Visa Cuts Holder Liability--With Strings Attached

Visa USA on Wednesday announced the latest and most broad-reaching action to protect consumers against losses due to debit card fraud. But consumer groups reacted coolly, saying that the move does not go far enough and that too many debit cardholders remain confused about their use.

Visa’s new policy, which affects 75% of debit cardholders in the U.S., eliminates customer liability for unauthorized use of both debit and credit cards, but only if consumers report the loss within two business days of learning of the problem. After two days, Visa credit and debit cardholders will face a maximum liability of $50.

Previously, Visa credit cardholders could legally be held responsible for up to $50 if a thief stole and used the cards, regardless of when consumers notified the issuing bank. And for those with Visa debit cards--which deduct funds directly from holders’ checking accounts--the potential customer liability ranged from $50 to $500 or more, depending on when the fraudulent use was reported.

Visa’s new policy, which takes effect in November, covers about 300 million credit and 47 million debit cardholders.

But consumer groups said that Visa’s action, while better than MasterCard International’s policy change last month, isn’t as strong as Bank of America’s move last week to waive all debit cardholder liability for fraud loss regardless of when it is reported. Even though Visa cardholders could be free of liability if they report the loss promptly, consumer advocates said, the burden still is on consumers to prove that they acted swiftly.

Moreover, consumer groups said neither San Francisco-based Visa nor MasterCard has adequately addressed the fundamental concern about debit cards that makes them inherently more risky than credit cards.

“Unlike a credit card, a loss with an unsecure debit card is instantly drained from your checking account,” said Gail Hillebrand, a senior attorney for Consumers Union in San Francisco. “Consumers may find themselves without a penny in their account and may face enormous bounced-check penalties as a result of theft, fraud or error.”

Visa executives, however, said they have made a major improvement in this area. Under Visa’s new policy, customers will be given provisional credit within five business days of notification for lost funds caused by unauthorized transactions. Previously, customers had to wait up to 20 days before receiving provisional credit.

“That’s the maximum,” Visa spokeswoman Susan Forman said of the new five-day provisional credit policy. “It doesn’t mean members won’t make provisional credit earlier.”

MasterCard, which has 16.5 million debit cardholders, has not yet shortened the 20-day legal requirement for giving provisional credit, although MasterCard last month was the first to put a $50 cap on what debit cardholders could lose in cases of fraud.

Visa, seeking to outdo its smaller, Purchase, N.Y.-based rival, said its new policy will also require its 4,500 member banks that issue debit cards to include an activation feature similar to that on most credit cards before they can be used. Visa also said it had formed an alliance with the National Consumers League to produce and distribute a free debit consumer education brochure, which can be obtained by calling (800) 355-9625.

Jon Gollinger, a consumer specialist at California Public Interest Research Group, called on Visa to “fix other problems that make debit cards risky.” He said financial institutions continue to issue debit cards automatically as replacements for regular ATM cards without explaining to customers the difference between debit cards and ATM and credit cards. He said issuing banks should ask customers whether they want debit cards as opposed to traditional ATM cards.

Debit cards, also called check cards, have proliferated in the last few years because banks have generated increasing fees from them and have found them far cheaper to process than checks. While ATM cards can also be used at certain types of retailers, such as supermarkets and gas stations, those transactions typically require a security code, or PIN. But debit cards with Visa and MasterCard logos on them can be used at any retailer that accepts those cards, with just a signature.

Industry experts said losses by debit card fraud are very low--at Visa, it is less than 0.1% of total transaction volume. Nonetheless, consumer advocates say, the potential losses and problems for consumers are much greater with debit cards than personal checks.