Thursday, August 28, 2008

ATM Cards as Loan Collateral at Pawnshops

There's a prevailing practice these days at pawnshops and even loansharks where they accept ATM cards, debit cards that is, as collateral for loans they offer to people, mostly pensioners and low income group mostly tagged by credit card companies as high risk.

Most clients have no credit cards, those receiving monthly pensions, or simply low-salaried employees who want to avail of the credit facilities.

The scheme is just the lender will get the borrower's ATM card and PIN, yes the PIN, so that he can withdraw the funds from the ATM to amortize the loan.

What are the implications of this practice? Is it illegal?

First, the ATM card, technically, is the property of the issuing bank; you can't pawn something that's not yours.

Second, it's a violation of the cardholder's agreement with the issuing bank to not disclose the PIN to anyone under any circumstances.

Third, any fraud claims by the cardholder will be dismissed due to negligence since there also is a clause in the ATM card application form of the bank stating that the cardholder "shall in all circumstances assume full responsibility for all transactions processed by the use of the Card whether or not processed by the use of the Card whether or not processed with the Depositor's knowledge or by his authority." (Source: Metrobank ET atm card application form).

The risks involved needs to be viewed from the borrower(cardholder) and the lender (pawnshop or loanshark/5-6 scheme)

Disclosure of the PIN to others opens his account to fraud from insiders of the lenders, who can withdraw funds unknown to the lender.

Possession of the ATM card and PIN is a potential magnet for ATM card cloning, prevalent in Europe with credit card cloning syndicates, but use the cards to withdraw funds in Eastern Europe and Asia where the AMV Standard (chip cards) is not yet implemented and still use magnetic stripe with the transaction routed via VISA or Mastercard cash advances or Plus, Cirrus, Maestro networks.

Some online banking facility allow just the knowledge of card number and PIN to make transactions. Very dangerous to those "trusted" people of the lenders.

A borrower, after getting his loan, can go to the bank to report a lost card or request a PIN change, thereby leaving the lender with a non-working ATM card, now tagged as a hot card by the issuing bank.

Lazy cardholders don't change their PIN at all, despite all the efforts of bank advising the practice. What happens after the card is with them already after full payment of the loan?

With the use of Internet Banking, mobile banking (via cellphones), cardholders can access their accounts without their ATM cards, thereby defrauding the lender.

Disclosing the PIN to lenders is the most convenient for both borrower and lender, but also the most insecure. (Security is inversely proportional to convenience, remember?) Proponents of the scheme blame credit card companies and not themselves for not practicing money smarts; IMHO, they should regularly read Ms. Salve Duplito's for practical tips on this.

I've yet to encounter horror stories of the scenarios I described above but I know, in due time, I will. And you have to put all the blame on the cardholder.

Calling BSP, who regulates the pawnshop industry, please do something about it!

Related Posts:
ATM Transaction Fees in the Philippines
Maximum ATM Cash Withdrawal Amount Limits


  1. I've heard so many horror stories about this. Honestly! There are a lot of other ways to loan money if you really need it. Don't be stupid.

    The acronym PIN stands for PERSONAL Identification Number, not PUBLIC Identification Number.

    It's simple common sense.

    If ANY transaction forces you to breach any LEGAL AGREEMENT, then it's OBVIOUSLY NOT LEGITIMATE.

  2. By the way, your CAPTCHA is skewered that the "submit" button is missing. I had to do the tab + enter until I got the right button. :)

  3. Any body advice? My new business is atm pawn, the borrow 60k and after a Month the file loss atm to Land bank I loss 60k please any help and advice....please