WRITTEN STATEMENT

OF

MASTERCARD INTERNATIONAL INCORPORATED

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT

OF THE COMMITTEE ON BANKING AND FINANCIAL SERVICES

UNITED STATES HOUSE OF REPRESENTATIVES

SEPTEMBER 24, 1997

Chairwoman Roukema and Members of the Subcommittee, my name is Irene Katen. I am Vice President, Business Management, U.S. Deposit Access of MasterCard International Incorporated ("MasterCard").¹ I appreciate the opportunity to appear today before the Subcommittee on Financial Institutions and Consumer Credit of the House Banking Committee to discuss the current regulation of debit cards and the steps recently taken by MasterCard to provide consumers even greater protection.

Over the past few years, consumers have embraced debit cards as a convenient, safe and time-saving alternative to cash and checks, and MasterCard has seen consumer use of MasterCard-branded debit cards increase dramatically. By the end of June 1997, a total of 19 million MasterCard-branded debit cards had been issued by U.S. financial institutions participating in the MasterCard system. This represents growth of more than 100% over the previous year. Because MasterCard cards of all types are accepted at approximately 14 million merchants, and more than 325,000 ATM locations worldwide, MasterCard expects that consumer use of MasterCard-branded debit cards will continue to increase dramatically in the future.

MasterCard has long understood the importance of making debit cards a safe alternative to cash and checks for consumers. Moreover, MasterCard understands that consumers have come to associate a certain level of protection from the MasterCard brand. For this reason, MasterCard has taken the lead in providing increased protection for debit cardholders. As discussed below, MasterCard recently was the first payments system to voluntarily provide that none of its debit cardholders will be liable for any more than between $0 and $50 if the card is used without their permission. This represents a substantial strengthening of consumer protection when compared to federally-mandated protection and makes MasterCard-branded debit cards some of the safest that exist today.

OVERVIEW OF MASTERCARD AND MASTERCARD DEBIT CARDS

MasterCard-branded cards are issued by approximately 22,000 financial institutions that are members of the MasterCard payment systems. Today, there are more than 400 million cards issued bearing the MasterCard logo, approximately 19 million of which are U.S. debit cards.² MasterCard-branded debit cards enable consumers to pay for goods and services with the convenience of a payment card, but without obtaining an extension of credit, at more than 14 million locations around the world. Traditionally, consumers not wishing to use credit cards had only two basic alternatives -- they could pay by cash, or they could pay by check. Both options have their limitations. Consumers paying by cash have to make sure they have planned ahead and obtained sufficient cash prior to making their purchases. In addition, for most people, paying by cash for larger-dollar transactions simply is not a viable option because of security concerns.

The check payment option also has significant limitations. Anyone who has attempted to pay by check at a merchant with whom they have no prior relationship or a merchant located out of state knows that it can be an inconvenient, frustrating, and often futile, exercise.

A MasterCard-branded debit card works in much the same way as any other MasterCard card. However, whereas a MasterCard-branded credit card accesses a line of credit, with a MasterCard-branded debit card, a consumer can directly access funds in a deposit account. Both MasterCard debit and credit cards are accepted for payment at every location in the nation and around the world that accepts MasterCard. This means that consumers can use their MasterCard debit cards at more than 3 million locations throughout the U.S. and 14 million worldwide to purchase all types of goods and services -- from gas and groceries to furniture and meals at restaurants -- without carrying any cash and without borrowing any money. This represents extraordinary convenience to consumers who now, in essence, have instant access to cash in their deposit accounts even if they are making purchases at merchants located thousands of miles from home.

But perhaps even more importantly, MasterCard-branded debit cards (like MasterCard-branded credit cards) combine convenience with extraordinary safety in a way that cannot be found in other forms of payment. As noted above, check payments simply are not an option in many circumstances. As a result, for consumers who choose not to use credit cards, cash payments in many instances have been their only option. As we all know, when cash is lost or stolen, it is rarely recovered, and the consumer loses the entire amount. The MasterCard-branded debit card, on the other hand, protects consumers against such potentially devastating losses. Federal law provides basic protections against such losses, and MasterCard has voluntarily made those protections even stronger.

The federal protections are found in the Electronic Fund Transfer Act ("EFTA") and Federal Reserve Board Regulation E. These laws provide that a consumer who has a debit card can limit the loss from unauthorized use of the card to a maximum of $50 if the consumer notifies the financial institution within two business days after learning of the loss or theft of the card. But, if the consumer fails to give timely notice to the financial institution, the consumer may be held liable for up to $500 if the losses occurring after the two-day period resulted from the consumer’s delay in providing the notice.

