Academic journal article ABA Banking Journal

Penny Wise and PIN [Persoanl Identification Number] Foolish? (Editor's Column)

Academic journal article ABA Banking Journal

Penny Wise and PIN [Persoanl Identification Number] Foolish? (Editor's Column)

Article excerpt

WE OBVIOUSLY DON'T KNOW how the retailers' class-action lawsuit against Visa and MasterCard will turn out, but the thinking seems to be that a settlement may be reached. If so, that would likely result in some adjustment to how debit cards are priced, which, in turn, could put a stop to the questionable practice of "steering" customers from PIN-based transactions to signature-based transactions.

The practice is a bizarre turn of events, considering that retail bankers worked for decades to build the framework for, and interest in, "direct debit" transactions. The reasons for these efforts were logical--funds moved instantly, the transactions were more secure, and the merchant knew funds were good.

Despite this, only relatively recently have we seen debit card usage surge. While PIN-based transactions have grown steadily, much of the recent gains have come from offline use. This has been a goldmine for many banks because signature-based debit transactions generate far more revenue than do PIN-based transactions, as explained in the cover story (p. 31), written by Jim Peterson.

This disparity encouraged the "steering" mentioned above. Some of it is accomplished by positive reinforcement, e.g., awarding points for dollars charged on a debit card, but only for signature-based transactions.

More common are penalties. Banks tell customers that they will begin charging them 25 cents or even $1 if they use their debit card in a PIN-based transaction.

The issue seems similar to the ATM surcharge "wars," now pretty much settled down. But there are two big differences in the debit card situation. First, ATM surcharges mostly are applied to noncustomers using a "foreign" ATM. …

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