Signatures Cost More Than PINs With Debit Cards

Whenever American consumers use their debit cards, they are often faced with the choice of either signing for their purchase or entering a four digit PIN.

For most consumers, the difference between signing for a debit card purchase or providing a four digit pin is completely lost. They see the same price for purchases either way. However, for retailers and for the banking industry, the difference between the two places amounts to billions of dollars.

Consumers are not aware of it but, whenever they sign for a debit card purchase at the checkout counter, retailers pay more than if they had provided their four digit pin. On average, it costs retailers 75 cents more for every $100 purchase when they accept a signature for debit card purchases. This is more than double of what it would cost if consumers punched in their four digit PIN code instead.

Because of this huge difference, major retailers are reluctant to accept signatures for debit card payments. Costco, one of the big retailers in the U.S., refuses to accept signatures for debit card purchases at their checkout counters. Home Depot and Wal-Mart on the other hand do their best to encourage their customers to use their PIN.

Interestingly, providing a PIN for debit card payments is what usually happens in most countries other than the U.S. In terms of security, PIN debit card transactions are much more secure as well. Still, in the U.S., signature debit card transactions are still the norm and accounts for 61% of all debit card transactions.

The current situation is due to the heavy influence of Visa, the currently dominant credit and debit card payment network.

Competition for payment networks have a different twist compared to regular businesses. While most business competition would tend to drive prices lower, it is different for payment networks. The competition between Visa and its direct rival, Mastercard is focused not as much on consumers as on gaining as many banks as possible who would issue credit cards bearing their name and using their payment network. These network companies usually set the price on how much merchants have to pay the banks who issues these credit cards. As a result, the higher the fee a payment network dictates, the more profits a bank sees. Unfortunately, the profits generally come at the expense of merchants shifting the higher cost to consumers.

Visa used this oddity of the payment network competition to encourage banks to use signature debit card payments which is the higher paying method for debit card handling for them. They then turned over their fees to the banks to further encourage them to issue more Visa debit cards.