Signature Debit vs. PIN Debit

October 3, 2010

October 3, 2010

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This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started FeeFighters. There are two kinds of debit card transactions: Signature / Offline Debit and PIN / Online Debit.  Signature / Offline debit is processed over the same network as regular credit card transactions and saves the merchant […]

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This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started FeeFighters.

There are two kinds of debit card transactions: Signature / Offline Debit and PIN / Online Debit.  Signature / Offline debit is processed over the same network as regular credit card transactions and saves the merchant a small amount of money.  PIN / Online Debit is processed over a seperate (cheaper) network and can save the merchant lots of money.

Signature / Offline Debit

In a Signature Debit transaction the card must have a VISA or Mastercard logo (which most debit cards have these days) and the customer must not enter their PIN code and must sign the receipt.  In other words it “feels” just like a regular credit card transaction.  These transactions are slightly cheaper than regular credit card transactions because VISA and Mastercard have created a seperate interchange category for debit transactions.  Keep in mind that your Merchant Account Provider may not be passing the savings along to you (see “Debit Markup“).

PIN / Online Debit

PIN / Online debit transactions go over different networks (the same networks used for ATM transactions) such as NYCE,  STARInterlink (owned by VISA), and PULSE (owned by Discover). The costs of those networks, because they are newer and becuase they have less risk of fraud, are lower than the credit card networks.

The Pin / Online Debit transactions have a lower risk of fraud because they require the PIN code. Your merchant services provider can set you up with PIN / Online Debit in addition to Credit and Signature / Offline Debit (see “Equipment and Terminals“).

Online Debit transactions are called “Online” because the transaction happens in real-time (i.e. an ACH of the customer’s money out of their account happens right away), rather than the credit card transaction process which has two steps: first an authorization while the customer is standing there and then later that day a settlement where the money is transferred (see “How Merchant Accounts Work“).

Consumers can also usually get cash back with their Online Debit transactions.

Wal-Mart Class-action Lawsuit

Since the same card can be used in 2 different ways in the same situation, one of which is significantly cheaper to the merchant, merchants typically do everything that they can to encourage consumers to type in their PIN code.  Wal-Mart in the early 2000′s decided to take that idea to it’s extreme and not allow Signature Debit transactions.

VISA and Mastercard replied by threatening to cut off credit card transactions for Walmart, saying that their contract requires merchants to accept all card bearing the VISA or Mastercard logo.  Wal-Mart then sued VISA and Mastercard for anti-trust violations, claiming “tying”.

VISA and Mastercard eventually settled the case in Wal-Mart’s favor.  Most merchants are not going to want to shut off signature debit transactions to their customers, but the length to which Wal-Mart was willing to go demonstrates the amount of savings possible from encouraging shoppers to switch to the PIN network.

See “Mastercard Settles Wal-Mart Lawsuit” (Tech-MIT)

See VisaCheckMasterMoneyAntiTrustResolution.com

See “April Showers for MasterCard and Visa” (Transaction World)

Overall cost comparison

Economists at the Kansas City Federal Reserve have done some research on the relative costs of each option, which I have summarized below (see Fumiko Hayashi’s Payments Research for more information).

It is important that I note that online / PIN Debit transactions are usually charged as a flat fee, in contrast to  Offline / Signature Debit transactions which, like credit card transactions, usually have a flat fee as well as a percentage fee.

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