NEW YORK (AP) — A store credit card isn’t the only way to get exclusive perks.
Although not widely publicized, two major retailers offer store-branded debit cards that draw directly from customers’ checking accounts. The cards from Nordstrom and Target are still a rarity among retailers and haven’t yet hit the radars of most shoppers.
But they also reflect the growing preference for debit cards that consumers have shown in recent years, notes Marshall Cohen, a retail industry analyst with NPD Group. And at a time when consumers are searching for ways to keep debt in check, he said store debit cards could soon find a wider audience.
“If this is successful, everyone else will follow suit,” Cohen said.
Here’s how store debit cards work.
Shoppers who sign up for the cards — which can only be used in the retailer’s stores and online — get the same perks as on the company’s in-house credit cards. At Target, customers get 5 percent off all purchases made with their debit cards. Nordstrom debit card holders earn two rewards points for every dollar spent; shoppers receive a $20 store voucher that’s good for one year after they accumulate 2,000 points.
To apply, customers fill out a form and supply a voided check or routing number for a designated checking account.
But store debit cards don’t tap directly into checking accounts in the same way as traditional debit cards. Instead, the cards simply trigger the type of transactions that are used for online or recurring payments, such as mortgage or utility bills.
These transactions take longer to clear, meaning purchases aren’t reflected in accounts right away; Nordstrom and Target both say transactions should appear within about two or three days.
Target declined to comment on how applications for its debit cards have been stacking up in comparison to its store credit cards. But Nordstrom spokesman Colin Johnson said there’s been an uptick in demand for the company’s debit card in recent months, even though the card has been available since 2005. Without providing details, he said a significant portion of new card applications are for debit cards rather than credit cards.
“Customers like having the flexibility and option to take part in the rewards program without taking on another credit card,” Johnson said.
The shift underscores the growing popularity of debit cards in the marketplace. In 2009, consumers charged more to their debit cards than to their credit cards for the first time, according to Visa. The growth of debit card use reflects a movement away from cash and checks. But in an uncertain economy, consumers also see debit cards as a way to manage money and keep debt under control.
The preference for debit has since grown more pronounced; Visa says customers charged $1.137 trillion to their debit cards in the 12 months ending Sept. 30, compared with $867 billion on credit cards. And retailers have reason to prefer debit as well.
A regulation that went into effect in October caps the fees merchants pay banks when customers use their debit cards. Such fees are still unregulated for credit cards, however, meaning retailers pay less when customers use debit cards.
At the same time, many retailers have clamped down on issuing store credit cards after defaults spiked in the downturn. Those shifting factors may eventually prompt additional retailers to offer their own debit cards as an alternative, says Cohen of NPD Group.
“It’s a new twist on the retail credit card,” said Nessa Feddis of the American Bankers Association. “If retailers are able to promote more sales and find more loyal customers from it, you could see it pick up.”
But Feddis noted that growth of retail debit cards will hinge on shoppers’ appetite for adding yet another piece of plastic to their wallets.
And as prudent as a store debit card seems compared with a store credit card, there is a potential downside. Because the transactions on store debit cards take some time to process, there’s an increased risk of shoppers mistakenly overdrawing their accounts.
Customers may not be able to opt out of overdraft programs for such charges either. Banks are required to obtain the consent of customers before enrolling them in overdraft programs for traditional debit transactions. But the rule doesn’t apply to the type of delayed transactions that store debit cards rely on. Overdraft fees at banks are typically around $35.
In addition, Target’s debit card has a return payment fee that ranges from $20 to $40 depending on the state. At Nordstrom, the return payment fee is $25.
As for loss or theft, store debit cards have the same protections as traditional debit cards since they are still accessing customer accounts, Feddis notes. By law, any card that’s used to access a checking account caps liability at $50 as long as the card issuer is notified within two days, or $500 within 60 days.