Last Friday, Felix Salmon, in a post entitled Signature Debit Refuses to Die,  uncovered a seemingly nefarious scheme by Chase with respect to a promotion Chase is running (called Commuter Cash) for New York City transit riders.  But the reality is probably not quite so nefarious as Felix suggests.

Felix noticed that Chase was giving transit riders that used signature debit about 6.7% cash back on their transit purchases, but that the discount was not available for riders who used PIN debit. In summary, he argued that (1) Chase makes more money off interchange fees for signature debit than for PIN debit, (2) the Commuter Cash promotion is a way to train the public to use signature debit rather than PIN debit, (3) signature debit has higher interchange rates because it is more susceptible to fraud, and (4) Chase is ultimately shooting itself in the foot because it will be on the hook for increased fraud. Each of these points is largely incorrect.

First, interchange rates for signature debit and PIN debit are basically the same. Historically signature debit had higher interchange rates than PIN debit, but the rates have been converging for some time, and today the rates hardly differ. Compare the signature debit interchange rates for Visa (page 2 here) with the interchange rates from Interlink, one of the largest PIN debit networks (page 2 here). For standard retail transactions, the rates are exactly equal (0.95% plus $0.20).

As can be seen in the interchange rate tables, there are different categories of purchases which may increase or decrease the interchange rate. So it may be true that Chase sees larger profits from NYC transit transactions that use signature debit instead of PIN debit, depending on which category such transactions fall under. Perhaps it falls under the Passenger Transport Category, with the relatively high signature debit interchange rate of 1.60% plus $0.15. This might account for the discrimination in favor of signature debit with respect to transit transactions. But for most transactions, at this point, Chase is basically economically neutral as between signature and PIN debit.

Moreover, Chase’s behavior is neither the effect of, nor the cause of, fraud.  The credit card market is structured such that Chase has almost no exposure to fraud in any event. Risk of fraud first falls on the merchant (via chargebacks). If for some reason the merchant fails before fraud can be charged back to the merchant (and the debt goes uncollected), the merchant’s bank is then on the hook for the fraud. Only if the merchant bank does not cover the losses due to fraud would any incidence of fraud affect an issuer such as Chase. In fact, the incidence of fraud liability for the merchant bank is tiny, and the incidence of fraud liability for an issuer such as Chase must be close to zero.

So why did Chase discriminate? Perhaps the interchange rate with respect to transit is higher for signature debit, so it was cheaper for Chase to give cash back on transit transactions than other kinds of transactions. Perhaps, due to old, inflexible computer systems, it was simply easier for Chase to implement the discount on its signature debit network than on the PIN debit network. Or maybe they wanted to advertise a great discount, and didn’t actually want to pay it out to everybody. But whatever is the case, it is unlikely that Chase is carrying on a concerted effort to manipulate people to use signature debit over PIN debit. And it is even more unlikely that such an effort would ultimately bring any harm to Chase as a result of fraud.