The explosive growth of payment options has impacted the way consumers
prefer to pay and the way merchants are doing business with businesses
ranging from supermarkets to parking facilities to quick service food
restaurants who accept a wide array of electronic payments. Merchants
and consumers currently use or accept credit cards, gift cards, prepaid
cards and debit cards for everyday transactions. Despite the abundance
of card types, the benefits and differences amongst these various
payment types are not always obvious and, oftentimes, downright
confusing.
When using a debit card to pay, a consumer can choose to either sign or
enter their Personal Identification Number (PIN). Although both PIN
and signature debit offer unique benefits to the cardholder, to the
issuing institution and to the retailer, it is common to find limited
or inaccurate signage at the retailer as well as minimal communication
by the issuing financial institution to the cardholder regarding how to
take advantage of these benefits such as safety and security, which are
top of mind for consumers these days.
According to industry research, PIN debit is one of the fastest growing
payment types and consumers state they prefer entering their PIN at the
Point-of-Sale (POS). Further, the rapid decline of check usage
increases the importance of debit, especially PIN debit, in the overall
consumer payments mix. And, according to a new study conducted by an
independent research firm, on average, POS transactions cost
approximately 50 percent less than signature debit transactions for
financial institutions.
Understanding PIN and Signature Debit
Merchants, merchant service providers and financial institutions need
to ensure that they have a solid understanding of all payment options
since this understanding can help them offer the payment option
consumers most want to use.
Many in the payments business know one key fact about both PIN and
signature debit transactions: each deducts funds from the consumer’s
checking account. But that’s where the similarities end.
About PIN Debit
PIN debit transactions require that the cardholder use a PIN. A PIN
pad must be located at the POS for cardholders to enter their PIN to
authenticate their identity and to authorize the transaction.
A PIN debit transaction removes funds from the cardholder’s checking
account almost immediately as the authorization and the settlement of
the transaction is a ‘one step’ process. The payment itself is
processed over Electronic Funds Transfer (EFT) networks, which is the
same way an ATM transaction is handled. STAR®, NYCE® and PULSE® are
all well-known EFT networks.
Faster funds settlement, reduced chargebacks, and improved transaction
security are all benefits of PIN debit.
It is also interesting to note that PIN debit is the preferred debit
payment method for consumers, according to the annual STAR Consumer
Payments Usage Study. The study found that 47 percent of consumers
surveyed prefer paying with PIN debit, compared to 30 percent who
prefer the signature method. Survey respondents largely cite increased
security as the number one reason for choosing to use their PIN numbers
to make purchases (46 percent).
About Signature Debit
Without the PIN, the cardholder’s identity is not authenticated
although it is sometimes confirmed when a store associate requests
picture ID. In addition, a signature debit transaction is a ‘two step’
process for authorization and settlement. This lengthens the time it
takes for the merchant to be credited for the funds from the purchase;
it also increases the opportunity for losses and chargebacks.
Recent rule changes made by the card associations for specific merchant
categories have eliminated the need for signatures on certain
low-ticket purchases, which could provide another opportunity for
increased fraud.
PIN Debit Less Expensive than Signature Debit
While there are differences between PIN and signature debit, activation
and usage of both types of debit should be encouraged to help support
consumer choice and to maximize revenue.
According to the POS Debit Issuer Cost of Payments Study conducted by
First Data Corp., PIN debit transactions cost half as much as signature
debit transactions for financial institutions. The average cost per
transaction for signature debit is 22 cents, while PIN debit is 11.6
cents.
Processing and back-office expenses are key cost drivers for debit
programs and combined, these costs account for 90 percent of total
costs for both products. Back-office expenses can range from risk/fraud
management and chargebacks to settlement and accounting, collections
and customer service.
While both forms of debit offer security, there are differences in how
consumers use the two types of debit payment options that can drive
revenue for merchants. The average ticket price for PIN debit is
slightly higher than signature debit. According to the POS Debit Issuer
Cost of Payments Study, the average signature debit ticket is $38.34,
compared to $40.32 for PIN debit. The study also found the average net
fraud losses were more than four times greater for signature debit
programs than for PIN debit programs.
Consumers who use both PIN and signature debit – nearly six out of
every 10 – tend to make significantly more purchases than those who use
one payment method, exclusively with consumers reporting that they use
their cards an average of 21.4 times per month when using both payment
methods (STAR Consumer Payments Usage Study 2005). This means higher
overall interchange for the card issuing institution.
Consumer Preferences Drive Merchant Acceptance
An increase in debit card use at the POS is good news for retailers.
When consumers use their debit cards, they spend more. In fact, debit
purchases are 32 percent higher compared to cash and 24 percent higher
compared to checks. Grocery stores, gas stations and specialty retail
locations are the most likely to benefit, as they are the most popular
outlets for PIN-secured debit payments. (STAR Consumer Payments Usage
Study 2005.)
Given consumer preferences and merchant adoption behavior, issuers
should encourage use of PIN and signature debit cards. Many issuers
have an opportunity to improve performance of their card programs in
terms of purchase transactions and volume, many times by structuring
rewards and other programs around debit card usage. Smaller issuers
should evaluate methods to increase usage of all debit transactions in
order to benefit from scale efficiencies and competitive cost
structures.
Despite the difficulty in understanding which type of debit is best,
the solution is simple: consumers must be able to pay with their
payment method of choice. Promoting the expansion and acceptance of
all payment methods will benefit all industry participants, from
consumers to card issuers to merchant service providers.
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