When banks first began issuing ATM cards in the 1970s, debit cards had very limited utility unlike their counterparts, credit cards, which could be used almost anywhere. Consumers could only withdraw cash from the automatic teller machines — usually on premises at their bank. Later came other functions such as checking bank balances, transferring money between accounts and depositing funds after hours. Bank debit cards have always required the use of a personal identification number (PIN) to access funds or perform other transactions. Certain merchants began accepting debit cards for point of sale transactions in the late 1980s, notably supermarkets, convenience stores and gasoline retailers. These transactions still required the input of a PIN via a keypad used by the consumer. The settlement process involves transferring cash from the individual’s checking account to the merchant’s account.
The debit card world changed dramatically when Visa and MasterCard credit card associations entered the arena and teamed up with banks to issue bank debit cards and prepaid debit cards with the Visa and MasterCard credit card logo. This allowed PIN-less debit card transactions to occur and provided worldwide acceptability to debit cards as with Visa and MasterCard credit cards. Visa and MasterCard had figured out a way to make money from merchants when consumers paid for goods and services through their checking account. Consumers were happy because they could have much of the utility of a credit card without having to worry about going into debt (although it required discipline to write down the charges to keep the checking account balanced). And lastly, merchants were happy because they could avoid dealing with losses from bad checks — by paying a percentage fee for each sale to the card associations.
Bank debit (also known as check cards) and prepaid debit cards differ from bank ATM cards in that they do not require use of a PIN to access funds, unless the customer is using an ATM to withdraw cash. A prepaid debit card also has a credit line equal to the amount on deposit with the card company, so it is a pre-funded credit line rather than a borrowed credit line. Debit cards draw funds from a bank checking account and prepaid credit cards draw funds from the money “loaded” onto the card beforehand.
Prepaid debit cards carry the Visa or MasterCard logo and are accepted worldwide as with normal credit cards. These cards are a good option for those with insufficient credit history or impaired credit because they do not require a credit bureau check to be approved. The traditional un-banked populations in the United States have proven to be a tremendous growth area for these products and should continue to fuel growth over the next decade.