Debit card on a stack of money

Checking Accounts and Debit Cards

Banks and credit unions offer checking accounts so that individuals and businesses can keep money safe while at the same time having total access to it. When a deposit is made into a checking account, the available balance is verified and the funds can be withdrawn either in the form of cash or by making a purchase using a debit card or check. Most merchants accept both checks and debit cards as forms of payment. Debit cards are a form of electronic funds transfer that is instantaneous.

Why Banks Profit From Checking Accounts

Banks hold a tremendous amount of money in consumer and business accounts. Although this money does not belong to the financial institution, it is considered part of the bank's assets because very little of the money is being withdrawn at any given time. This gives the bank a powerful tool for investing. Financial institutions are able to receive favorable interest rates of their own because of the virtual guarantee of sizeable collateral.

The Debit Card Transaction Process

Debit cards offer consumers and businesses the opportunity to make purchases without having to write a paper check. When such a purchase is made, the information contained on the magnetic card strip is recorded by the merchant's computer. A secure, encrypted transmission is sent to a bank clearing house. The clearing house sorts the information and charges the customer's bank the appropriate amount. In other words, the available balance is verified at the time of purchase.

At the same time, the clearing house collects information about the total amount of purchases, the amount debited over a given period of time, and the type of merchandise bought. This is valuable information that is also collected by certain merchants. Customers have a limited ability to opt out of this type of information collection. However, most institutions and merchants share this information with only a few different outside parties, primarily for the purpose of finding out which customers may be interested in certain promotions.

Debit cards are only usable if there are sufficient funds on deposit. Some banks offer what is known as overdraft protection. This means that a purchase can be made even if there are insufficient funds in the cardholder's checking account. A linked account such as a credit card can be used as a backup means of payment. If this option is chosen, the cardholders will now have to make payment to their credit card company in a timely manner to avoid finance charges.

Some Things To Remember

Debit cards can be used worldwide at any participating foreign bank or ATM that displays the proper logo. Most debit cards are issued through a partnership with a major credit card company such as Visa or MasterCard. International transactions are subject to a per-use fee. If a withdrawal is made at an ATM not owned by the card's issuing bank, a third-party fee may apply to the transaction.

Debit card transactions are protected by a special form of encryption code. This is exactly the same type of encryption used by electronic gateways to send payment information for a credit card purchase. Customers are thereby assured that no other outside party can intercept the transmission and gain access to sensitive account information or personal identification details.

Last Updated: October 22, 2014