Consumers should stop and give two cheers to Visa and MasterCard for revising their debit card operating rules to cap consumers' liability. Their action addressed an increasingly significant consumer protection problem and perhaps bypassed a legislative and regulatory quandary. Now it's time for Visa and MasterCard, in the spirit of competition, to further improve consumer protection. Other debit card issuers should follow suit.

As American Banker described in earlier articles, the Visa and MasterCard debit programs have created significant problems for consumers. The U.S. Public Interest Research Group has called the off-line debit card a "sloppy bank product" and "completely unsafe," and there have been calls for regulatory protections.

Consumers are not fully aware of the risks of the new debit cards that they receive unsolicited from their banks. Typically these are reissued ATM cards, but consumers are not fully informed that the new card has different liability risks and consumer protection. Because of the lack of a PIN and/or signature requirement, there is a much greater chance of theft and abuse. Since debit cards are tied to a checking account, their loss can wipe out the cardholder's liquid assets overnight. Banks have provided information on the new range of services but have not clearly informed consumers of the new risks. Most consumers are unaware that their new ATM/debit card can be used without a PIN.

Because federal regulations give a bank up to 20 days to reconcile a lost or stolen card problem, a cardholder may be without needed funds for a very long time, unlike the analogous credit card situation in which the customer's account is credited until the dispute is resolved. Finally, under these regulations consumer liability for loss could be as much as $500 - or potentially unlimited if the consumer waits too long. By contrast, there is no time limit for reporting lost or stolen credit cards to take advantage of the $50 liability limit

MasterCard's $50 limit and Visa's absolute cap on liability address a serious problem. The off-line debit card is not as secure as an ATM card because of the lack of a PIN requirement. The risks are really more similar to that of a credit card. Therefore, modifying the liability rules to follow the credit card environment makes sense.

By reducing the consumer's potential liability, MasterCard and Visa create substantially greater incentives for banks to police their off-line debit programs and work with merchants to reduce loss.

But enough applause. The job is not complete. MasterCard needs to follow Visa and wholly eliminate consumer liability when there is timely reporting.

But the change in liability solves only part of the problem. The off- line product is still very risky, and consumers are not fully informed of those risks (or their alternatives) when their ATM cards are being converted to off-line debit cards.

What further action is necessary? Let me make five proposals.

1. Better consumer disclosure. Consumers should be informed in clear and simple language that their ATM cards are being converted to off-line debit cards. Consumers who receive new or converted cards should be told that they can be used without a PIN or signature.

2. Consumer choice. Consumers should be given the choice of accepting an off-line debit card. Because these cards are more risky, consumers should have to make a decision to accept the off-line card after being informed of the risks.

3. On-line debit as an alternative. Because on-line debit, which requires a PIN, has a much smaller risk of loss, consumers should be given the choice of designating their cards for only on-line debit. Both Visa and MasterCard have on-line debit networks, which are more efficient and less risky than their off-line sister programs.

4. Permit consumers to tailor their debit program. One approach to limiting the risk of loss is to allow consumers to set their own daily limit for their off-line card (for example, $100 a day). Debit cards are most frequently used for small purchases, and some cardholders could set a daily limit accordingly. This could also provide an earlier warning of card theft.

5. Speed up the dispute resolution process. It is one thing to give credit card issuers a relatively long time to resolve disputes. Consumers get to hold onto their funds while the dispute is pending. Given the loss of access to consumers' critical liquid assets, debit card issuers should reduce the dispute period to 10 days or less, or at least credit the consumer's funds after that time until the dispute is resolved. Visa's new rule that provides for provisional credit after five days is a good first step in resolving this problem.

When the liability limit was changed, MasterCard's president stated that the $50 limit was a "home run for consumers." He is right. But providing efficient and safe payment products is a nine-inning game. It is time for both Visa and MasterCard to step up to the plate and finish the job. u Mr. Balto is attorney adviser to Robert Pitofsky, chairman of the Federal Trade Commission. This article represents Mr. Balto's views and not those of the commission or any individual commissioner.

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