Debit cards, similar in shape and size to credit cards, substantially advanced the replacement of coins, paper money, and checks with electronic money. These plastic cards with a magnetic strip on one side enable individuals to convert bank deposits into instant cash or pay for purchases by electronically shifting money from a buyer’s bank account to a seller’s bank account. The development of the debit card may rank with coinage, printed paper money, and checks as one of the great innovations in money, creating a new monetary era that supplants the era of paper money.
The debit card burst upon the world in 1971 when a banker in Burbank, California, connected the idea of money with the idea of a vending machine. A vending machine dispensing cash would free customers from the rigor of fixed banking hours, enabling customers to withdraw cash 24 hours a day, seven days a week. Thus the automated teller machine came into being.
The next important step in debit card development occurred in 1974 when the First Federal Savings and Loan of Lincoln, Nebraska, installed debit card reading machines at the cash registers of the Hinky Dinky supermarket. Rather than withdrawing cash, these machines enabled customers to transfer funds from their own bank accounts to the supermarket’s bank accounts, abolishing the need to carry cash or a checkbook to the supermarket. Debit card transactions take less time than check transactions and eliminate the need for protection against bad checks.
Debit cards have not been an unmixed blessing. There have been numerous instances in which authorized individuals have used debit cards to empty out someone’s bank account. The use of debit cards at automatic teller machines usually requires a personal identification number, which makes unauthorized use more difficult. Some of the debit cards that double as credit cards may be used at some retail outlets without personal identification numbers, and these cards have the greatest potential for fraudulent misuse.
Debit card transactions require an intricate telecommunications network that is only cost effective in grocery stores, department stores, and other large retail outlets that handle large volumes of sales. Small transactions that take place at small retail stores and even vending machines still depend heavily on coins and paper money. A new debit card, sometimes called the smart card, removes the need for an expensive telecommunication network, making it feasible for use with vending machines and small retailers. The smart card has an embedded computer chip that allows the card to be programmed for a fixed amount of money. The smart card can be used to make purchases up to a fixed or approved amount without a telecommunication network that connects a card-reading machine with a bank computer. The smart card can be used at isolated retail sites, or at vending machines, without the necessity for correct change.
The latest development in the smart card is an electronic payment system called Mondex. Under the Mondex system, a machine transfers money from a customer’s card to a merchant’s card, without going through the intermediary of a bank. The merchant can then pass on the electronic money from his or her card to the card of another person. The Mondex system, still in the testing stage in the last years of the twentieth century, allows blips of electronic money to change hands without going through the intermediary of a bank, holding the greatest promise of revolutionizing the currency system and ending the use of coins and paper money.