Merchants encourage use of PINs for debit card payments


Merchants encourage PIN numbers in debit card transactions due to lower fees. Read more at

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As the cost of letting customers pay with credit cards and debit cards increases, merchants are encouraging consumers to pay for debit card transactions using a PIN as opposed to with a signature.  That is because out of all the fees retailers pay for processing payment card transactions, PIN transactions are among the least expensive.

The practice of driving customers toward payment methods with the low transaction fees is known in the industry as “steering.”  And, while steering may be great for a merchant’s bottom line, shoppers may end up missing out on rewards, which banks tend to only offer when a debit card purchase is made using a signature.

When customers sign for a purchase, the bank earns a higher fee.  Meanwhile, PIN fees have remained lower since their introduction over a decade ago, when financial institutions lowered fees to persuade merchants to accept plastic for small purchases.

While some of the largest U.S. retailers have steered consumers toward PIN-debit machines for years, the practice has recent picked up momentum, particularly among small retailers that are harder to track, industry watchers say.  According to the National Retail Foundation’s legal counsel, many retailers have begun installing PIN pads to lower their costs.

Visa, the largest U.S. card network and dominant in the debit-card business, explains that a typical supermarket pays 24 cents in fees when a shopper buys $40 worth of groceries with their debit card PIN.  If that customer instead decides to sign for their debit card purchase, the fee jumps to 35 cents.  For payment with a regular credit card, the fee would total more than 50 cents.

Most of these fees go to the card issuing banks and companies responsible for processing card transactions.  The banks then pay fees to Visa and Mastercard.  The amount paid by a merchant depends on the type of business, its size, the type of card and other factors.  While some fees are flat, others are a percentage of the transaction amount.

In 2003, electronic payments exceeded the use of cash and checks for the first time.  Currently, most of the transactions processed by Visa involve debit cards, making up almost two-thirds of the 6.2 billion Visa transactions in the three months ended Sept. 30, 2006.

Analysts note that while retailers felt powerless for years in the face of fees, they now are using PIN steering to cut transaction-fee costs.  However, some retailers stress that the ability to pay with a PIN also represents greater choice for consumers.

A recent study by industry consulting firm Mercator Advisory Group shows that around 2 million merchant locations presently have the technology set up to accept PIN-based debit card transactions, versus around 6 million for credit cards and debit cards needing a signature.  Mercator said that number for PIN transactions will likely rise as merchants calculate if the savings from PIN-debut transactions will cover the expense of adding the devices.

Mercator estimated that major retailers can switch 80 to 90 percent of their debit card purchases to PIN transactions.  The consulting firm said that if merchants are able to save 20 cents per transaction, a merchant with 100 million annual electronic purchases can save $8.5 million via steering.

At the same time, due to advancements in technology, it has become easier and cheaper for merchants to steer customers.  Retailers who physically take a debit card from the customer are able to enter the payment as a PIN transaction and then give the customer a device to enter the PIN code.  When the customer swipes his or her debit card, the retailer can have programmed the checkout device to automatically request a PIN instead of a signature.

Credit card companies dislike steering, even though it is acceptable under their rules, since it would bother the banks — credit card companies’ customers.  Visa and Mastercard would find it challenging to raise fees on PIN-based debit card transactions without upsetting retailers.

Instead, banks are working to make signature-based debit card payments more appealing to customers.  One of the more popular strategies involves creating debit-rewards programs that yield points for signature transactions, while PIN-based transactions usually do not earn rewards.

And, while Visa and Mastercard only guarantee they will reimburse cardholders for unauthorized debit card purchases using a signature, noting that PIN transactions can be routed through other companies’ networks, consumer remain unlikely to be charged for unauthorized PIN transactions.  That is because under federal law, cardholders are not responsible for over $50 if the fraudulent transactions are reported promptly.  Additionally, banks tend to provide their customers with some protection.

In other developments, in 2006, Mastercard and Visa started permitting retailers to get rid of the necessity for a signature on debit card purchases of less than $25, although the merchant still pays the fee for a signature debit card transaction.  The aim of that decision was to enable faster checkout lines at stores.  The new “contactless” cards that can simply be waved near or tapped on a reader are also considered “signature” transactions.

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