Debit Cards: PIN or Sign?

A decade ago, banks were desperately promoting debit cards as a payment device because of the lower cost of processing electronic transactions instead of paper checks. The challenge was convincing consumers to use a "plastic check" (e.g., Visa's Check Card debit product). Now, the battle for consumer acceptance of the debit card product has largely been won. According to the Nilson Report, in 2001 U.S. consumers made over 10 billion debit card transactions totaling over $400 billion, an increase of more than 26 percent over the previous year.

But wait: banks may be poised to snatch defeat from the jaws of victory. Despite the growth in popularity of the debit card, the product's future is far from secure. The consumer's ability to use a debit card in either a signature-based mode (like a credit card) or PIN-mode has quite different economic implications for the card issuer. As a consequence, some banks are actively encouraging one type of use, and discouraging the other type of use. Consumers can hardly be blamed for being confused, which doesn't bode well for longer-term acceptance of the product.

At the root of the problem is the fee structure for processing debit card transactions. Interchange and merchant fees make signature-based debit transactions much more profitable for banks (and more expensive for merchants that are forced to accept them). Of course, this is the basis for the massive lawsuit filed by retailers against Visa and MasterCard, the associations that set the fee structure. While the outcome of the lawsuit could dramatically change the outlook for the debit card product, banks may be putting future growth of the product in jeopardy independently of the court case.

A new study from Jefferies and Co. claims that banks collect up to 4 times as much revenue on signature-based transactions than on PIN transactions. Consequently, many banks have begun to actively push signature-based usage. Scott Madison, one of the authors of the Jefferies and Co. report, told American Banker reporter Lavonne Kuykendall that "consumers are being pushed toward signing (for their transactions) by airline rewards points and sweepstakes, or by a penalty for PINing."

The authors surveyed 250 banks of all sizes regarding their debit card programs. Thirty-nine of the banks impose per-transaction fees on cardholders who enter a PIN at the point of sale. Eleven banks offer reward points or airline miles to customers that sign for a debit purchase. But the question of whether to steer customers toward one type of transaction vs. the other (let alone how to do it) is controversial within the banking community. Wells Fargo charges a $1 monthly fee if a debit card is used for a PIN-based debit purchase that month. Fifth Third Bank and KeyCorp charge transaction fees (50 cents and 25 cents, respectively). Citibank's AAdvantage MasterCard frequent flyer debit product rewards customers with airline miles for purchases made in signature mode, but not for PIN-based transactions. In contrast, frequent flyer debit cards issued by J.P. Morgan Chase and Bank of America offer cardholders miles regardless of the debit mode. Darrell Esch, a senior vice president in charge of Bank of America's debit card program (the largest in the U.S.) has warned that the growing trend of charging a fee for the use of debit cards could ultimately doom the product. He said, "We may price folks away from this product and then everyone's back to handling paper."

Even Visa U.S.A. has jumped into the "steering" controversy with a major television advertising campaign promoting its Visa Everyday Extras contest. Winners receive $100 per day for a year, but are eligible only if they use a Visa Check Card to make a signature-based debit purchase. "PIN-based purchases and ATM transactions do not qualify," according to the contest rules.