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Are You Ready for a Cashless Society?How Visa and the Banks Have Profited from Signature-Based Debit Cards
POSTED ON BY Ken Tumin
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:
The article reviews the history of debit cards and how signature-based purchases have become more common than PIN-based purchases:
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:
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:
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.
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.
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. "
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.
since it is still profitable to them.
Here in Texas, Spec's, a spirits and fine food store chain offers a 5% discount for cash or debit.
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?