In addition, under the EFTA and Regulation E, the consumer may incur unlimited liability for unauthorized use of the debit card in certain circumstances. Specifically, if the consumer is sent a periodic statement for the debit card account that shows an unauthorized transaction and does not inform the financial institution of the problem within sixty days, the consumer may be held liable for the entire loss resulting from unauthorized debit transactions occurring after the sixty-day period.

Although the EFTA and Regulation E already provide significant protection against loss, MasterCard has led the industry by voluntarily adopting even stronger protections. In 1994 MasterCard was the first payments card company to establish a zero-dollar liability cap for its U.S.-issued credit cards. In June of this year MasterCard once again led the industry by being the first card association to extend the benefits of this rule to U.S. MasterCard debit cardholders. Under MasterCard’s new rule, no MasterCard debit cardholder will lose more than $50 for unauthorized use of the card, and a cardholder’s liability is limited to zero if the cardholder reports the loss or theft of his or her card within twenty-four hours after the cardholder discovered it was missing.

MasterCard is proud that it was the first payment system to provide such a significant level of protection to consumers. As part of our efforts to strengthen consumer protection in this area, we also examined other possible measures such as a shorter deadline for recrediting a consumer’s account for disputed amounts and requiring card issuance procedures such as special procedures for activating newly issued cards. We found, however, that these areas already are adequately addressed through common industry practice. For example, we found that although the EFTA and Regulation E allow up to twenty days to provisionally recredit a consumer’s account for a debit card transaction, consumers generally receive recredits in much shorter time frames. Similarly, the new card activation practices being used by debit card issuers appear to be working well. As a result, addressing these issues in our new rule appeared to be unnecessary.

The new rule continues MasterCard’s tradition of consumer protection. For years, MasterCard and its member financial institutions have worked to protect consumers against fraud. The anti-fraud tools that have been developed are used to combat both debit card and credit card fraud. For example, many MasterCard members use new-card validation procedures, monitor transaction patterns, and set spending limits to detect and prevent unauthorized transactions and minimize fraud. Moreover, MasterCard developed, and was the first payments card company to introduce holograms, tamper resistant signature panels, and card validation code algorithms.

MasterCard members also protect their debit cardholders from fraud and protect their privacy by limiting access to consumer account information. When a consumer uses a debit card, the merchant does not have access to the consumer’s account information, but instead only receives from the financial institution information concerning whether the transaction has been approved.

MasterCard and its member banks also have continually emphasized consumer education as a valuable tool to combat fraud. For example, MasterCard continues to conduct consumer education campaigns informing debit cardholders of the importance of safeguarding their cards and immediately reporting the loss, theft or unauthorized use of their cards. Most recently, MasterCard has joined with Call for Action -- a Washington, DC-based consumer advocacy group -- to create a new educational brochure called A Smart New Way to Pay, which includes tips consumers can use to protect their debit cards.

Recent figures show that these efforts to prevent fraud have been highly successful. In 1996, of the hundreds of millions of MasterCard debit card transactions that took place, only two in 10,000 were fraudulent, most of those did not affect consumers, and now, to the extent they do, consumers are protected under the new MasterCard rule.

ADDITIONAL FEDERAL REGULATION OF DEBIT CARDS

In addition to the debit card protections provided by MasterCard, debit cards are extensively regulated under the EFTA and Regulation E. In fact, the EFTA and Regulation E regulate virtually every aspect of debit cards. For example, these laws impose specific requirements for financial institutions issuing debit cards in the following areas: (1) initial disclosures of information to the customer when the debit card is issued; (2) notice to the customer of change in terms of the card agreement; (3) notice to the customer regarding the procedure for resolutions of errors; (4) information to be contained on the receipt at the time of purchase and on periodic statements; (5) resolving errors on periodic account statements; and, as discussed above, (6) consumer liability for unauthorized transfers.

Under the "initial disclosure" requirements, a financial institution must make extensive, detailed disclosures to a consumer before its customer even uses the debit card. In this initial disclosure, the financial institution must provide a complete summary of the customer’s liability for unauthorized use of the debit card as well as the telephone number and address of the person to be notified if the customer believes an unauthorized use of the card has occurred. In addition, the financial institution must disclose: (1) the issuer’s business days; (2) the type of transfers the customer may make with the card and any limitation on the frequency and dollar amount of these transactions; (3) any fees imposed by the issuer for a debit card transaction; (4) a summary of the customer’s right to receive receipts and periodic statements from the financial institution; (5) a summary of the issuer’s liability for failing to stop or make certain transfers; and (6) information regarding the procedure used for resolving errors.

