are not widely used. It also examines payment habits that affect their use such as the American addiction to credit cards. Debit cards both serve as a cash substitute and make it easier for consumers to withdraw and spend cash from their bank accounts. As a cash substitute, debit cards eliminate the anonymity of cash transactions and may make it possible, in an appropriate consumer protection regime, to correct the misallocation of losses caused by seller misconduct. By making cash easier to obtain and spend, debit cards revitalize the cash economy but may also contribute to overindebtedness through high-cost overdraft credit. Although the lack of anonymity jeopardizes consumer privacy and creates a risk of identity theft, merchants also lose anonymity when payment cards are used instead of cash. Data about the incidence of seller misconduct and other information relevant to consumers that is generated in the chargeback process - the process of charging back to the seller a transaction not properly chargeable to the consumer - could be made publicly available as an aid to consumer choice. More crucially, the uniform discount rate charged merchants by card issuers fails to reflect the comparative risk to consumers posed by different merchants. It is urged that discount rates be experience-rated according to chargeback experience. Although the chargeback system has been touted as a method of achieving remedies for consumers, consumers have rights in the chargeback system only to the extent that applicable law gives them the right to assert against their bank defenses and claims they possess against the merchant with which they dealt. Several countries permit a consumer to assert against his bank any defenses and claims he has against the merchant with which he dealt if the consumer used a credit card to make a purchase. However, none of these countries accords these rights to debit card users. This distinction between credit and debit cards is premised on a false equation of debit cards with cash and has no justification. Other articles have called attention to the divergent rules that govern loss allocation for unauthorized transactions in payment systems, but have not provided a satisfactory analysis. Losses were allocated to the consumer up to a $50 threshold in the United States, a structure emulated in other countries, on the theory that up to that amount the lost or stolen card would have been used as a "convenience card" in place of cash, so that the loss should be treated as if cash had been lost. However, this makes no sense, because in general, the loss of cash is final only because cash can be spent anonymously, not the case with cards. Since most debit cards do, or should, require use of a PIN, allocation of loss to the consumer should be limited to cases in which the PIN is negligently or culpably divulged by the consumer to the wrongdoer or in which the consumer's negligent or culpable conduct otherwise compromises a security system protecting against unauthorized use of the card. The article discusses other problems of consumer protection in the debit card deluge, including problems of access to banking services, bank fee regulation, and system insolvency. It concludes with a recommendation that developing countries currently devising consumer protection regimes not mimic the economically advanced countries, but take into account their own conditions and utilize the new possibilities afforded by debit cards to give their citizens better protection against seller misconduct.