Giving yourself credit with debit

Instant payment using debit cards might cure spending addictions. But will they replace credit?

07/04/09 - Abu Dhabi, UAE -  Khaled Mubarak al Awbthani, of Abu Dhabi, uses his debit card issued by Abu Dhabi National Bank for all his purchases.  (Andrew Henderson/The National) *** Local Caption ***  ah_090407_DebitCard_0017.jpg
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For Khaled al Awbathani, the choice between paying with cash, credit or debit card is clear. Debit cards, he says, offer a better alternative to carrying large sums of cash, steer him clear of incurring debt and help track his expenses and available bank balance. "I can see how much I've spent, and it also helps me see how much I have left in different accounts," he explains. "It's also easier to buy with debit cards." Mr al Awbathani isn't alone. While people in the western world have long been using debit cards to make purchases large and small, the trend of substituting cold hard cash with debit cards - and staying away from credit cards - is beginning to catch on here. The tip in debit's favour stems ultimately from the financial crisis - banks are less liberal with credit than before and have been decreasing credit lines. In these lean times, consumers are also becoming more attentive to the dangers of the enticing power of credit. "People just buy with their credit cards, and every month they buy more with credit and get more debt," Mr al Awbathani says. Indeed, a debit card may be the best cure for an addiction to credit. Debit cards offer the convenience of being able to make purchases with plastic without all the fees and interest charges that come with plunking down your Visa card. When you swipe your debit card, the cost of the transaction is deducted straight away from your current account, just as if you'd withdrawn money from an ATM and paid in cash. The benefits, though, go beyond avoidance of the debt trap. Imagine having to pay for a household appliance that costs thousands of dirhams with cash. If your bank hasn't issued you a credit card or if you are uncomfortable with charging any expenses on credit, a debit card might be just the ticket. On the other hand, some consumers find debit cards particularly useful for inexpensive items because they relieve them of the hassle of searching for loose change through pockets or purses. In the US, where banks have shifted greater marketing energy to debit from credit, the payment industry has promoted debit as a convenient tool for "everyday expenses". More importantly, debit cards, unlike ATM cards, can be used at the point of sale for purchases and for withdrawing cash anywhere in the world because they operate on MasterCard or Visa networks. "Debit cards give customers so much more flexibility and open so many more doors for them," said Anil Chander, the head of cards and business strategy at National Bank of Ras Al Khaimah (RAKBank). RAKBank began offering debit cards in November at the request of its customers. Its new clients receive a debit card, and the bank is converting all its existing ATM cards to debit cards, Mr Chander said. More banks are likely to follow suit and convert their ATM cards to debit cards as attention turns increasingly towards this form of payment. "At the moment credit doesn't look as attractive because banks have to fund the lines of credit when credit is expensive and they are taking on the risk, so more banks are turning to debit," said Olann Kerrison, the head of analysis at the London-based research firm Lafferty Group, which recently completed a study of the card industry in the UAE. Arup Makhopadhyay, the executive president and head of retail banking at Abu Dhabi Commercial Bank, said consumers were now more receptive to debit because economic conditions had made many uncomfortable with using credit cards. Introduction of more debit cards would certainly be welcomed by consumers who are not fond of carrying cash or using credit cards. "I'd rather use [a] debit card than to keep withdrawing cash from ATMs," said Saurav Parida, who recently moved to Abu Dhabi from the UK. Mr Paridasaid he had been making more stops at the ATM than he liked and had paid for all his purchases with cash because his bank, HSBC, does not offer debit cards. Change, however, is coming to HSBC. It will begin rolling out contactless debit cards to all savings and current account holders in June. HSBC, one of the major retail banks in the UAE, said it delayed the introduction of debit cards until it could upgrade its technology. "As a global bank we also have to ensure that all our products and services launched are in line with HSBC Group's guidelines and principles, which at times may take longer than a local implementation," said Thimal Perera, the bank's regional head of cards. So far, banks in the UAE have done little to bring consumers over to debit. Reward programmes on debit cards have been few, marketing barely visible, and many banks until recently had not even offered the cards to their account holders. Yet despite lacklustre efforts to promote debit cards, many consumers have shown a fondness for them. Between 2005 and 2008 debit cards in all categories grew faster than credit cards in the UAE. The number of debit transactions used to buy items grew 115 per cent and the volume spent at cash registers grew 196 per cent, according to the study by Lafferty Group. Still, reward programmes and other incentives might be necessary to win over traditionalists who believe cash is the best medium. Take Indira Sabdula, an Abu Dhabi resident, who wondered aloud why she needed to use cards. "This is a safe country, it is not like I have to worry about having cash with me," she said. "I'm very comfortable with cash because I can count how much I took with me, and when I get home I can count again and know exactly how much I spent." Asked whether her bank could entice her to substitute paper payments with plastic by offering reward points, she had to think about it. "Maybe," she said. But banks are unlikely to offer debit card reward points as readily as they do for credit cards, simply because credit cards are more profitable. With debit payments, banks give up the opportunity to collect interest. They also receive a smaller transaction fee from merchants on debit payments compared to purchases made with credit cards. Some banks have tried to get around this problem by substituting high profit with high volume. If banks can get customers in the habit of using debit cards for small purchases, they reason, they can make money on the sheer number of transactions. For instance, Bank of America, the largest retail bank in the US, introduced its "Keep the Change" programme two years ago. The scheme rounds up all debit card charges to the nearest whole number and puts the difference into a savings account, though it caps the amount awarded at US$250 (Dh918) per year. Mr Kerrison said the "Keep the Change" programme was an example of a reward system that was not expensive for banks and still appealed to consumers. But for many customers who pay with plastic, credit cards remain the preferred product. Patrick Nineur, for instance, an architect who lives in Abu Dhabi, said that even when he uses credit cards for purchases he still pays his bills on time and doesn't incur interest charges. For those like Mr Nineur who pay their credit card bills in full every month, a card that allows them to pay later provides an easy way to help maintain a budget. With all transactions available for viewing on most banks' websites within a day or two of purchases, credit cards give you practically the same transparency in your expenses as debit cards do, with the added bonus that you have up to 30 days to pay off what you spent. What's more, credit cards offer richer rewards. So if you are disciplined in paying your credit card bills, a card that delivers more rewards may be a better choice. If banks in the Gulf keep promoting debit cards, as is expected, they will be following a strategy adopted in other markets about four or five years ago. In the US, the surge in the promotion of debit cards occurred at a time when credit was readily available, but at a time when American banks were trying to convert more cash transactions to plastic. Having concluded that there was little room for growth in credit payments, American institutions saw debit payments as an easy way of growing their businesses. Banks in the UAE, by contrast, are turning to debit cards because of troubles in the credit market and concerns that consumers are becoming more reluctant to charge purchases. Will it work? It's hard to tell, but the success of debit cards here will likely depend largely on how heavily banks promote them, since customers show that they are ready to embrace them, especially if the rewards schemes add extra incentive.