The Illogical Battle Between PIN Debit And Signature Debit

10 Tipping Points for the Payments Industry
Part 7
Bubbling like a witch's cauldron in the heart of the electronic payments industry's turmoil over signature cards is the strange and self-destructive contention between the two primary ways of getting funds out of your checking accounts with a bank card.

Banks like signature-debit because they earn a lot more interchange on purchase transactions than they do with PIN debit?never mind data that show PIN-debit transactions cost half or less to process, and generally experience chargeoffs of a few basis points compared to signature-debit chargeoffs of 1% or more. Consumers and merchants, on the other hand, prefer the certainty, comfort, and cost of using PINs.

Why the difference? Well, PIN-debit transactions ride the venerable rails of the electronic funds transfer networks (e.g., Star, NYCE, Pulse, Accel/Exchange, etc.), and the vast majority of transactions are cleared and settled in real time or in the same day, with holds on the funds to ensure availability for payment.

Signature-debit transactions, on the other hand, mostly ride the Visa/MasterCard credit rails, and the vast majority of these transactions don't clear and settle until the next day or two. Most banks could apply holds to these funds if they wanted to; but they choose not to. Why? Because consumers, who think they're using a real debit card and expect their funds will be deducted from their accounts immediately, discover that many of their signature-debit transactions don't come out of their balances for two to three days. The result? Good old highly profitable non-sufficient funds (NSF) fees.
Banks, many of which have seen their NSF fee income on signature-debit cards rise to more than half of their total revenue from this payment product, gladly push rewards programs for consumer use. And?15% to 20% of the time?they punish their customers with surcharges for using the PIN alternative for purchases!

Can this be what God intended for a debit card to be? Probably not. Consider that, while the banking industry has made a ton of money from signature-debit over the years, the confounding logic of how this product actually works appears primed to rain a hailstorm of acrimony down upon the industry.

For one thing, when merchants look at the total costs of transacting by payment type, credit cards appear to be the most expensive form of tender for their overall average ring in the store. But when looking at the average ring for that specific payment type, signature-debit is clearly the most expensive form of payment. Ditto for online purchases (where Visa reports more than half of its e-commerce transactions are done by signature debit) and online bill payments, according to recent studies. So it's another growing source of irritation for the nation's merchants and billers.

Strike two against signature debit may be the startling rise in the incidence of NSF fees from these so-called debit cards; the only “debit” being conducted is the $30 penalty fee for overdrawing the account, and that debit does happen to occur real-time. Consumer groups and staffers in the new Congress are hot on the trail of this new phenomenon.

Strike three may well be the recent announcements by a few large banks that they will permit overdrawing on checking accounts from PIN purchases, too. The explanation is that both sets of electronic debits get processed the same way in terms of posting order for many issuers, so why discriminate? Moreover, the practice spares consumers the embarrassment of an authorization decline at the point of sale. Hmmm….

These developments threaten to stand PIN debit's traditional value proposition on its head. True, merchants experience the additional cost of terminal equipment for secure entry and validation of PINs. And, until this year, PIN or PIN-less debit transactions could not be easily done online. So acceptance of this option in emerging markets has been constrained. But study after study for 15 years has shown that EFT transactions are four to 15 times safer than signature-based transactions, and therefore less costly end-to-end for both merchants and banks. In a post-9-11, security-conscious society, that would seem to be a difference worth preserving.

Finally, Star's annual payments study shows that banks (and the rest of the payments food chain) benefit significantly if consumers use both products (22.7 electronic transactions a month) versus doing signature exclusively (14.4 a month) or PIN only (10 a month). A rising tide promoting both payment types would again seem to float all boats…

Prognosis: For several years now, Visa has tried to persuade the transacting world that there's no difference in the two payment types, so the rates should be the same, and the choice of payments be left to the banks. Merchants clearly disagree. And the consumer is clearly caught in the middle. But there are growing signs that some banks are ready to leave the Visa fold and support payment choice?in the interests of all transaction parties. Why not offer and support both options, and let the marketplace decide which one is more logical for what purpose and preference? Wildcard: Meanwhile, consumers are getting trained to consider a raft of non-bank debit cards, which use the ACH network rails, incorporate NSFs as part of their business model, and link to merchant-loyalty programs. The merchant cost is lower and value higher, and what's the difference to the consumer? Note to Visa banks: Have you let the horse out of the barn? Hello?
—Steve Mott