Debit card fees pit merchants vs. consumers

Debit card fees pit merchants vs. consumers

Stone, Tracie

Debit or credit? It’s a choice made by shoppers each time they use plastic to make a purchase. And while the choices seem straightforward, the differences appear to favor either the bank issuing the debit card or the merchant processing the transaction, leaving consumers stuck in the middle.

Each time a debit card transaction is made, the store incurs a charge. How much the merchant pays depends in part on whether the cardholder opts for typing his or her fourdigit personal identification number, or PIN, into a keypad or asks that the transaction be put through as a “credit” for which be must sign.

Because PIN transactions are an online onestep process, yielding immediate authorization and settlement, fees incurred by the merchant are lower than those associated with signature debits, which require a two-step process and involve more parties.

According to Nancy Kyle, president of the Retail Merchants Association of New Hampshire, costs incurred by merchants for signature transactions are percentage-based, while a flatfee is charged for PIN-based transactions. And in New Hampshire, for members of the RMANH at least, PIN-based fees are never higher than 90 cents.

Officials at Visa, the leader in the debit card industry, estimate a market owner would typically pay 24 cents in fees on a $40 PIN transaction. That same sale conducted as a signature transaction would cost the storeowner 32 cents.

In addition to the added costs, signature-based transactions mean merchant payment is delayed, making storeowners more vulnerable to chargebacks and losses.

“PIN transactions in theory are more secure for merchants,” Kyle said. “If someone finds or steals a debit card but doesn’t have the PIN number it’s useless.”

Rivals cash

Melinda Kolitsas, a 37-year-old mother of three, rarely uses cash when she buys groceries or makes department store purchases – she chooses to use her debit card instead. But she prefers to sign for her purchases – a practice, she said, that can be difficult to follow at certain stores.

“I use my debit card everywhere. I don’t have to worry about having cash on me, and I think it’s safer,” Kolitsas said. “I like to put it through as a credit and sign for it, but some places make it really hard.”

Climbing steadily since 2000, the use of debit cards nationally now rivals cash, with each claiming about 33 percent of all instore sales, according to the 2005-2006 Consumer Payment Preferences Study conducted by the American Bankers Association.

Since 2001, debit card use has increased by 21 percent, surpassing the use of credit cards on the national level.

In New Hampshire, however, credit cards are still the most widely used method of payment and signature-based debit transactions are increasing steadily, said Kyle.

“I think the rewards offered by issuing banks and the convenience of not having to carry around a checkbook are behind the increase in signature debit transactions,” Kyle said.

Even with the costs associated with signature debit transactions, however, businesses benefit by offering debit service to their customers, according to the Consumer Payments Usage Study conducted in 2005 by electronic funds transfer network STAR in 2005. The STAR study found that shoppers using debit cards spend 32 percent more than if they were paying with cash.

Jessica Christoferson, owner of Cymbidium Floral in Exeter, believes accepting debit card transactions are critical to her business, despite the cost she incurs.

“I find it costs me on average about 2 percent for every debit card sale,” said Christoferson, who opened the boutique just two years ago and, because of the size of her young business, is only set up to accept signature-based debit transactions. “We have to offer it. It’s just the cost of doing business these days.”

While businesses prefer that customers complete debit transactions with PlNs, banks issuing debit cards prefer signature transactions because of the higher fees associated.

Many banks now offer rewards programs to debit card users when they make debit purchases and sign for them.

And, in many cases, “zero liability” protection in case of unauthorized use only applies to signature debits.

For consumers like Kolitsas, the collection of rewards points and the zero liability coverage are reasons enough to sign for debit purchases, and that’s a choice that she should be allowed to make, according to Jerry Little, president of the New Hampshire Bankers Association.

“Consumers have the right to put through debit card transactions as signature-based transactions,” Little said. “If merchants refuse to allow it, they are in violation of their contract with the credit card association.”

There are times, however, when consumers who typically opt to sign for debit card purchases may want to forego their reward points and use a PIN number.

In situations when the total cost of a purchase may not be immediately known – such as at gas stations where the debit process begins before pumping the gas or restaurants where tips are added at the end – merchants have the right to put holds or “tags” for as much as $50 to $75 on the cardholder’s checking account, according to Little.

“The hold is placed until the transaction is consummated, then it’s released. It’s important that consumers know that if they insist on completing a signature transaction in these situations they expose themselves to this hold,” Little said. “At the end of the day the PIN transaction or signature transaction is going to end in a withdrawal from the checking account.”

Copyright Business Publications Inc. Apr 13, 2007

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