A customer using the touch screen on a wireless card reader.

pin debit vs signature debit

Sunday, December 06, 2015

The first batch of debit cards were introduced by The First National Bank of Seattle in 1978 and were available to only those with a considerable savings account. They work in the same manner that paper checks do in that they are essentially a stand-in for an individual’s bank account with purchases made on them, initiating a transferring of funds from the cardholder to the merchant.

Since then, debit cards have grown more and more popular every year and have all but replaced paper checks. Some have argued history will repeat itself as mobile payment services begin to become more integrated in on and offline marketplaces; but regardless of what the future holds, debit cards are one of the most common forms of payments that all merchants should be familiar with.

Because debit cards are a bit more complicated than they seem, and the different pathways in which they can be utilized affects merchants, this article will focus on breaking down pin and signature debit card pathways so businesses are informed and knowledgeable about how debit payments really work.

PIN debit

This path has other names such as simply “debit”, “online”, and the “true debit” method. This form of payment typically occurs the most at physical shops where the debit card and cardholder are present and the customer enters “debit” on a card reader terminal or handheld POS system (some chip readers run debit card charges as “debit” as default).

In a PIN debit transaction, the funds from the purchase are sent directly from the customer's bank to the merchant’s bank. To do this, the transaction information is sent on a different network than the card network that credit card payments and “credit” debit charge paths take. This is the same network used in direct deposits and wire transfers. This network allows for more direct fund transfers and therefore faster payments, with most transactions being completed within hours, or at most by the end of the business day.

Due to the speed of transactions this method allows and the sensitive bank information necessary to perform them, an encrypted personal identification number (PIN) is required to enact them to further secure the correct identity of the card holder.

Signature debit

This path has other names like “offline debit payment” or simply “credit”. This path occurs when customers hit “credit” on the card reader terminal or if a customer uses a debit card for online transactions. If a merchant lacks a POS system with a PIN pad, then the credit path will be the default. Customers will provide their signature to authorize the payment rather than a PIN.

Essentially, “credit path” debit transactions go through the same process as credit cards, but instead of credit being transferred, funds from the card holder’s bank account are transferred. This method involves the debit transaction information being sent to the same card network that credit card payment information goes to, except in this case it is flagged as a “Debit Transaction”.

It goes through the same relay as a credit card transaction except that in the end, after the acquiring bank ( often a merchant's payment processor) pays the merchant, the issuing bank simply settles the payment with the acquiring bank with actual funds (rather than credit) from the card holder's bank account.

Like credit card transactions, it may take as long as three days for the acquiring bank to receive the funds from the customer. This is due to the relaying of information required between all the parties; however, the merchant should receive the fronted payment from their payment processor/acquiring bank much sooner than that.

Rules of thumb

When considering which payment pathway you want to encourage at your business, here’s some key differences of how the two types affect both your store front and your customers.

Processing fees: Fees regarding debit card transactions under the “PIN” method are standardized federally at a rate of 0.05% of the payment cost per transaction, plus an additional $0.21. While this rate is the federal standard, it not only can be subject to change, but is negotiable, so make sure to check with your payment processor to settle on a price that fits your company’s needs. For example, some debit card providers will not charge a percentage rate at all and only charge a per-transaction flat fee.

If the method used for a debit transaction is “Signature”, then the merchant is charged by its payment processor in the same manner as it is for credit cards. Check with your payment processor to learn what exactly your business will pay out to them per credit card transaction.

Due to the longer and more complicated process involved, in addition to added security measures, signature debit transactions are charged a greater percentage rate than PIN transactions, but a lower flat fee.

For this reason, businesses that consistently make large amounts of lower-priced sales would save in costs by encouraging signature debit transactions. Conversely, businesses that make fewer sales that are of higher value would benefit from PIN debit payments.

Debit card chargebacks:

There’s little stopping a scammer who’s stolen a debit card from making signature pathway payments. This security issue leaves customers susceptible to fraud and merchants at risk of chargebacks.

For this reason, PIN payments can be a valuable anti-fraud tool due to requiring a personal code that only the cardholder should know. Additionally, PIN transactions are typically settled either the same day they’re made or the next business day, unlike signature debit payments which have a longer road to travel and may take up to three days to settle and give warning of fraudulent behavior.

Durbin Amendment: Prior to 2010, merchants and card-issuing banks debated and argued over the exact amount of interchange fees (fees per debit card swap). At one point, banks charged merchants 44¢ per debit transaction, leading to billions of dollars in revenue for issuing banks.

In 2010, merchants were successful in lobbying for a reduction in interchange fees that resulted in a federally-mandated 26¢ interchange fee. This change led to a significant loss in revenue to issuing banks who attempted to make back their money back through increased maintenance fees. The Durbin Amendment also contains a provision which awards issuing banks small increases in interchange rates if they follow increased safety measures.

Safety/Security:

PIN payments are considerably more secure than signature payments due to the required PIN code needed from the cardholder. In this sense, fraudsters must steal both the customer’s card information and their PIN code, otherwise the transaction will be declined. This added provision not only goes a long way in preventing transaction disputes, but also happens automatically at no expense to the merchant.

Signature payments, however, have been shown to be considerably more prone to fraudulent behavior and disputed transactions. This is in large part due to the signature method not always being required for purchases under $25 and the signature not providing as much authentification of a rightful cardholder as PINs are capable of performing.

Furthermore, most online merchants and ecommerce platforms have signature debit payments as their default, and in the modern age, these online marketplace are the environment of choice for many fraudsters. Also worth mentioning are debit transactions made through mail and telephone exchanges which also standardly use signature debit and are more prone to suspicious behavior.

While PIN payments are still open to disputes and fraudulent behavior, businesses worried about potential chargebacks and damaging their reputation due to security issues would be best off encouraging and standardizing PIN payments.

Closing thoughts

Above all, the most important principle in deciding which forms of payment to accept at your business is offering as seamless and easy a customer payment process as possible. This means accepting all common forms of payment that are feasible given your company's constraints, including both debit and credit card payments.

But, regarding whether a company needs to provide both types of debit pathways is a bit more complicated. It may seem that PIN payments are the obvious choice due to increased security, reduced rates, and the ability for customers to enjoy the convenience of cashback (customers can opt to receive physical cash after a transaction in return for paying the merchants the matched amount). All of these things improve the customer experience and can develop a faithful client base.

However, signature debit is not without its benefits, these being mainly the streamlined integration with online storefronts and easy phone transactions. Not to mention, the reduced interchange fees compared to PIN payments make it an attractive option for shareholders who make an abundance of lower cost sales.

For the reasons above, every merchant should first determine the exact needs of their business, and then sit down with a representative of their payment processor to help decide their options and which debit pathway best fits their business.

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