A Detailed History of Debit Cards

Debit cards are a new method to transact cash between a buyer and a seller of goods or services. They replace the interest-bearing debt created by using credit cards and restrict the user to the actual amount of money contained in his account. When the card is used like an ATM card, or for online purchases, some banks and credit unions charge fees.

The First National Bank of Seattle issued the first debit card to business executives with large savings accounts in 1978. These cards acted like a check signature or a guarantee card, where the bank promised the funds would cover the transaction without the customer needing a check to complete the transaction. The bank only issued debit cards to those customers who had a long history with the bank and were in good standing, because like a check, the funds were not immediately removed from the account. In 1984, Landmark implemented the first nationwide debiting system, built on the credit card infrastructure and ATM networks already in place. By 1998, debit cards outnumbered check usage around the world. Its preference over checks continues to grow every year.

Although debit cards look like credit cards, they do not function like credit cards. Debit cards connect to the available balance contained in the holder’s checking account. If the funds are not available, the debit card cannot complete the transaction. Unlike a check, the money does not float until the bank completes the funds transfer. Rather, the funds transfer from the customer’s account to the seller’s account in real time, providing the seller with a guaranteed exchange for their goods for money. Debit cards with the logo of a major company imprinted on them, such as Visa or MasterCard, can function like a credit card where the transaction does “float” for two to three business days after the transaction, until the bank can transfer the funds.

Debit cards began as a convenient method to exchange money for goods or services in the late 1970s and early 1980s, over writing checks. There are several types of debit card available. One type of debit card is a tangible card that resembles a credit card. Historicallly, banks and credit unions only have issued these cards. Retailers now issue prepaid debit cards in specific amounts, similar to gift cards, imprinted with Visa or MasterCard. These debit cards, unlike gift cards, can be used anywhere. There are also intangible debit cards that transfer money from your bank account to a seller’s bank account, like an ATM card.

The main benefit of debit cards is that it relieves the user from carrying around a checkbook to every store and taking the time to write a check. Other benefits include ease of travel. In the past, before debit cards were in wide use, one would have to stock up on traveler’s checks or foreign currency in order to purchase items in a foreign country. Debit cards erase that requirement. Also, if the debit card is stolen, transactions are easier to track than traveler’s checks, standard checks and cash. Using a debit card does not require the buyer to show personal identification in order to complete a transaction, unlike credit cards or checks.

The main disadvantage to using a debit card is that if funds are not available in the checking account, the transaction will not occur. In emergencies where large sums of cash are needed, like after an automobile accident, if the funds are not in the account, the mechanic will not release the vehicle. Many stores treat returns made from debit card purchases like check purchases. Rather than receive cash, the retailer may issue in-store credit. Another disadvantage to debit cards is the possibility of overdrawing the account. Debit cards require the user to remember how much money is available in the account, where a properly maintained check register reveals the available balance.