Merchants Making Inroads in PIN Debit

For the last several years, merchants and banks have been at loggerheads over PIN vs. signature debit. To boil it down, banks like signature debit, because interchange fees are higher; merchants prefer PIN debit for the opposite reason.

With the faster growth of PIN debit, the battle has essentially become a stalemate, with each type of debit capturing an equal share of the overall, prepaid-card market.

The future of debit rests in this debate over signature vs. PIN, because the balance of pricing power between merchants and banks will eventually be determined by the form of debit embraced by the marketplace.

Overall debit card usage has increased over the last 10 years. In conversation with BI.net, Joshua Gilbert a to First Annapolis spokesman said, signature debit grew approximately 12% last year, while PIN debit activity jumped approximately 14%. In actual volume, last year there were roughly 17 billion signature transactions and 12 billion PIN point-of-sale (POS) transactions.

Why is PIN debit growing faster? Bruce Cundiff, director of payments research and consulting for Javelin Strategies and Research, suggests that economics may be behind the shift.

“From a merchant’s perspective, it is a matter of profitability rather than revenue,” he tells BankInnovation.net. “It is cheaper for a merchant when a customer uses PIN debit.”

Interchange fees on PIN debit transactions are cheaper than on signature transactions. Banks charge around 65 basis points for PIN debit transactions and about 140 basis points for signature debit.

About 40% of merchants have installed PIN pads at their POS checkouts, which is an increase from three or four years ago, when purchasing and usage was between 20% and 25%, Cundiff says.

What’s happening is merchants are “steering” consumers to PIN debit, meaning that they are encouraging the usage of PIN debit for transactions, because PIN was more cost-efficient for merchants. Many times, when a debit card is used by a consumer at checkout, the first option encountered is to enter a PIN code. Some machines are able to automatically identify debit cards when they are used and offer the PIN entry option. Many consumers feel that entering a personal PIN number for further card authorization is a safer option, says Kevin Bell, senior vice president, payments product manager for ICBA Bancard, Inc, a subsidiary of Independent Community Bankers of America.

To counter merchants’ PIN progress, Bell says “banks may impose a lower limit on PIN transactions.” The limits on these PIN transactions can be based on the number and dollar amount on PIN purchases. “There are options to set limits on different signature transactions, but they are dependent on the processor’s capabilities,” he says.

Still, we must point out that debit cards are not as widely accepted by merchants as Visa and MasterCard, for example. Until that happens, the real victor in the PIN vs. signature encounter will not be crowned.