Early this year one of my contacts at a credit union told me about a disturbing new trend that they’re seeing with their members’ debit card transactions. More signature-based debit card purchases (done without PINs) are coming through as PIN-based transactions. This has some important ramifications for everyone with a checking account, and especially a high-yield reward checking account. The reason is that banks and credit unions make less money from PIN-based debit card purchases compared to signature-based purchases. Thus, if PIN-based replaces signature-based for debit card purchases, the financial institutions will earn less money, and that will make it more difficult for financial institutions to keep checking accounts free, to cover costs of ATM fees and to pay high yields on reward checking accounts.
Two years ago I described PINless debit card purchases. This is one of three basic types of debit card purchases:
- PIN = you enter your secret code
- Signature (or "credit" or non-PIN) = No code necessary, may need to sign for purchase
- PINless = no code necessary, but processed as a PIN purchase
From the customer point-of-view, PINless debit card purchases appear to be like a signature-based purchases. No PIN code is provided. However, the purchase is routed to the issuing bank through a debit network instead of a Visa or MasterCard network. That results in lower interchange fees that retailers pay to banks and credit unions.
My credit union contact said they have been seeing these PINless debit card purchases at Krogers owned grocery stores, gas stations and convenience stores. As this CUES article mentions, Walmart has also begun processing signature debit purchases as PINless. It appears the PIN networks have limited PINless transactions to purchases totaling $50 or less.
Why are we seeing this now? It’s connected to the Durbin amendment of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act which gives retailers options on debit card network routing. That went into effect a few years ago, but retailers had not been taking advantage of it. That recently changed, and as mentioned by the CUES article, "Big retailers may have been waiting for the outcome of a court challenge." That court challenge ended in January when the Supreme Court declined to review an appellate court decision.
This long zero interest rate environment has been very difficult on reward checking accounts. Rates and balance caps have gone down over the last several years. I’m afraid this is yet another headwind for reward checking. When I asked my credit union contact if they are planning to make any changes to their reward checking account due to this loss of interchange revenue, he said that if most retailers adopt this, he was sure it would lead to a drop in the interest rate.
In addition to the long-term impacts from the increased prevalence of PINless transactions, you should be aware of possible immediate impacts. If your reward checking account requires signature-based debit card purchases, you may be surprised when you find you didn’t meet your monthly debit card usage requirement. According to my credit union contact, they cannot tell the difference on their end. They only see that the PINless debit card purchase was a PIN-based transaction.
Another possible ramification is that your bank or credit union may hit you with an ATM-like fee when you make a debit card purchase that goes through as a PINless transaction. One guy was so mad with this fee that he started this Facebook page.
If PINless transactions do impact reward checking accounts, we’ll need to consider if reward checking accounts are worthwhile as an alternative to internet savings and checking accounts. As reward checking rates and balance caps diminish, internet savings accounts will look like a better choice.