Raising the stakes in their efforts to sway consumers to signature-based debit transactions, more banks have begun charging consumers a fee as high as $1 each time they make a debit payment with a PIN instead of a signature. Some are also offering reward points for signature-based debit payments.
While retailers are installing PIN pads to nudge consumers toward PIN debit which costs merchants less in interchange banks are tugging their customers in the opposite direction, since they make more money from the interchange charged in a signature debit transaction. PIN debit transactions can often lose money for banks when the processing cost is higher than the interchange collected, according to an October survey by Dove Consulting Inc. and Pulse EFT Association.
Banks that impose fees on PIN debit have been informing customers through statement stuffers, and telling them they have a choice. The banks argue that these fees do not antagonize merchants, since they do not cost them anything extra. But some supermarkets and other types of large stores routinely prompt consumers for a PIN, so there could be some conflicts if the trend continues.
A lot is at stake in the PIN vs. signature debate. Banks have fee income to lose or gain, merchants face profitability issues, and the electronic funds transfer networks which process and switch PIN-based debits could suffer sharp declines.
The matter may ultimately be decided through the courts. The retailers class action against Visa and MasterCard, commonly known as the Wal-Mart case, concerns the associations requirement that merchants accept all forms of debit payment. Visa and MasterCard say that consumers should be able to decide how to pay. The retailers, who recently had their class status for the suit upheld, are awaiting the scheduling of a trial date.
Stan Paur, the president of Houston-based Pulse EFT, said that some banks have charged consumers fees for PIN debit transactions for a while, but the practice seems to be spreading. Pulses survey with Dove found that 6% of financial institutions charged PIN debit fees.
Mr. Paur said it also found that consumers may be willing to pay a modest fee for PIN-based debit at the POS, and that if that is true, the financial industry could recognize significant noninterest income off these transactions.
For the moment, banks in various markets are experimenting with ways of discouraging PIN debit without offending too many customers. Among three Cleveland-based banks, for example, KeyCorp has informed customers through statement inserts that on March 1 it will begin imposing a 25-cents fee on all PIN debit transactions. Charter One Financial Corp. has slapped a $1 transaction fee on PIN debit and has begun offering rewards points for signature debit transactions. And National City Corp. is planning an April 1 pilot of a program that will give customers a 25-cent reward for each signature debit transaction, up to $2.50 a month.
National City will not charge a fee for PIN debit. We definitely dont want to intimidate or confuse the consumer, said Matthew E. Burns, a vice president of electronic banking at National City. We wanted to make them feel comfortable to use their debit card at as many merchants as possible.
At KeyCorp, Our No. 1 priority is educating our customers so they can learn how to avoid the fee, said Jill Arslanian, a spokeswoman.
Sarah Grotta, a senior vice president at Key, said the best customers will not incur the 25-cent fee it plans. Certainly the greater your relationship with Key, the more apt you are not to be charged the PIN point of sale fee, she said.
At Commerce Bancshares Inc. of Kansas City, Mo., a long-running Skip the PIN and WIN contest enters customers in a lottery for every signature-based debit transaction they make. Prizes of $1,000 are awarded weekly from April through October, and daily in November and December. At the end of each year there is a $25,000 grand-prize drawing. No fees are imposed on PIN debit purchases.
Other banks have rejected these various tactics. J.P. Morgan Chase & Co. decided against fees for PIN debit, and also vetoed the idea of favoring signature debit when it set up its loyalty program for its cobranded Continental Airlines debit card, said Ben Colvin, Morgan Chases debit card manager.
Some customers prefer to use the PIN, and some prefer to use signature, Mr. Colvin said. Weve chosen to not create barriers, and allow them to access their account however they feel comfortable.
Morgan Chase, which runs a sizable merchant-acquiring business as well as a large consumer card issuing business, did not want to put a customer in the position of getting into a debate with a clerk at a point of sale over how they want to transact, and thats what I see as a potential problem, Mr. Colvin said.
Some of the banks that have imposed PIN debit fees say they have yet to hear complaints. Charter One has been busy promoting its year-old MegaRewards program, which issues a point for each dollar paid in a signature debit transaction. The points are redeemable for merchandise, restaurant gift certificates, and airline tickets.
David A. Bowen, the senior vice president of retail product management at Charter One, said there have been no complaints by customers or merchants about the $1 fee for PIN debit. We still have a significant volume of PIN-based transactions, he said.
There are some advantages to PIN-based debit; the obvious one is cash back, Mr. Bowen said. For 50 cents to $1, is it worth it to me to get cash back as opposed to another trip to another location? For many, they regard it as a convenience fee not unlike the ATM surcharge fee.
Ron Congemi, the president of Concord EFS Inc.s Star Systems unit, the largest EFT network in the United States, said he does not oppose a small transaction fee, but that $1 per transaction becomes punitive.
A dollar is almost twice the revenue that you would receive from a signature-based transaction, Mr. Congemi said, adding that he was amazed how far banks and merchants were going to steer consumers. Theres no question were in a defining period the retailers attempting to push consumers toward PIN pads, and some banks attempting to push consumers away from PIN pads, he said.
Mr. Congemi said both sides would lose. All boats do rise with the tide if they promote all debit card transactions, he said. To promote one over the other historically has not worked.
Tony Hayes, the director of financial services practice for Boston-based Dove Consulting, cited last years 5.2 billion PIN debit transactions and said that if every issuer charged 25 cents per transaction, the industry would have earned an incremental $1.3 billion.
