Why we pick 'debit' rather than 'credit'
When you punch in a PIN to pay with your debit card, you're saving the store -- and maybe yourself in the long run -- some money.
We recently changed the way we buy most stuff -- be it groceries at the supermarket or paint at the hardware store. When we swipe our debit card, we type in our PIN. That's the “debit” choice when card users are asked to pick “credit” or “debit.”
Why are we doing this? When you say “credit” and provide a signature -- sometimes waived, depending on how much you “charge” with your card -- you’re allowing the banks to siphon more money from the store and, ultimately, the consumers.
A recent New York Times story explained how this came to be -- and gives a lot of the credit, shall we say, to Visa. Here’s a very condensed version:
When debit cards were introduced, merchants could accept them without paying a fee to the banks. But that all changed in the 1990s when Visa offered to process debit card transactions on its credit card network -- creating the “credit” with signature choice.
Visa also set higher fees for each transaction as a financial incentive to attract more clients -- banks that agree to issue Visa-branded credit and debit cards. Naturally, more banks signed up. “By 1999,” the Times said, “Visa was setting fees of $1.35 on a $100 purchase, while Maestro and other regional PIN networks charged less than a dime, Federal Reserve data show.” (Maestro belonged to MasterCard.)
More recently, Visa has taken an interest in the PIN-transaction market, too. Visa controls 73% of the signature debit market and is the dominant player in the PIN debit market with 42%.
How does this affect you and me?
- Merchants pay a processing fee for each transaction plus an “interchange” fee that’s a percentage -- usually 1% to 3% -- of the purchase price. Interchange fees from debit and credit card purchases brought in $45 billion for banks last year, more than double their take in 2002.
That’s the fee that makes businesses angry. The Times said, “Some merchants say there should be no interchange fees on debit purchases, because the money comes directly out of a checking account and does not include the risks and losses associated with credit cards.”
- Merchants pass the fees on to consumers in the form of higher prices, which are paid by everyone, even those who use cash. “The National Retail Federation estimates those lucrative interchange fees cost households an average of $427 in 2008,” the Times said.
So far, PIN transactions cost merchants less than signature transactions. “When you sign a debit card receipt at a large retailer, the store pays your bank an average of 75 cents for every $100 spent, more than twice as much as when you punch in a four-digit code,” the Times said. Small merchants pay even more.
But that could change. Debit cards have already surpassed credit cards in popularity and are expected to beat out cash by 2012 as our favorite way of buying things. There’s more money to be made by Visa, MasterCard and the banks.
Some, including members of Congress, are looking at regulating the fees, but years of lawsuits and complaints about the unfairness of it all haven’t had much impact.
Would it make a difference if these fees were lowered? Would, for instance, merchants hire more employees or drop their prices if we all switched to PIN transactions (or made all purchases with cash)? It’s hard to say.
Obviously one person's decision to punch in a PIN won't amount to a hill of beans or cheaper kibble. But when we consider that more money stays with our locally owned grocery store -- well-regarded for its support of local charities and events -- rather than being siphoned off to some big bank, that’s enough for us.
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