Debit Cards vs. the Fraud at Target Stores

With the recent electronic data theft from Target, Neiman Marcus, and others in the 4^th quarter of 2013, many people are looking for an alternative to their bank or credit union issued debit card. We are getting a lot of questions like:

•          How safe is my debit card?
•          What happens if I find unauthorized electronic debits in my bank statement?  
•          How do I get reimbursed for unauthorized usage of my card? How long does it take?

Bank customers and credit union members all over the country have concerns about the safety of their data. Let’s be clear here, your financial institution very likely has the best anti hacking software made today. There has not been a significant breach of banking data since 2011. How often are retail merchants the victim of identity theft hackers? It seems like every month we hear about a new breach! 

The problems really lie with the retailers like Target. Their security was so poor the thieves were able to use common malware that had been used before in other data breaches and the bad guys didn't even encrypt where the money was going! Essentially, Target was broken into by an amateurish gang who left all kinds of evidence of what was happening, but Target’s IT department failed to recognize the danger. (See the article in the Minneapolis Star Tribune  for a story on the methods of the thieves.) 

Target will not be paying for anyone’s monetary losses resulting from the fraud. They won’t be paying the millions of dollars it cost the financial institutions to replace all the compromised debit and credit cards. Retailers have no responsibility to their customers when there is a data breach. For many of you this is a very surprising revelation but that is how it works today. The financial institutions are forced to pay for their customer’s losses after a hacker has broken into the merchant’s computerized payment system. Target’s breach cost banks and credit unions $200 million so far! It cost credit unions in Wisconsin $750,000 alone. The numbers for California are still being calculated.

(Okay, I am done with my “I am so mad at Target’s weak data protection.” screed. Now, let’s talk about Debit Card security.)

The debit card is a viable alternative for paying in store charges as well as preauthorized transfers. When managed properly, it has very strong anti-fraud/anti-theft procedures. The Federal regulation known as Regulation E provides consumer protections for fraud against unauthorized use of a debit card. One has 60 days from the issuance of their account statement in which the problem or error occurred to contact their financial institution and file a Reg E complaint. This is true for banks and credit unions.

Once the complaint is filed it takes about 48 hours for most institutions to issue provisional credit to their clients for the disputed items. Each will have a different procedure so you should make yourself familiar with the procedure at your institution. The reimbursement is pending an investigation into the fraud. Most investigations are completed within 10 days resulting in final credit or revocation of credit. Reg E limits a consumer's liability for unauthorized electronic fund transfers, such as those arising from loss or theft of an access device, to $50; if the consumer fails to notify the depository institution in a timely fashion (>60 days after the statement was issued), the amount may be $500 or unlimited.

The key to this is that customers of banks and credit union members need to keep an eye on their accounts. It is so much easier today than 10 or 15 years ago as we now have online and mobile banking. Our customers and members can keep up on their accounts while on the run and be able to address any inconsistent transactions immediately with their institution. The faster someone reports an unauthorized transaction, the faster the institution can reimburse them.

One of the reasons credit cards are being pushed as a payment alternative is that the credit card companies are pushing this issue and have been for many years. My friends at Visa would want people to pay all their bills and groceries with a credit card and then write one check at the end of the month to pay all. According to the credit card companies this protects your checking account from being exposed to fraud. Of course, the credit card companies would be very pleased if you could only pay a portion of their bill. Then the consumer will be paying interest and that is the issuers’ primary desire!

For domestic payments, I would use my debit card and keep a close watch on my checking account thru my online banking program. I would definitely use a credit card when traveling internationally.

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Our Next Free Teen Financial Education Class:
Real World Budgeting for Teens and College Students
Saturday, March 22, 2014 - 10:00 -11:00 a.m.
Chesbro Financial Center, San Jose, CA

Attend this FREE, fun and interactive class made just for teens! Various life scenarios involving everyday finances are covered:

• Learn how to make wise money decisions when starting an "adult life".
• Learn tips and find out the steps on how to rent that first apartment.
• Learn the best tricks for making ends meet when you are on your own.
• Find the hidden costs of being on your own.
• Learn how saving money can improve your lifestyle.
• Learn how your down payment on your first car can effect your payment and interest rate.

Teens, learn what it's like to be on your own in the real world!

Parents are also welcome to attend.

RSVP today to Greg Meyer, Community Relations Manager - gmeyer@meriwest.com or call (408) 365-6328

Electronic Money – The World has Changed

There once was a time that “Cash was King.” It was acceptable in any transaction up to any amount. When buying a car back in the day, someone might take more than ten thousand dollars with them to pay for the transaction. Paying debts with large amounts of cash was not uncommon. In the 1940’s and 1950’s, there were only three ways to pay for something; cash, check, or a wire transfer. The popularity of charge cards had not begun.

In the 1960’s charge cards or credit cards became a normal part of our financial world. Now we had a fourth way of paying for our wants and needs; a credit card. “Buy now and pay later” was the motto of many back then. It was a popular option for those with limited cash, as credit cards allowed them to purchase expensive items and pay for them at a modest interest rate over time. Credit cards changed the way we looked at cash. Cash dollars were no longer a necessity in a transaction.

The 1970’s and the introduction of the ATM was what really set us on the path to electronic money. An ATM made it possible for someone from out of town to get cash from their account without having to write a check and show several forms of ID to get it cashed. They could go to the ATM of the nearest bank and, for a small fee, access their account and get up to several hundred dollars from their account. They did not have to go to the ATM of their bank. Banks would exchange the money electronically between them to settle the transaction.

After the ATM card, came the ubiquitous debit card. The debit card was originally created by a Frenchman, Roland Moreno, in 1974. EFT/POS (Electronic Funds Transfer/Point of Sales System) or the debit card system as it is popularly referred to, changed how we all exchange money for goods and services. Suddenly, if we had the cash in our account, we could pay for any item if the merchant accepted EFT. Cash money was no longer a required part of monetary transactions. In 2011, only 27% of transactions were of the cash type and it is expected to drop to 23% by 2017. Another number that is expected to drop is the use of paper checks for payments; only 7% of transactions in 2011 involved a paper check.

There are convenience stores and other markets that are refusing cash and moving to 100% EFT transactions. Considering that merchants must pay a small fee for each transaction, why are we going to 100% EFT?

For years, checks were the way we paid for things when we did not have the cash readily available. That system worked just fine but it had pitfalls. What were the dangers of accepting a check?

·         It took several days for a check to clear. Prior to electronic check clearing in the late 80’s, it took even local checks seven days to properly clear. An out of state check would take two weeks !

·         We never knew if the money to pay the check would be available on the date the check cleared.

·         Once the check “Bounced” back to us, it would take a couple of days to get the check back to us. Taking time away from recovering on the bad check.

Checks could be stolen, duplicated, or altered. If a merchant took a bad check, the merchant paid for it and took a loss. With electronic transactions, particularly with PIN style transactions where the accountholder must enter their PIN code in order to complete a sale, it gives the merchant much more confidence that the person processing their transaction is not a fraud. Electronic transactions reduce the amount of fraud losses for merchants.

In a few years, paper checks will be a thing of the past!

Happy Holidays to everyone! Stay safe this season.