A Finextra member 23 November, 2008, 17:34 0 likes

I think it's called poverty. There are plenty of people without bank accounts and localities without banks where local loan sharks will charge you £2.50 to lend you a tenner for the week. In better off areas it's not uncommon to find shops and cafes who don't take cards either. Indeed one of my favourite restaurants in Greenwich is cash only.

Adam Nybäck - Anyro - Stockholm 25 November, 2008, 20:31 0 likes

Well, we do have cash only restaurants in Sweden too, but that's just to make it easier to hide the profit from the government. We have a lot of poor people too, but I think most of them have bank accounts, since it's free and convenient.

Still sounds weird to me... Too poor to have a bank account, but have cash to buy stuff on the internet.

Makes more sense to hear about people too poor to have any cash because they used their credit cards too much on the internet.

A Finextra member 26 November, 2008, 10:32 0 likes

I'd agree. It is very strange!

A Finextra member 02 December, 2008, 11:10 0 likes

Adam said "Still sounds weird to me... Too poor to have a bank account, but have cash to buy stuff on the internet."

Actually, these people do have bank accounts. Having a bank account does not mean that one has a credit card. Banks do issue at the very least, ATM cards or debit cards.

Some debit cards were originally issued to teenagers in order to control the spending and ensure that one only spends the money that he has. Well, we're all finding out now that these debit cards are not just for teenagers ! But even having a debit card/atm card does not mean that you can use the card everywhere. Debit cards are not widely accepted as credit cards. 

For those that wonder (like I did) why some stores (online or otherwise) do not accept debit cards when the interchange fee for debit cards is a lot lower than credit cards, here are a few answers :

1. Some debit cards (such as visa electron, maestro, solo) require that the money be available (in the cardholder's bank account) at the time of payment in order to ensure that the bank account can not be overdrawn. Some merchants do not accept these cards because their systems can not check for the availability of funds and the issuing bank can not guarantee or put the funds 'on hold'.

2. Some debit cards do not show a 16 digit card number (as an example, Maestro). Therefore, you can't use them for online payments.

3. For small transaction amounts, it is sometimes cheaper for a merchant to accept credit card payments than debit card payments. Accepting debit card payments means incurring a minimum flat fee per transaction while credit card payments are often on a percentage-based basis. 

4. Some POS just could not handle the processing of debit cards as well as it can process credit cards. Take for example, a gasoline pump station. If one uses a credit card, the gasoline POS usually holds a certain amount (preauthorizes), then allows the cardholder to fill up the car with gas. The actual amount, which is of course equal or lower than the preauthorized amount, is eventually settled. This same process can not be done with a debit card. The gasoline POS has no way of knowing exactly how much gasoline will be pumped into the car, nor does it have a way of checking how much money is available in the cardholder's bank account.

5. There are also inherent problems with deferred posting (settlement) of offline debit which can result to an overdrawn account.

6. Some debit cards just do not work outside of the region of issuance.

7. Even direct debits (that use ACH instead of the card networks) are also problematic for merchants since the merchant can not immediately know if there are sufficient funds in the customer's bank account to cover the amount of the transaction. It can take up to 24 hours for a merchant to get notified of NSF 'non-sufficient funds'. Obviously, this is a concern for merchants that provide services or goods at the time of 'payment'.

From a consumer standpoint, doing a direct debit (which means giving someone access to a bank account) is perceived to be not as convenient and secure as paying with a debit or credit card.

But also from a consumer standpoint, debit cards are definitely less secure than credit cards. It's not that its difficult to secure debit cards but I've always thought it foolish that card schemes have set the interchange fee for debit cards too low that there is no wiggle room within this interchange fee to pay for security.

Interchange fee for credit cards (as defined by VISA Europe) is : processing cost (35%), interest free period (14%), payment guarantee/anti-fraud (51%). Well since they defined it this way, it was then easy for merchants to demand a lower interchange fee for debit cards.  Other than the processing cost (wherein it is checked if there is sufficient funds in the cardholder's account), there is no interest free period involved in debit card payments, and banks also do not guarantee and secure debit cards as much as they secure credit cards perhaps because it's not their (banks) money that's being used.

Overall, the reasons or issues stated above can all be fixed.  

But a study of debit cards and the interchange fees associated to debit cards provides enough proof that lower interchange fees do not necessarily mean wide acceptance and usage. This can be a subject of a separate blog.

All of these : debit cards / credit cards / MIF (multilateral interchange fees), SEPA, digital money, faster payments, STP, credit crunch as a result of an irrational exuberance of credit giving, PAYMENT SECURITY are all part of one big puzzle.

Adam Nybäck - Anyro - Stockholm 28 February, 2009, 17:10 0 likes

Thanks for the explanation Marite. I don't know enough about these 7 issues to give you a good answer, but I believe most of them were fixed in Scandinavia back in the 80's or something.