Retailing giant says it wants to require PIN transactions on debit cards to reduce fraud and transaction costs.
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Wal-Mart is suing Visa over how debit transactions are handled at the register, and its customers have a stake in the outcome.
The battle over whether Wal-Mart must allow signature debit transactions can influence how secure your transactions are at the retail giant, and how quickly funds are taken from your account.
The lawsuit filed in New York State court on Monday seeks the right to route debit transactions via PIN networks. Since it installed chip-card readers, Wal-Mart has required chip debit cards to use PIN transactions, rather than offering the choice of PIN or signature, according to its court papers, but Visa objected.
In practice this generally bypasses Visa, and its higher transaction costs. Visa is the dominant signature debit network, but competes for PIN transactions with several other debit networks.
“I don’t think most consumers are aware of the differences,” said Julie Conroy, research director at the industry consultant Aite Group. PIN and signature transactions “ride on different rails.”
See related: Debit cards: PIN versus signature at checkout
How PIN, signature transactions work
Most of the differences between PIN and signature transactions occur in the background, but there are some that directly affect consumers.
First, PIN transactions pull money from your account faster than signature. Like a credit card transaction, a signature transaction will put a temporary hold on the funds, which clear your account a day or two later. PIN transactions generally withdraw funds from your account the same day. That could mean more overdrafts for consumers who manage their checking account with very little margin between the checks they write and the funds available to cover them.
Second, the level of fraud protection can be higher for signature transactions. Visa and MasterCard carry most signature transactions, and apply their zero-liability policies for fraudulent transactions to debit transactions. PIN transactions are subject to protections under federal law, which make the cardholder liable for the first $50 of fraud.
However, many card-issuing banks will go beyond the federal protection, either as a general rule or on a case-by-case basis.
“Banks will waive the $50 to keep the customer relationship,” said Bob Woodbury, general manager of the NYCE payments network, a unit of FIS. NYCE, a Visa competitor, processes PIN transactions at 2 million point-of-sale terminals for 95 million debit card holders.
Moreover, the risk from fraud is less for PIN transactions, Woodbury said. That potentially reduces the fraud risk for consumers’ accounts if a major retailer such as Wal-Mart adopts PIN-only policies. “This suit is about protecting our customers’ bank accounts when they shop at Wal-Mart,” the retailer said in an emailed statement.
PIN transactions experience the lowest fraud rate of card payments, according to the Federal Reserve’s 2013 payments study, with less than 1 fraud incident per 10,000 PIN purchases and ATM transactions.
However, Conroy of Aite Group said, fraudsters are getting better at compromising PIN transactions with tiny cameras and “shoulder-surfing” techniques.
“Issuers say there are more complaints coming in when a PIN is forced by a merchant,” Conroy said. Users would rather sign than tap in their PIN if people are crowding behind them in line, she said.
The transaction costs to the merchant are also different. Signature transactions cost Wal-Mart about 5 cents more than PIN, on average, a spokesman said. Signature debit transactions generally go over Visa’s network, while PIN transactions can be carried by one of several competing networks.
Using PIN networks “saves Wal-Mart (and its customers) money,” the company’s court filing says.
PIN or signature, credit or debit, or …
PIN debit card networks grew out of ATM card systems that extended their reach to process retail transactions. By contrast, signature networks were the result of credit card networks entering the debit transaction arena. As a result, point-of-sale card readers’ question “credit or debit” became shorthand for signature or PIN, for debit card users.
“Of course pushing the ‘credit’ button doesn’t mean it’s a credit card all of a sudden,” Woodbury said. But because the signature debit networks were built by Visa and MasterCard, they carried over some practices that differed from the PIN networks built to handle ATM transactions.
Since the advent of chip cards, a new generation of point-of-sale terminal technology is rolling out at retailers, sometimes displacing the “credit or debit” choice for debit card users with new, unfamiliar options, Conroy said.