Innovations and Payment Systems

Card issuers encourage debit card signature transactions


Why and how banks encourage consumers to sign for debit card transactions instead of using their PIN.

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Debit cards provide a choice for consumers who make a purchase with their plastic.  Debit card users can opt to go the “debit” route and enter their personal identification number (PIN) when making a transaction.  Or, they can decide to use their debit card as they would a credit card and sign for the purchase.  When it comes to bank issued debit cards, there are a number of ways the bank encourages you to put down your John Hancock.

Compare Low Interest Credit CardsUpon first thought, there may seem to be little difference between keying in your PIN number or signing your name for a debit card purchase.  But in fact, the decision could have an impact on your wallet.

With consumers increasingly choosing to make debit cards their plastic of choice (debit cards now make up over one-third of all card transactions), banks are looking for a way to increase business from this consumer choice.  With experts noting that signing for debit purchases is more profitable for the banks, they are encouraging customers not to stick with the PIN.

Although banks make more money from signed debit card transactions, the extra cash is made off merchants, not consumers.  Merchants pay higher fees when consumers choose to use their signature.  With PINs, merchants pay credit-card companies and their bank partners a flat fee to process the debit transaction, generally between 10 cents and 50 cents.  However, the merchant fees for processing a signed debit transaction are a percentage (typically 2.49 percent) of the transaction value.

One method some banks use to persuade cardholders to sign for debit purchases is by charging “point-of-sale” fees for entering a PIN.  These banks charge the consumer 25 cents to 50 cents per transaction, while others tack on a monthly fee of $1 to $2.  Whether you personally will pay a fee could stem from which bank you use, where you live and even the type of account you have.  According to an estimate from the American Bankers Association, 13 percent of consumers pay such fees.  Industry watchers note that although POS fees have existed for years, they have become more common as consumers make everyday purchases with debit cards.  At present, only two of the largest U.S. banks have been charging POS fees — Wells Fargo and U.S. Bancorp.

Meanwhile, banks are also using incentive programs like those offered for reward credit cards to spur signature-backed debit transactions.  Signing for debit card purchases can reward consumers, including those whose cards bear the imprints of big names like Visa and Citi, with all sorts of rewards.  However, with a PIN, rewards take longer to earn, if they can be had at all.  So even if you pay a fee for your debit card, you could be missing out on rewards if you choose to enter a PIN when making a purchase.  Therefore, it’s important to read the fine print in your card agreement.

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