Not having enough cash in your wallet has become an inconvenience of the past. These days, all you need to do is whip out a card to pay for a meal in a restaurant, a pair of new shoes or even a lounge suite.
Debit cardholders are not using these cards extensively as a means of payment for goods and services, but rather to draw money from automated teller machines (ATMs) and bank branches, Rob Clark, the general manager for sub-Saharan Africa at Visa International, says.
He says the rate at which Visa debit cards are being issued has increased by an average of 137 percent each year between 2000 and 2003, even though expenditure on the cards has grown by only 69 percent a year over the same period.
It is possible, he says, that people are not using debit cards to pay for purchases more frequently because they have not been educated about how to use them, not enough merchants accept them and people prefer traditional methods of payment, such as cash and cheques.
Consumers who do not use their debit or credit cards to pay for purchases take the risk of carrying large amounts of cash.
Eddie Grobler, the senior vice-president and general manager of MasterCard Southern Africa, agrees that South Africans are not using their debit cards to pay for purchases as much as they use them to draw cash. However, this is changing, he says. MasterCard found a 70 percent year-on-year growth in the use of debit cards to pay for purchases.
He adds that if you consider that there are about 10 000 ATMs in South Africa, but there are about 120 000 point-of-sale devices at which you can use a debit card in the country, it indicates that the facilities to pay via debit card are widely available.
There are more debit cardholders than credit cardholders in South Africa, but this is because South African banks issue ATM cards that are also debit cards, and not because consumers ask for debit cards rather than credit cards, Grobler says.
So far, MasterCard has issued about 9.6 million debit cards and about 2.6 million credit cards in South Africa, he says.
Credit cards, on the other hand, tend to be issued only when an individual applies for (and qualifies to receive) such a card, he says. Credit cards are stand alone products and you don't have to have a bank account to get a credit card.
Which is best?
In deciding whether a debit card or a credit card is better for you, you need to consider whether you are able to work according to a budget or whether you tend to overspend.
If you are not disciplined about how much you spend, a debit card may be a better option because it will keep your splurges in check. With a debit card you cannot spend more than what you have in your account, or your overdraft limit.
Walter Volker, the general manager for Absa group payment systems, says that if you use a debit card, all your transactions are done in real time which means that you will never exceed your account balance or overdraft limit.
A disadvantage of a debit card is that if the system is offline, your transaction will be declined.
Volker says every customer who opens a cheque or savings account automatically qualifies for a debit card. Depending on whether you have a cheque account or a savings account, you may receive a statement including details of your debit card transactions.
Pieter van Wyk, the deputy managing executive for Absa's card division, says you can pay most of your monthly expenses or purchases with your credit card. You will receive detailed monthly statements so you will have a record of what you have spent and where you spent it.
With a credit card you also qualify for up to 57 days interest-free credit. The number of days interest-free credit you will enjoy will depend on your bank, the credit card you have, and whether you used your card for payment of goods or services early or late in the billing period.
Credit cards also often offer an optional budget facility, which you can use for high-value purchases or payments. Usually, there is a separate limit on how much you can spend on the budget facility and you can spread the repayments over a number of months. However, if you use the budget facility, interest is paid from the date of the transaction and there is no interest-free period.
The costs
- Credit cards:
There are no transaction fees for purchases on a credit card, but you pay a fee if you use your card to draw cash from an ATM.
However, you are liable for a monthly or annual card fee. The fees vary between banks and on different cards, but range between R8 and R44 a month.
Interest is the other "cost" you may incur when you use a credit card. If you fail to pay the full outstanding balance on or before the payment due date, you will be charged interest on the total amount as shown on your statement, even if you have paid some of the balance.
You pay interest on cash withdrawals from the date of the withdrawal until the date of payment.
- Debit cards:
The costs of using a debit card are based on the type of account to which the debit card is linked - for example, a cheque account or a savings account. The charges will also depend on the account package you have. Banks impose different charges depending on the type of cheque and savings account you choose.
