Insufficient funds: Fighting the scourge of fraud through credit and debit cards

It’s now standard in Canada for both type of cards to use chip and PIN to authenticate transactions, a widely-adopted global security practice, says the University of Calgary professor and author of “Technocreep.”

“It’s saved hundreds of millions of dollars in bank fraud in Europe,” Keenan says. “Europeans had this technology first.”

Rather, his preference largely has to do with the fact that any fraudulent activity on credit cards doesn’t automatically put bank accounts in the red, whereas with debit the damage has already been done until the matter is resolved.

“You’re starting from the position of disputing a charge as opposed to going to your bank and saying, ‘Wha-wha-wha? My account is empty,” he says. “So which position would you rather be in?”

Consumers using credit cards, however, do have to be wary of running up a high-interest balance, whereas with debit the money comes right out of your account.

But being at a loss of funds while waiting for a debit fraud issue to be rectified can put some consumers in a very stressful financial situation, says Tara Zecevic, Equifax Canada’s vice-president of fraud prevention and identity management.

“There’s an immediate impact.”

The Canadian Bankers Association says on its website that when customers are the victim of debit card fraud, “banks will immediately look into the matter and get the money back to the customer as quickly as possible, which can usually happen within a few days or even before the customer knows it’s gone.”

Beyond time considerations related to claim disputes, Concordia University associate professor Mohammad Mannan says another advantage of using credit over debit is stronger consumer protection measures.

“With credit, you have almost zero liability,” says Mannan, whose research interests include online banking and PIN security.

The Financial Consumer Agency of Canada says your maximum liability must be $50 if your credit card is issued by a federally regulated financial institution, and, in the case of Visa, MasterCard and American Express, these credit card companies have zero liability policies.

But with debit fraud liability policies, Mannan says, “it’s not as straightforward as credit cards.”

The Canadian Code of Practice for Consumer Debit Card Services says that “cardholders are not liable for losses resulting from circumstances beyond their control.” But in all cases where a debit cardholder contributes to unauthorized use, the code says the cardholder will be liable for the resulting loss.

That can include voluntarily disclosing a PIN, including writing it on the card, or keeping a poorly disguised written record of a PIN in proximity with the card. Failure to notify your issuer within a reasonable time about a lost, stolen or misused debit card also falls under unauthorized use.

Interac says this code is embedded in the Interac rule framework, and applies to financial institutions who offer Interac Debit, Interac Flash, cross-border debit and Interac Online services.

Specific terms for Interac’s liability policy are outlined in financial institution client agreements, including time frames for reporting cards that have been lost, stolen or misused, says Interac spokeswoman Teri Murphy.

“Financial institutions do reimburse for losses that occur beyond an individual’s reasonable control,” Murphy says.

“If you don’t protect your PIN, if you do have a Post-it Note on the back of your Interac debit card that has your PIN, that’s a different circumstance.”

Biliana Necheva, a spokeswoman for the Canadian Bankers Association, said in an email consumers are refunded if they have been a victim of credit or debit card fraud.

Mannan cautions that people who choose to use credit exclusively over debit must be cognizant of paying off their debt in a timely matter, given that interest rates for credit cards typically hover around 20 per cent.

“I pay my bills on time so I’m not paying interest,” he says.

Certified financial planner Jason Heath of Toronto’s Objective Financial Partners says that if someone is worried about spending and overusing a credit card, they should consider setting a card limit that’s in line with their targeted monthly budget.

“That way you literally can’t spend too much,” Heath says.

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