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How Visa and the Banks Have Profited from Signature-Based Debit Cards

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Many banks that offer rewards for using their debit cards require signature-based purchases instead of PIN-based purchases. Otherwise, you won't qualify for the rewards. Many reward checking accounts are like this. Also, checking account sign-up bonuses often require signature-based purchases. ING Direct's bonus that it sometimes offers for opening an Electric Orange checking account is one example.

Why do banks push for signature-based debit card purchases? This New York Time article describes why:
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 article reviews the history of debit cards and how signature-based purchases have become more common than PIN-based purchases:
How this came to be is largely a result of a successful if controversial strategy hatched decades ago by Visa, the dominant payment network for credit and debit cards. It is an approach that has benefited Visa and the nation's banks at the expense of merchants and, some argue, consumers.

A big chunk of the fees of a debit card purchase that stores pay to banks is what's called an interchange fee. According to the article this can be about 1 to 3 percent of each purchase. The article describes how interchange fees have been growing:
The banks have used interchange fees as a growing profit center and to pay for cardholder perks like rewards programs. Interchange revenue has increased to $45 billion today, from $20 billion in 2002, driven in part by the surge in debit card use.

I can see why merchants are mad, but it should be noted that we may not have had reward checking accounts or cash-back credit cards without these interchange fees. On the other hand, we are paying more for goods and services because of these interchange fees. From the article:
merchants say they inevitably pass on that cost to consumers; the National Retail Federation says the interchange fees cost households an average of $427 in 2008.

This seems high. Assuming an average 2% interchange fee, $427 of interchange fees would require over $21,000 in purchases. For consumers, very few stores give discounts for cash payment. So you're paying more regardless of how you pay. Thus, it makes sense that you share in your banks' profits by using either a cash-back credit card or a reward checking debit card.

To learn more about reward checking, please refer to this reward checking overview.


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Comments
12 Comments.


Comment #2 by Anonymous posted on
Anonymous
Most RCAs have Master Cards as their debit cards, exceptions include FAB&T (uses Visa).

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Comment #3 by Anonymous posted on
Anonymous
Just because a bank is promoting it does not mean that it hurts the customer. The fact of the matter is that, as long as you are receiving additional compensation from the bank (higher yields, rewards, etc.), you are being helped. In the end, it is those who pay with cash or PIN-based transactions that are subsidizing these programs and lose.

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Comment #4 by Anonymous posted on
Anonymous
I believe that MasterCard branded debit cards are cheaper for institutions than Visa branded ones. As I understand it, however, the extra charged by Visa gives additional features, many of which I would guess are of little or no importance to the smaller institutions which tend to offer reward checking accounts.

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Comment #5 by Anonymous posted on
Anonymous
You explained why it happened to me today.

I used to make online payment with my rewards debit card at officialpayments.com for 10 or 12 debit card transactions. Usually officialpayments.com count the debit card as credit card with 0.05% fee charge. Today they changed something and showed me the notice:
“You have selected to make a credit card payment using a debit card number. To continue making this payment as a debit card at a new convenience fee of $3.95, click the "Continue" button below. "

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Comment #6 by Anonymous posted on
Anonymous
When you use officialpayments, they want to recoup as much as possible for accepting either credit card or debit card purchase. Plus, I noticed there fees vary depending on the state, municipality, and what it's for. For $125 in one instance, they charge $8.95 convenience fee. In another state for different bill, they charge $7.00. It's ridiculous; officialpayments' merchant fee to process credit card for $125 should only be about 2%; 3% max. Plus, let's say they have to pay an extra $0.50 for per/transaction. They're still profiting afterwards.

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Comment #7 by Anonymous posted on
Anonymous
I am a major debit card user these days...because of multiple RCAs... I use the cards all the time for things I always used to pay for in cash...and they work fine.. I never have any problems.

I know the banks certainly make fees off those card transactions. But I get 4+% interest on my substantial RCA account deposits, and ATM fee refunds, both of which are major benefits to me.

In my world, there are very very few merchants that offer cash discounts, so why not use the cards. The only ones I can think of that offer cash discounts are some gas stations.... But among regular retailers, I almost never see them.

If a retailer can save between 1-3% by avoiding bank fees for a customer who pays cash, why not offer a cash discount? In fact, retailers don't do it, so they're not giving us any incentive to help them save their own money.

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Comment #8 by Anonymous posted on
Anonymous
What I cannot understand is the paucity of banks that pay 5% or more
since it is still profitable to them.

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Comment #9 by Anonymous posted on
Anonymous
Congress just started meddling in credit/debit cards fees, it is the end of RCA, mark my word for it.

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Comment #10 by Anonymous posted on
Anonymous
My understanding is that merchants are forbidden from offering cash discounts by the Visa and MasterCard merchant agreements.

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Comment #11 by jwbodnar (anonymous) posted on
jwbodnar
I believe the commenter above is wrong. A discount can be offered for cash, but a merchant who accepts MC or Visa cannot charge more for the credit card transaction. This has been the case for a long time.

Here in Texas, Spec's, a spirits and fine food store chain offers a 5% discount for cash or debit.

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Comment #12 by Anonymous posted on
Anonymous
Ahhhh and there's the rub - the rewards are given for use of the debit card are because you will spend more. It well known by merchants and banks that purchasers using plastic spend more - MUCH more than purchasers using cash. There is much less psychological pain using plastic because you do not give anything away. Watching your cash go away and not come back - and seeing the amount you have get smaller causes a psychological pain that will cause you to spend less.

Of course you make 4% on your RCA - but then you spent 10-15% more each month than you would have if you used cash. Lets see - 4% on $1,000 = $40 a year. 10% increase in spending of $1,000 = $100 a year. How's the RCA looking now?

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Comment #13 by Anonymous posted on
Anonymous
umm, we're not spending more using our plastic cards; most of us are using debit cards for these RCA for our most smallest and often transactions. For me, instead of giving $2 to get change for my Dunkin and Donuts, I now use my debit card. I always eat out twice a week for lunches that I always just give either $5 or $10 bill for change; no I use my debit card. I spend no more, no less. When I reach my 12 transactions, I switch back to using my credit cards that reward me of 1%, sometimes higher.

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