The transaction fees will also depend on the specific fee package you have selected. Generally banks offer three types of cheque account fee packages:
- A pay-as-you-go option - you pay a fee for each transaction;
- A fixed monthly fee option - you may perform a fixed number of transactions each month for a set fee; and
- A rebate option - if you keep a minimum balance in your account at all times, you are not charged for transactions or the monthly cost of these transactions is discounted. Currently the minimum balance for Absa cheque account customers who want to enjoy the rebate is R10 000.
As an example, if you have a basic cheque account with the pay-as-you-go fee structure at Absa, using your ATM card as a debit card to pay for a purchase in a shop will cost you R2.05 for the first R100, R0.57 for each next R100 to a maximum of R11.45. This means a purchase of R500 will cost you R4.33.
Another cost associated with the use of a debit card is the cost of the card itself. The first card issued is usually free, but if you need a replacement card, there will be a fee. Absa charges R30 to replace a card.
How your electronic payments are processed
Making electronic payments with a debit card, credit card or even by way of internet banking is becoming so commonplace that you probably seldom think about how the money makes its way from you to the recipient.
Money transfers between individuals and organisations take place via electronic payment systems. The two dominant payment systems in the world are Visa International and MasterCard.
The clearing and settlement system in South Africa is Bankserv and it is owned by the big four banks in South Africa - Absa, First National, Nedbank and Standard Bank.
The role of the payment organisations is to provide payment systems for their member banks. Visa, MasterCard and Bankserv do not issue cards or extend credit. This function is performed by the card-issuing banks.
Visa, MasterCard and Bankserv work on the four-party system. The four parties are the buyer, the buyer's bank, the seller and the seller's bank.
How a purchase is made
When you buy, for instance, a pair of shoes, you present your card (either a debit or credit card) to the shop assistant. The assistant will obtain authorisation for your purchase from the store's bank, Clark says.
Shops and other businesses that accept electronic payments rely on a merchant's bank, also known as an acquiring bank, to process their electronic transactions. This request for authorisation can be made via an electronic terminal or over the telephone.
The shop's bank will check with your bank if your account is valid and, if you are using a debit card, that there are sufficient funds in the account, or, if you are using a credit card, that you have sufficient credit. This authorisation request is sent electronically by the shop's bank to your bank (the bank that issued the card to you) through a transaction network.
Your bank will review the request and transmit the decision (to approve or decline it) back to the shop in seconds.
How a merchant gets paid
The shop from which you bought your shoes delivers all its sales information to its acquiring bank each day. The acquiring bank then credits the shop's account for all the sales of the day.
Then the processing centre of the acquiring bank collates and sorts all the Visa, Mastercard or Bankserv transactions from all the retailers and service providers that are its clients. This information, which may include transactions from various countries, is then sent to Visa, Mastercard or Bankserv.
These payment organisations consolidate all the transactions for each bank that has issued its cards. The banks are then sent an electronic file that includes currency conversions, fees, the settlement (transaction) amounts and required reporting information.
Your bank's processing centre receives the file and your account will be debited with the transaction amount.
Your bank will transfer the money you owe together with the money its other clients owe to Visa, Mastercard or Bankserv. These organisations will then ensure that the money is distributed to the relevant acquiring banks of the various shops and businesses.
Warning
A disadvantage of using a credit card to make a payment is that if the card falls into the wrong hands, the signature on the back of the card can be easily copied and cashiers do not always verify that the signature on the sales voucher corresponds with your signature on the back of the card.
However, should somebody use your credit card fraudulently by forging your signature you do not carry the risk of the loss, unless you were negligent and did not take precautions to keep your card in a safe place.
If you detect an unauthorised transaction on your account, you must alert your bank within 60 days from the date of your statement. This is why is it important to check your credit card statements - and other statements - each month. You must also report lost or stolen credit cards to your bank immediately to ensure that you are not held liable for future unauthorised or fraudulent transactions.