Plastic fantastic: debit cards with a twist

Not too long ago, users of the plastic-payments system had only one big decision to make: which credit card to carry.

Now things have gotten more complicated, and many people, though aware that plastic has taken new forms, have only a hazy idea of how those new forms work.

You probably are aware that there are two fundamentally different kinds of plastic now – credit cards and debit cards.

When most people think of a debit card, they mean their ATM card, which can be used both in banking transactions and for many purchases.

ATM-type transactions are done "online," meaning that the automated teller machine or the merchant is hooked directly into an electronic banking network, and the transfer of funds takes place immediately.

You authorize these transactions by entering a personal identification number, or PIN, on a keypad at the ATM or checkout counter. These transactions are secure as long as a thief doesn't get your PIN.

Not all merchants have the keypads and other equipment for online transactions, but most take credit cards. So Visa and MasterCard have come up with offline alternatives – Visa calls it the Visa Check Card; MasterCard calls it MasterCard Debit – that allow merchants that accept Visa and MasterCard credit cards to accept debit transactions.

You authorize these transactions by signing a receipt, and the clerk is supposed to make sure your signature matches the one on the card. Your account is not debited immediately; instead, the merchant typically sends in all the transactions electronically at the end of the day. The funds are taken from your account a day or so later.

Both signature- and PIN-based debits can be done with the same piece of plastic: an ATM card that is linked to the two big credit-card associations.

Signature-based debit cards "are fairly new," says John Hall of the American Bankers Association, a Washington-based trade group. But their arrival "opened millions more locations" to debit transactions. These new places included some big stores that didn't want to invest in equipment for PIN-based debits, as well as many restaurants and small businesses. "Any place that accepted credit cards could now take debits," says Mr. Hall.

"We are seeing essentially mass adoption by American consumers," says Jerry Sargent, vice president for debit-card strategy and development at MasterCard.

The availability of two options – from Visa and MasterCard – has spurred sharp growth in the number of debit transactions.

According to an ABA survey, debits accounted for a larger share (26 percent) of store-payment transactions than credit cards (21 percent) last year for the first time.

Cash remained the leader, but its share shrank to 33 percent, from 39 percent in 1999. Checks accounted for 18 percent.

Interestingly, most of the growth in debits was in PIN transactions, which climbed to 15 percent from 11 percent, while signature transactions rose to 11 percent from 10 percent.

This may be in part because more small stores are acquiring keypads, but the overall message is that consumers are finding debits an attractive option.

Debit cards offer the convenience of not having to carry cash or a checkbook. They are often more readily accepted than checks, and because they are limited more or less to the amount of money in your account, they offer a form of discipline that credit cards do not.

The limit is "more or less" because there have been consumer complaints that, in the case of an offline, signature-based transaction, some banks will cover what amounts to an overdraft and then sock the cardholder with a bounced-check fee.

If you have a bank account, you probably have a debit card. But do you know which kind? In an increasing number of cases, it's both.

Cards that started out simply as PIN-based ATM cards now commonly carry the signature-based option.

Look at your ATM card for a Visa or MasterCard logo. If it's there, chances are it can be used in signature-based transactions.

If you lose the card, don't be casual about it, figuring nobody knows your PIN. Thieves may not need it if they can manage to forge your signature.

Federal law protects you against losses on debit cards (both kinds) over certain thresholds. Your maximum liability is $50 – the same as for a credit card – if you report the loss or theft of your card within two business days of discovering that it's gone.

Your legal liability rises to $500 if you report it after two business days, and the liability is unlimited if you don't report the loss within 60 days of receiving a bank statement that shows unauthorized transactions.

Visa and MasterCard, both eager to promote use of signature-based cards, promise zero liability for fraudulent or unauthorized transactions on both their credit and debit cards.

But Sargent cautions that the zero liability applies only to signature-based transactions. That means that if someone obtains both your card and your ATM's PIN and empties your bank account or buys merchandise, the card association's limit does not apply. Your only protection is the federal limit.