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In defense of debit cards

By Marcie Geffner · Bankrate.com
Monday, August 2, 2010
Posted: 9 am ET

There's no doubt about it: Some Bankrate readers really love their debit cards.

Indeed, as I've said, there's a lot to like: Debit cards are easy to use, they look cool, and some of them offer points toward goods and services, airline miles or cash back on debit-card transactions.

The most common fee for a debit-card reward program is $25 per year, according to a Bankrate survey of debit-card rewards programs. But as one reader pointed out, many banks charge less or zero. More than half of the 40 programs in Bankrate's survey are free. That's a plus for banking customers because it's easier to break even or come out ahead if the fee is less, and if the program is free, even a few cents back is a profit.

Banks offer debit-card rewards to attract and keep customers. But it's also cheaper for a bank to process a debit-card transaction than it is to process a paper check and rewards programs can be profitable, even after the cost of the rewards, since the bank collects a fee on the transaction from the merchant. That's why these programs tend to require signature-based, rather than PIN-based transactions: Your signature means the merchant pays a higher fee to your bank.

Readers seemed unconcerned about the price inflation that indirectly results from all these fees and rewards. The line of thinking being that if the merchant chooses to accept a debit card and the bank chooses to offer a reward, it's well and good for the customer to take advantage of it. No one (except me) seems put out by the fact that the customer who doesn't use the card indirectly subsidies the customer who earns the rewards.

All the same, a debit card still inserts a bank into a simple transaction between a merchant and customer, and no bank is involved if the customer pays cash. By its very nature, cash forces people to be more aware of how much they're spending and that helps them stick to a budget.

Of course, there are situations in which it's impractical to pay cash. Shopping online might be safer with a form of payment that offers protection from fraud or damaged goods. A major purchase might justify the use of a credit card that offers an extended warranty.

But the bottom line is the same: Are debit card rewards worth the risk of such a strong incentive to shop more and spend more?

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