oth on-line and off-line debit card transactions post against a customer's demand deposit account (DDA)-a checking account.

The primary difference between these transactions is in the customer authorization process. With on-line debit, the customer enters a personal identification number (PIN) to authorize a transaction; off-line debit requires a customer signature, as in credit card transactions.

On-line debit card transactions are routed through EFT networks (the same networks that route ATM transactions), while off-line debit transactions are processed through the credit card clearing and settlement networks.

On-line debit card transactions also post to customer accounts in real or nearly real time; off-line transactions can take a day or two to post to the cardholder's account.

This delayed posting feature creates some float, meaning customers can make payments in anticipation that sufficient funds will be available in their checking accounts by the time the payment clears, even if there are not sufficient funds available at the time of the transaction. (You know the game: Pay for groceries on Thursday, relying on the certainty that funds will be available for debiting on Friday when the customer's paycheck is deposited into the checking account.)

What is PIN-less debit?

PIN-less debit is an on-line debit application offered by the major retail EFT networks (Star, Pulse and NYCE) for recurring payments of varying amounts to certain regulated enterprises including utilities, lenders and individual government agencies. For collecting entities, a key benefit of PIN-less debit is cost structure.

EFT networks use flat-fee structures-typically in the range of 40 - 60 cents a transaction. The credit card networks are accustomed to clear and settle off-line debit card payments, and they vary their fees based on transaction value, the type of business accepting the payment and capture methods.

How popular are debit cards? In other words, what percentage of the time can a merchant expect to see off-line (signature) debit cards?

Some merchants, such as furniture or jewelry stores, may see very few debit cards (on-line or off-line) presented for payment, while others such as grocers and quick service restaurants may accept debit cards for a large percentage of sales.

Available data suggest debit cards generally enjoy significant popularity at merchant check outs. For example, 59% of all transactions initiated with Visa-branded cards last year involved Visa off-line debit cards, also known as Visa Check Cards.

Visa reported that check card transactions represented 36% of Visa's U.S. sales volume last year, or $454 billion. MasterCard reported that approximately 2 billion transactions worth an estimated $82 billion were initiated using its MasterDebit (off-line signature) debit card product in 2003.

Financial Insights, a private financial services and technology research and consulting firm based in Framingham, Mass., estimated that 19.1% of POS transactions in the United States were initiated using debit cards in 2002.

By 2007, Financial Insights expects debit cards to be used in 45.1% of POS transactions, surpassing credit card usage by a factor of two to one.

In 2002, off-line (signature) debit cards were used for a total of 8.2 billion POS transactions, according to Financial Insight's data; on-line debit cards were used in 5.2 billion transactions, representing roughly a 60 - 40 split between off-line and on-line debit. Credit cards were used for 13.9 billion POS transactions last year, according to Financial Insights.

This year Financial Insights predicts merchants will handle 11 billion off-line debit card transactions, 9.6 billion on-line debit and 15.5 billion credit card payments.

By 2007, the firm estimates that on-line debit cards will account for nearly twice as many POS transactions as signature debit cards (24.9 billion versus 12.5 billion).

What are the prevailing consumer sentiments toward debit cards compared to credit and other types of payment cards?

While consumers have traditionally used debit cards as replacements for cash and checks, results of a recent survey by Edgar, Dunn & Co., a global financial services strategy and management consulting firm, suggest growing numbers of consumers now use debit cards instead of credit cards at the POS.

The firm's payments experts suggest the switch in preferences is due in large part to a "fundamental shift" in consumer attitudes toward cost and fiscal discipline.

(In other words, consumers in growing numbers want to pay for purchases with funds on hand today rather than with money they expect in the future.)

"[A] significant percentage of debit card spending has migrated from the credit card among cardholders who prefer debit," the firm said in reporting results of its nationwide consumer survey.

Thirty-eight percent of consumers surveyed by Edgar, Dunn & Co. in 2003 said they prefer using debit cards to pay for purchases, while 22% prefer standard credit cards and 20% prefer co-branded cards. Fifteen percent of consumers polled prefer using loyalty cards.

What are the prevailing interchange rates for on-line and off-line debit card transactions?

Off-line debit card interchange varies according to the type of merchant involved and the transaction amount.

For example, a Visa check card used at a service station is assessed an interchange rate equal to 0.7% of the transaction total plus 17 cents (with no maximum amount), whereas the fees for grocery stores top out at 35 cents. MasterCard's interchange structure mirrors Visa's closely, although some of the categories differ.

(For more detailed information, refer to the Visa and MasterCard off-line interchange fee charts published in The Green Sheet, January 26, 2004, issue 04:01:02).

Interchange for on-line debit card purchases range between 40 and 60 cents and are set by the EFT networks through which transactions are routed. Acquiring banks can-and do-mark up these fees to cover associated expenses, such as telecommunications costs, and to produce profits.

What types of consumer protections exist for debit cards?

Both MasterCard and Visa offer consumer protection in the form of zero liability for unauthorized use of off-line signature debit cards just as they do with their consumer credit cards.

Certain conditions apply, however; for example, only consumer accounts in "good standing" qualify for zero liability protection.

Unauthorized uses of on-line debit cards are addressed by the federal EFT Act and Regulation E. In most cases, customer liability for unauthorized use of online debit cards is $50.