Friday, August 6, 2010

Featured Post: Does Durbin Amendment Position "PIN Debit" as "Signature Debit" Killer?

In case anyone was wondering why I started and specifically called this blog, The "PIN Debit" Blog, take a look at the video interview conducted by Novantis below.

As I've stated over the years, PIN Debit is up to 14.5 times more secure than signature debit.  (PULSE/Hitachi Study 2005, see graphic below)

Although I have always believed that to be the biggest reason it would prevail over signature debit, it's taken longer than I thought because, simply put, banks were making too much money off the more fraudulent ridden signature debit.  But that has changed.  There is no longer the cash cow incentive that banks enjoyed by pushing the far inferior offline debit product known as "signature debit."

Therefore, the writing is on the wall.  The recent passing of the Durbin Amendment signifies the "future passing" (demise) of signature debit.  Here's why:  The two biggest reasons signature debit existed in the first place have now been eliminated.

  • Reason Number 1:  It created recurring revenue to banks in the form of overdraft charges
  • Reason Number 2:  It created recurring revenue to banks in the form of higher interchange fees.

Now that the first reason for pushing signature debit over PIN Debit (overdraft charges) has been eliminated, (unless "someone" for "some reason" decides to opt-in) there is no incentive for banks to ignore the up to "14.5 times higher" (2009 showed it was "only" 7.5 times higher) fraud levels involved with signature debit.  Another words, if there is no money in the consumers account and banks can't earn $35 off a $4 cup of Starbucks, why would they approve the transaction?  They wouldn't, because there's too much risk and no upsdie.  So, as I said, Reason Number 1 has been eliminated.

Which brings me to Reason Number 2:  Now that the Durbin Amendment has passed, the Feds will start regulating Signature Debit Interchange.  That means it will be lower.  Once that happens there will be even "less" of a reason for banks to push signature debit.  Signature Debit will simply not be profitable enough to continue pushing it.  So, I predict that PIN Debit (and here's a play on words) will become the banks "signature" product.

Add to this mix the fact that consumer usage of PIN Debit already outpaces signature debit growth and combine that with the fact that retailers will "steer" their customers towards PIN Debit (no chargebacks!) with a is clear (to me) that the demise of signature debit is near.

The video interview below couldn't say it any better than it I could, except I would add to it the following:

Will it be Internet Retailers looking to save millions on Interchange who "steer"
their customers away from "card not present" transactions or the banks?
The advent of Chip and PIN in the United States:

Once we see the shift from signature (offline) to PIN (online) Debit it will more than likely, induce the banks into making that long avoided decision to switch from magnetic stripe based transactions to Chip and PIN based transactions. 

In my humble opinion, the "only" thing holding back the implementation of smart cards in the US wasn't the estimated $8 billion dollars it would cost to implement, it was the $5 plus billion that banks were earning off of signature debit interchange.

For every year banks delayed the implementation of Chip and PIN in the US,  they earned $5 plus billion. That's not chump change. (or is it? I guess that depends on whether you take the position that retailers were chumps for paying it all these years)

With that $5 billion jackpot gone (combined with the fact that the billions in overdraft charges created by signature debit overdraft charges have disappeared into thin air) there's an immediate incentive for banks to introduce Chip and PIN into the US.

In the meantime, it will be interesting to  see what happens with the Internet.  When the brick and mortar retailers "steer" their customers towards PIN Debit, (which is a no-brainer) then the next step is for those same retailers with an Internet presence to steer those customers away from "card not present" transactions...towards "card present" PIN Debit transactions...meaning that financial transactions conducted on the internet will be done with peripheral card readers.  So now you know why I have continued to "plug away" despite many in the payments industry who think that a software vs. hardware solution is the answer.  Short term...yes, maybe...but long term?...I'll keep pluggin'.

THE FINANCIAL COLUMN — Debit Cards: Preparing For A Changing Growth Equation


Consumers are quickly shifting away from Credit Cards in favor of PIN Debit Cards.

The biggest impact will be on Signature Debit. If you’ve already pulled out a Debit Card, all you have to do to get the discount is enter your PIN instead of signing — we think it’s a “no brainer” that Signature Debit volume will move decisively to PIN Debit. We also believe that many consumers will start putting away their Credit Cards in favor of PIN Debit and a discount. And we predict the shift will come quickly

Disqus for ePayment News