Tuesday, January 5, 2010

Cashing In On Debit Cards

Have you noticed that when you use a debit card at some businesses you sign the receipt and at others you enter your PIN? And some places, usually coffee shops, restaurants, etc., they require a minimum charge if you use a debit card.

I always thought that something was costing someone some money--and I suspect it was me, the customer. I wasn't far off the mark. In today's New York Times there's an article about how Visa and Mastercard cash in on debit cards.

When you sign a debit card receipt at a large retailer, the store pays your bank an average of 75 cents for every $100 spent, more than twice as much as when you punch in a four-digit code.

The difference is so large that Costco will not allow you to sign for your debit purchase in its checkout lines. Wal-Mart and Home Depot steer customers to use a PIN, the debit card norm outside the United States.

Despite all this, signature debit cards dominate debit use in this country, accounting for 61 percent of all such transactions, even though PIN debit cards are less expensive and less vulnerable to fraud.

How this came to be is largely a result of a successful if controversial strategy hatched decades ago by Visa, the dominant payment network for credit and debit cards. It is an approach that has benefited Visa and the nation’s banks at the expense of merchants and, some argue, consumers.

My favorite quote from the article:

The fees are “not a cost-based calculation, but a value-based calculation,” said Elizabeth Buse, Visa’s global head of product.

I'm thinking the cost-based calculation would be way less. Otherwise, they would use it.

*** Update ***

I spoke with a coffee shop owner who informed me that he gets charged twenty cents plus a percentage of the sale for each credit card transaction which includes signed debit card transactions. Debit card transactions using a PIN cost him thirty cents. So since his sale transactions are low in price, it's more economical for him to do the signed transactions.

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