In addition, the initial disclosures must include a special privacy notice. Specifically, the initial disclosures must include a statement about the circumstances under which the financial institution may provide third parties information concerning the consumer’s account in the ordinary course of business.

In addition to the initial disclosures, the EFTA and Regulation E require financial institutions to provide their debit cardholders with updated information relating to changes in terms and conditions of the customer’s account. Generally, the issuer must notify the customer in writing at least twenty-one days before implementing any major change in the terms or conditions.

Moreover, the EFTA and Regulation E detail a wide variety of specific information that the financial institution must include on the consumer’s debit card transaction receipts. The receipt must be made available to the consumer at the time of the transaction. This receipt generally must include the following information: (1) the amount of the transfer; (2) the date the consumer initiated the debit transaction; (3) the type of transfer and the type of consumer account involved in the transfer; (4) the number identifying the consumer’s account or the access device used to initiate the transfer; (5) the terminal location where the transaction was initiated; and (6) the name of any third party receiving or relinquishing transferred funds.

In addition to the receipt provided to the cardholder at the point of sale, the EFTA and Regulation E require the financial institution to provide periodic statements to debit cardholders. Generally, the issuer must send the cardholder a statement on a monthly basis. This monthly statement must contain detailed information concerning each transaction occurring during the monthly cycle including: (1) the transferred amount; (2) the date the transferred amount was debited or credited to the consumer’s account; (3) the type of transfer and the type of consumer account involved in the transfer; (4) the terminal location; and (5) the name of any third party receiving or relinquishing transferred funds. Moreover, the monthly statement also must include the: (1) consumer’s account number; (2) fee amounts assessed for the consumer’s right to make transfers or for account maintenance; (3) account balances at the beginning and at the close of the statement period; and (4) the address and telephone number where the consumer should direct any inquires or notice of errors.

The EFTA and Regulation E also establish a consumer’s right to challenge information set forth on a periodic statement and request that that information be corrected. For example, if a consumer receives a periodic statement and determines that the statement incorrectly includes a transaction the consumer did not engage in, or sets forth an incorrect transaction amount, the consumer may notify the financial institution and the financial institution must investigate and, if appropriate, correct the consumer’s account including by crediting the consumer’s account for the appropriate amount of funds.

The convenience, safety, speed, money management potential, and worldwide acceptance of MasterCard-branded debit cards coupled with protections afforded by current federal statutory and regulatory schemes have brought about dramatic growth in consumers’ use of MasterCard debit cards both in terms of number of transactions and dollar volume. The enhanced protections against unauthorized use brought about by MasterCard’s voluntary move to a zero-to-fifty dollar liability limitation should translate into more growth as consumers become even more comfortable with paying with a MasterCard-branded debit card over cash and checks.

* * * * *

Once again, I want to thank you for the opportunity to appear before you today. MasterCard is proud of its record of taking important steps to protect consumers. We believe that such voluntary measures are the best way to ensure that consumers efficiently receive the protection they deserve. Voluntary industry efforts such as those taken by MasterCard combined with the extensive requirements already imposed under EFTA and Regulation E provide consumers with unparalleled protection. Therefore, we do not believe that any additional regulation is necessary. In fact, we believe that such regulation may have the unintended effect of inhibiting the kind of agile response to consumer demand exhibited first by MasterCard when it adopted its zero-to-fifty dollar limited liability rule. Moreover, competitors respond in different ways to consumer demand, and those responses, when tested in the marketplace, expand consumer choice; regulation beyond the current scheme may curtail the creative forces of the market in a way that may result in fewer choices for consumers.

We stand ready to work with the Subcommittee as it studies these issues further. If you would like any additional information concerning these matters, or if we can otherwise be of assistance to the Subcommittee or its staff, please do not hesitate to call upon us.

_____________________

¹MasterCard is a membership organization comprised of financial institutions which are licensed to use the MasterCard service marks in connection with payment systems, including the members’ credit, debit, stored-value, and other types of payment cards.

²In addition to U.S.-issued MasterCard debit cards, many millions more MasterCard cards issued outside the United States offer debit functionality.