By Ken L. Carpenter

Electronic payments (plastic cards) surpassed the use of cash and checks for the first time in 2003 and the majority of these transactions are processed by Visa. Visa dominates the credit-card and debit-card market and two-thirds of Visa’s plastic transactions come from debit cards. In was in 2004 that debit cards transactions out surpassed credit cards transactions for the first time.

 

The U.S. Department of Commerce says debit card use in America is growing at more than 25% per year. For years banks have been pushing the use of debit cards (also known as check cards) because it costs them considerably less to process an electronic debit-card transaction than a paper check. Debit-card transactions are also much faster and more accurate than paper checks. 

 

There are two ways a retail merchant or business can process a debit card. The first way is to run it though a credit card terminal or POS system like a credit card. By doing this it goes through Visa/MasterCard Interchange and the merchant is charged a transaction fee and a discount rate, which is a percentage of the transaction amount. This is called a Signature-based debit-card transaction. The second way to process a debit-card transaction is by attaching a pin pad to your terminal or POS system. Instead of asking a customer for a signature the merchant asks the debit-card user to enter a four-digit pin number. This is called a Pin-based debit-card transaction. By processing a debit-card transaction this way it does not go through Visa/MasterCard Interchange, but goes through one of thirteen debit networks. 

 

By processing a debit-card transaction through a debit network the merchant only pays a transaction fee and eliminates paying a discount rate. Even though the transaction fee is higher than a Signature-based debit transaction fee the discount rate is eliminated. Twenty-five dollars is usually the magic number for a merchant to remember. When transaction is over twenty-five dollars it costs less to process a debit-card sale using a pin pad because the transaction fee is less than the combined discount rate and transaction fee of a Signature-based debit transaction.

 

For example, if a sale is a $150.00 and a merchant is paying a 2% discount rate plus a

10 cent transaction fee it would cost a merchant $3.10 to process that transaction. If that same transaction were processed as a Pin-based transaction the cost would be between 55 to 65 cents. This is a considerable savings to a merchant. As the ticket amount increases the savings greatly increases. It is important to keep in mind as the ticket amount increases fewer and fewer customers use a debit card because they need to place the transaction on a credit card to spread their payments over several months.

 

 

 

 

The first obvious benefit of using Pin-based debit processing over Signature-based processing is the tremendous dollar savings. Another benefit of Pin-based debit processing is that these transactions are real-time transactions. As the transaction is processed it immediately takes the money form your customer’s checking account. If the money is not in the customer’s checking account the transaction is declined. Most merchants are reluctant to take out of state checks because of the risk involved. By taking Pin-based debit transaction form the same checking account this risk is eliminated. It is important to note that a Pin-based debit transaction cannot be voided because it is a real-time transaction. When a refund is needed for a Pin-based transaction a merchant must either give cash refund or issue a Signature-based credit refund to that customer’s debit card.

 

There are some situations where it does not make good sense to accept Pin-debit transactions and there are situations where it does not work to accept Pin-debit transactions. If a merchant’s average ticket is $25.00 or less there would not be a financial benefit of accepting Pin-based debit transactions. If a merchant’s average ticket is several hundred dollars (usually greater than $200) and they have few transactions in the $25.00 to $200.00 range then they would have very few situations in which customers would use a debit-card. In this situation it would most likely not benefit a merchant to spend the money to get set up to use a pin pad. Each merchant in the big-ticket arena needs to monitor his own customer usage of debit (check) cards. If customers are using them in your business several times a month then it would be beneficial. The cost of set-up varies between processors, but typically a merchant will see a debit access fee of $5/month and the cost of pin-pad and encryptions will run $150 to $250.

 

In a restaurant environment Pin-debit is not used because customers will not give their pin number to their servers. Pin-debit does not work in situations where a customer wishes to add a tip after the transaction is processed. 

 

In the lodging business or car rental business Pin-based debit is not used because the amount the card is authorized for is not usually the amount of the final transaction. Making these corrections for Pin-based debit transactions is very time consuming and costly. 

 

In mail order, telephone order, and internet businesses Pin-based debit is not used because customers will not give their pin number unless they are present to enter it into a pin pad. 

 

Signature-based debit transactions can be accepted in all situations where it is not best to accept Pin-based debit transactions. In the right situation there is a tremendous dollar savings when a customer enters their pin number in a pin pad and a business accepts their debit-card as a Pin-based debit transaction. Each merchant must analyze their situation to see if accepting Pin-debit transactions is beneficial to their business. In the correct situation accepting Pin-debit transactions can greatly reduce your debit-card costs.