General Industry Letters
Mortgage Banking Letters
Best Practices for Issuers of Debit Cards
December 20, 2001
To the Institution Addressed:
Re: Best Practices for Issuers of Debit Cards
Debit card use has grown tremendously in the United States over the past several years, as many financial institutions have replaced their traditional ATM cards with banking cards that include the VISA or MasterCard debit functionality. Debit cards can be a significant convenience to customers who may have difficulty getting approved for credit cards or prefer not to use their credit card for certain types of purchases. A debit card can give the consumer convenient access to his or her account to get cash, make a deposit or make a purchase.
However, there are indications that many debit cardholders do not fully understand their rights and responsibilities. For example, it has frequently been asserted that consumers are not given a clear choice between the traditional ATM or the "upgrade" debit card, which may not be appropriate or desirable for some individuals. Moreover, the Department has become aware of instances where fees and charges imposed on debit card users have been excessive.
As part of its ongoing effort to promote reasonable and fair business practices by supervised institutions, their subsidiaries and affiliates, the New York State Banking Department ("the Department") offers the following recommendations to debit card issuers.
- Keep fees reasonable
Per transaction fees and monthly service charges should be reasonably related to the cost of providing debit card services.
- No charge for dishonor by bank
Irrespective of the law, no charge should be imposed on a consumer when his or her debit card purchase is dishonored. This would be comparable to banks’ treatment of an unsuccessful withdrawal from an ATM.
- Debit card "overdraft"
If an account is overdrawn, it is not reasonable for a bank to honor the debit card transaction while at the same time assessing a fee for the "overdraft", without prior notice of the fee to the consumer. Whether or not the customer has an overdraft feature on the underlying checking account, any "overdraft" feature on the debit card should be optional, and the terms thereof should be clearly and conspicuously spelled out in the customer agreement. At the time a deposit account is opened, or by a subsequent mailing offering this feature, customers should be given a clear choice to either accept or decline. Finally, for those accepting an "overdraft" feature, fees should be reasonable.
- Disclose that the customer is entitled to have a basic ATM card
Customarily, debit cards are issued at the time a deposit account is opened, or by a subsequent mailing to "upgrade" an existing ATM card to the debit card. Customers should be notified that they are not required to accept a debit card if they feel that a basic ATM card would better suit their needs. Do not put the burden on the consumer to ask whether the debit card is their only option.
- Educate consumers
Over and above the requirements of Federal Reserve Board Regulation E, at the time that a debit card is issued and annually thereafter, the bank should regularly provide the customer with clear, plain language information regarding his or her debit card use. For example, in addition to providing an annual notice that describes in clear, conspicuous plain language the consumer’s rights and responsibilities as a debit card holder, the monthly statement should clearly itemize, set forth and explain the various fees and charges incurred during the statement period.
- Cap liability for unauthorized transactions at $50
A number of issuers are now offering consumers better protection than that required by federal regulations. Regulation E caps liability at $50 only if the consumer notifies the bank within two days of finding out that the card is lost or stolen, but then raises the cap to $500 thereafter, up to a maximum of 60 days. Like those banks that have already elected to do so, all institutions should voluntarily cap consumer liability to $50, irrespective of the time of notification.
It is in everyone’s interest to ensure that banks offering debit cards follow fair and reasonable business practices, thereby benefiting the consumer and minimizing any potential reputational harm to the institution and the industry.
If you should have any questions regarding the foregoing, we invite your written inquiry and would welcome the opportunity to meet with you to discuss your concerns.
Very truly yours,
Superintendent of Banks