Debit Card Fundamentals and Their Use in Government Programs by Cathy Corby Parker, James Wironen, Mollie G
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CLASS Technical Assistance Brief Series Spring 2011 • No. 9 Debit Card Fundamentals and Their Use in Government Programs By Cathy Corby Parker, James Wironen, Mollie G. Murphy, and Kevin J. Mahoney The Community Living Assistance Services and Supports (CLASS) Plan – a groundbreaking component of the Affordable Care Act – creates a voluntary federally-administered insurance program to help individuals pay for needed assistance in a place they call home if they become functionally limited. Implementation will require knowledge translation from various sectors, including research and existing public and private programs. This Technical Assistance Brief Series seeks to answer questions pertinent to developing and implementing the program. Debit cards were introduced in the 1980’s This brief describes the Introduction and a in the form of Automated Teller Machine history and operation History of Debit Cards (ATM) cards that provided consumers of debit cards and with 24-hour access to cash in their provides examples A little over 50 years ago, banks bank, checking, and savings accounts. A of their use in introduced credit cards. The utility of “debit card” is a plastic payment card that government programs these early credit cards was limited as resembles a credit card but it is linked to inform the use of a payment card and would only work to the card owner’s deposit account at a debit cards to access if both the merchant and consumer bank. When the card is used, it accesses CLASS Plan benefits. used the same bank. To address this funds the card owner has in his or her issue, major banks formed franchises bank account. A Personal Identification so that one bank’s card could be Number (PIN) is associated with each accepted at another bank’s merchant. debit card to protect against unauthorized These franchises became known as use. To increase convenience for “associations.” Today, Visa® and consumers, banks formed networks and MasterCard® are the largest card allowed their customers to use ATMs associations and their product offers owned by any bank in the network. A have expanded beyond credit cards. network logo was added to the card for consumers to easily identify the ATMs Card associations play an important that were in the network. To extend role in establishing the rules that govern the value of their ATM cards, networks use of payment cards by consumers and encouraged merchants to install PIN-pads businesses. To protect the safety and at their cash registers so consumers could integrity of the card-based payment make purchases with ATM cards. Over system, all payment cards must be time, ATM cards came to be known as issued or guaranteed by a financial “debit cards.” institution, and each merchant must be sponsored into the association by a In the 1990’s, Visa and MasterCard financial institution. launched their own version of debit www.TheSCANFoundation.org 1 Spring 2011 • No. 9 CLASS Technical Assistance Brief Series cards that did not require use of a PIN How Debit Cards Work for purchases. Instead, the consumer signed the back of the debit card and this signature could be matched with When a consumer uses a debit card to get the consumer’s signature on the receipt cash from an ATM or make a purchase, “A ‘debit card’ to validate the cardholder. Today, most the ATM or merchant Point of Sale (POS) is a plastic debit cards operate in both modes, system sends an electronic request to the payment card carrying one or more network brands and association or network linked to the card. that resembles a an association brand, allowing purchases The association passes the authorization credit card but it is to be authorized either with a PIN or the request to the bank that provided the linked to the card cardholder’s signature. debit card to the consumer. The bank validates that the card has not expired or owner’s deposit been reported lost or stolen and that there account at a bank. Originally, debit cards were linked to are sufficient funds available to cover one or more bank accounts owned by When the card is the amount of the transaction. If a PIN the cardholder. Around the year 2000, a used, it accesses is entered for identification, the PIN is new form of debit card called a “prepaid funds the card also validated. The bank then sends the debit card” was launched. The funds on owner has in his or approval or denial transaction back to the prepaid cards were still kept at a bank, her bank account.” association or network, who delivers it but in a pooled account where the balance to the ATM or POS where the cardholder was held in trust for cardholders. Behind presented the card. (See Figure below.) the scenes, balances on each card were tracked in real time so that any one cardholder only had access to the funds in the trust account associated with his or her prepaid debit card. FIGURE Authorization Processing Transaction Flow Authorization Request ATM or Card Card Store POS Association Issuing System or Network Bank Authorization Response www.TheSCANFoundation.org 2 Spring 2011 • No. 9 CLASS Technical Assistance Brief Series All of this happens nearly instantaneously store gift cards. Some debit cards are – sometimes in less than one second of hybrids of open loop and closed loop, in time. And, throughout the authorization that they have a network or association process transactions are monitored to look brand, but they do not work at all for patterns of fraud. merchants where that brand is accepted. • Reloadable vs. Non-Reloadable The newer debit card processing — Reloadable prepaid cards operate “The newer debit platforms associated with prepaid debit very much like a bank account and the card processing cards were designed to handle more card issuer must validate the identity platforms complex authorization procedures. This of the cardholder in essentially the associated with could include limiting use of the card same process as if the consumer was prepaid debit to certain categories of merchants or opening a bank account. Money can cards were particular merchant locations. It could be loaded onto a reloadable card via designed to handle also include restricting use of the card direct deposit of pay or government more complex to purchase of particular products or benefits (the same as if the employer authorization services if the merchant is able to send or government agency was depositing procedures. This information about the items being funds to a bank account). Consumers can also load money onto their cards could include purchased. Prepaid debit cards can also have multiple “purses” associated with a at retail locations that participate in a limiting use single card. For example, a prepaid debit reload network (such as GreenDot® or of the card to card could have a general spending purse MoneyGram®) by giving cash to the certain categories and a savings purse. retail store clerk to load onto the card. of merchants Non-reloadable prepaid cards are not or particular associated with an individual. Because merchant Debit Card of their anonymous nature, there are locations. It Characteristics strict limits on the dollar amount of could also include funds that can be loaded onto a non- reloadable card. restricting use There are a wide variety of debit card of the card to products in the market. Underlying this • PIN and/or Signature — Debit cards purchase of variation are five debit card characteristics can be issued with PIN and signature particular products that define the capabilities and uses for a cardholder authentication, just PIN, or or services if the debit card. These are: just signature. When a PIN is used, merchant is able to the card is processed over a network send information • Open Loop vs. Closed Loop — and the transaction is considered about the items “Open loop” means that the debit final at the time the authorization is being purchased.” card is connected to an association approved. When a signature is used, or network and the card can be used the authorization is routed through an at any merchant in the association or association, but the merchant must network. “Closed loop” is the term send an end-of-day electronic file to used for debit cards that are issued by a the association with all of the day’s particular retailer and can only be used authorized transactions before the for purchases at that particular retailer. movement of money will occur. Cards The most common closed loop cards are that allow ATM access must have a www.TheSCANFoundation.org 3 Spring 2011 • No. 9 CLASS Technical Assistance Brief Series PIN. Many retailers allow customers to • Bank-Account Based Debit Cards obtain cash back with purchases when a — Today, virtually every checking PIN is used. Cards that only use PINs account comes with a debit card. Most are not able to be used for e-commerce bank-based debit cards have both a purchases or bill payments at merchant signature and PIN. The number on “Debit cards can web sites. the bank debit card is linked to one or be issued with • Registered or Anonymous — All more bank accounts. A purchase or PIN and signature reloadable cards must be registered withdrawal using a bank account-based cardholder to a particular individual. Consumers debit card may be approved if there are authentication, with non-reloadable cards can register not sufficient funds in the account, based just PIN, or just the card or use it anonymously. The upon the bank’s overdraft policies. Funds signature. When advantage of registering a non- in the account associated with the bank a PIN is used, the reloadable card is that it can then be debit card are insured by the Federal card is processed used to make e-commerce or telephone Deposit Insurance Corporation (FDIC).