PIN Prompting Sways Debit Card Use

  Best Buy, Wal-Mart and Radio Shack, fierce competitors in the sale of electronic merchandise, each deploys payment terminals that prompt customers to tap in a PIN when paying with a debit card. Their hope is to steer transactions away from the more costly signature-debit networks of Visa USA and MasterCard International.
  PIN prompting does not require customers to use the PIN function on their debit cards. But simply encouraging cardholders to enter a PIN instead of signing a receipt is changing the way customers are paying for purchases. A new Mercator Advisory Group study found that merchants who use PIN prompting convert up to 90% of their debit transactions to PIN transactions.
  "It is highly effective in steering consumer choice" of card uses, says Ken Paterson, Mercator principal analyst. "It is probably 80% to 90% effective."
  PIN prompting is becoming common at so-called "big-box" store chains such as Wal-Mart. Stacey Pinkerd, Visa senior vice president, says Visa is seeing less growth in signature debit volume among big-box retailers because of widespread deployment of PIN pads and PIN-prompting systems. In that merchant category, Visa check card transaction growth is in the "single digits" annually, says Pinkerd.
  Pinkerd says that one merchant chain, which he declined to identify, reduced its Visa check card volume by 60% by deploying PIN pads and prompting customers to key in PINs. A 2005 survey by the Association of Financial Professionals indicates that about 25% of merchants accept PIN-debit cards, and about 5% of them prompt customers to enter their PINs.
  Financial interest is the main motivation for these retailers to adopt PIN prompting, Paterson notes. The Mercator report estimates that merchants who adopt PIN prompting can save about $8.5 million annually per 100 million transactions. The savings are estimated based on an average interchange merchants pay for a PIN-debit transaction that is about 20 cents less compared with what merchants pay for a signature-debit transaction.
  "When these processors talk to a merchant about PIN prompting, they talk about return on investment," Paterson says.
  Debit card issuers also are seeing the impact of PIN prompting. BB&T Corp.'s overall debit transaction growth on an annual basis exceeds average growth of debit transactions, says Scott Qualls, senior vice president of deposit access products for the bank.
  The bank, however, noticed preferences toward the use of the PIN-debit function on its debit cards during the holiday gift-buying season. The same merchant types that have adopted PIN prompting also are the type of merchants that see sales spurt during the holidays.
  "There is no doubt that PIN prompting has had an impact," says Qualls. "We have experienced that."
  Qualls, however, says many PIN-debit transactions at big-box retail stores are replacing check payments, and BB&T's interchange revenue from debit card transactions is rising at a healthy pace from growth of both PIN-debit and signature-debit card transactions.
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