BAI Online | Payments Strategies | May/June 2006 | Debit Transactions: Making Sense of It All

Today, carrying a debit card is much more common than carrying a checkbook, while more and more retailers -— many of which were historically cash-only — are enthusiastically accepting debit cards for payment.

With debit, consumers have two choices: They can enter a four-digit PIN just as they do at the ATM, or they can sign a receipt, similar to a credit card transaction. Both PIN debit and signature debit are convenient and offer benefits to cardholders, issuing institutions and retailers. However, the authorization processes are different. PIN debit transactions remove funds from the cardholder’s checking account almost immediately, because the authorization and the settlement of the transaction is a ‘one step’ process. Signature debit transactions employ a ‘two step’ process for authorization and settlement. This lengthens the time it takes for the merchant to be credited for the purchase, and also increases the potential for losses and chargebacks.

With fraud being a major concern today, it is important to note that PIN debit offers clear security advantages. According to the POS Debit Issuer Cost of Payments Study conducted by First Data Corp., the average net fraud losses were more than four times greater for signature debit purchases than for PIN debit. With no PIN to authenticate the transaction, signature debit may receive no authentication at all unless a sales associate requests a picture ID for verification. Moreover, recent rule changes made by the card associations have eliminated the requirement for signatures on certain low-ticket purchases altogether, which could further increase the risk of fraud.

The Economics of Debit

Some of the elements that drive the value equation for debit include transaction cost, transaction volume and the size of the ticket or purchase amount. The same First Data cost study cited earlier found that, on average, PIN transactions cost financial institutions nearly 50 percent less than signature debit transactions: 11.6 cents for PIN debit versus 22 cents for signature debit.

Does this mean that marketing efforts should focus solely on promoting PIN debit? Not at all. The Consumer Payments Usage Study, sponsored by the STAR Network, found that 56 percent of debit users preferred making both PIN and signature transactions. And, consumers who use both PIN and signature debit tend to make significantly more purchases than those who use only one form of debit. Consumers report average card usage of 21.4 times per month when using both payment methods.

The study also found that consumers who paid with their debit card tended to spend more, which is very good news for retailers. In fact, the dollar amount for debit purchases averaged 32 percent higher than purchases made with cash, and 24 percent higher than purchases made by check.

Therefore, issuers should promote and encourage both PIN and signature debit transactions. Emphasizing the card’s greater utility and flexibility can help issuers improve performance of their card programs. Structuring rewards programs or other incentives around debit card usage can also help increase transaction volumes.

The bottom line is that consumers prefer a choice, and that’s exactly what debit cards provide. Promoting these choices can increase consumer acceptance, while focusing attention on all payment methods will benefit all participants.

Ms. Debra Janssen is president of of First Data Debit Services.