How does a Debit Card Work

When you open a current account, with either a bank or another financial institution, you will be offered a range of ways in which to withdraw you cash or purchase items while shopping.  The very name of the account is based on the notion that it comes with a check, or cheque, book.  A check book is a series of small pieces of paper that contains your bank account details upon which you write the name of the person or organization to which you wish to make a payment, and the amount of money that you wish to pay them.  Debit cards are a paperless, electronic means to do exactly the same thing.  Unlike checks, but more like credit cards, you will need to sign the back of your debit card, on the signature strip, as soon as you receive it.  It is rare that this signature is checked, but sometimes vendors will check this, for example when there is a problem with the usual paying devices, see below.

Debit cards work in the same way as most plastic money.  You provide a retailer, or other supplier of goods or services, with your debit card in order to transfer funds electronically to them in exchange for their goods or service.  They are distinct from credit cards in that they move funds from your checking account to the vendor and it is in this way they act like an electronic check book.

When you make a payment with a debit card, there is a straight-forward process to follow.  You will either be asked for you debit card or you will be presented with a small electronic device.  Either way, the card is inserted into this machine which makes contact with your bank.  It reads the information from your card, either from a magnetic strip containing your information, or more recently from a small chip which is built into the card.  Checks are then made about your balance to establish whether you have the available funds to make the purchase.  There is usually a limit to the amount you can spend on any one purchase with a debit card, and this limit will also be checked to ensure it is not exceeded.

Next you will be asked to input your Personal Identification Number (PIN) using the number pad on the device.  A check is made to ensure that the number you input is the correct code for the card you are using.  If the code is incorrect, you will be asked to try again.  It is usual for there to be a limit of three attempts.  If after three attempts you have not entered the correct PIN, your card will be suspended and you will be asked to contact your bank to have it reinstated.  If the correct code is input, you are within your spending limit and have the funds available, your purchase will be authorized and your card returned to you.

The advantages of using a debit card, as opposed to a check, for a consumer are that:

a)     it is quicker and easier, since you do not have to write out all the information.
b)     it helps to ensure you do not accidentally overspend by checking that you have the funds in your account before you purchase.
c)     it is far easier to carry around than a check book.
d)     the debit card can also be used to withdraw cash, either at a shop or through an ATM (hole in the wall) machine, saving you the need to queue at a bank and allowing you to withdraw cash when the banks are not open.

The advantages to a vendor of using a debit card as opposed to a check are that:

a)     it is quicker, and so reduces queues at the checkout.
b)     it saves administration of processing checks, and hence costs.
c)     the funds are transferred automatically on payment, avoiding the possibility that the customer may default on payment or a check bounce.

There are risks associated with using debit cards and these should not be under-estimated.

a)     You must try to ensure that no-one sees you entering your PIN into the payment device.  If they do and subsequently steal your debit card, it is very easy for them to go on a spending spree.  You should let your account issuer know immediately you discover that your card has been stolen so that it can be cancelled and any losses mitigated.

b)     Another risk comes from the theft or cloning of your card.  This is where a criminal will capture the information held on your card (usually through a difficult to detect device placed on the payment device or at an ATM).  This information is then added to a replica of the debit card which will then be used in the same way as the original.  In effect criminals would be stealing money directly from your bank account.