To cut their payments transaction costs, merchants such as Publix, a Sarasota, Fla.-based supermarket chain, and Wal-Mart have been enticing their debit card customers to use PIN-based authentication instead of signature-based authentication. Although the difference between the two has been shrinking, the interchange fee for "online" PIN-based authentication is lower than the fee for the "off-line" signature-based approach. That means banks lose out each time a customer uses a PIN - about 80 basis points, according to A.N. (Tony) McEwen, executive vice president, Visa U.S.A. (San Francisco).
Banks have responded by cultivating customers' preference for signatures on the one hand, while participating in fast-growing PIN networks on the other.
Reward programs are one way to get customers to favor signature debit. Usage fees are another. "Some institutions have decided that they're going to charge their customers to use PIN debit transactions, and not charge for signature," says Stan Paur, chairman and CEO, PULSE EFT Association (Houston). "But with the lowering of signature debit rates and the increase in PIN debit interchange, I think that that's becoming a less common strategy."
Despite the potential impact on their debit card revenues, many banks have recognized the need to participate in PIN-based debit networks. Indeed, PIN issuance has become a requirement for universal acceptance given Wal-Mart's February decision to stop accepting MasterCard (Purchase, N.Y.) debit cards when the card association would not lower its interchange rates. Because Visa instituted a multitiered pricing scale favoring the largest merchants with lower rates, Wal-Mart still accepts Visa debit cards.
Issuers can ensure that customers can switch between off-line and online debit at will, simply by adding an additional logo on the back of an association-branded debit card. "Most financial institutions are issuing a card that has the capability to be used as both a signature debit card and a PIN debit card," says Paur. "They'll generally sign up with a shared network like PULSE, and they'll probably use Visa and MasterCard as their signature-debit options."
But Visa and MasterCard also offer PIN-based debit networks. So an issuer's choice of online-debit partner often becomes a question of which network relationships it wishes to support and maintain from a strategic standpoint.
The market leader is First Data (Greenwood Village, Colo.), which owns Concord's STAR network. Visa estimates that STAR controls 55.7 percent of PIN transactions at the point of sale. But Visa advocates caution when dealing with shareholder-owned entities. "We have most of the PIN-based market owned and controlled by non-financial-institution-controlled associations," Visa's McEwen says. His advice: "Make sure that the investments that those parties are making are not investments that are going to be competing with what you have in the marketplace."
PULSE also distances itself from the non-financial-institution-owned segment of the market for debit networks, with its broad-based membership of financial institutions, including credit unions and savings associations.