Using Your Debit Card: PIN vs. Signature

Debit cards are extremely popular because they offer the convenience of plastic without you actually having to borrow anything. Your debit card is connected to your checking account, which means that your purchase amount is deducted directly from your bank account. As a result, it does not accrue interest, since you are not building a balance. If you do not have enough money in your checking account to cover the purchase, you can be denied (unless you have opted in for overdraft protection). Most debit cards have a credit card company logo that ensures that you can use your debit card wherever credit cards are accepted. This makes it a little easier to tap your checking account, no matter where you are.

One of the things that is interesting about debit cards, though, is that you usually have an option to choose whether to use a Personal Identification Number (PIN) to authorize your purchase, or you can sign the sales receipt – just as you would with a credit card. Even on point of sale machines that automatically bring up a screen asking for your PIN, you can still choose “credit” and sign to authorize your transaction (even though you will not actually be using credit; the money will still come out of your checking account).

This choice is one that many of us do not think about very often. You may think that there is no difference between a PIN and a signature transaction, but there are differences. What you choose could have very real consequences, for you and for the businesses that you frequent.

PIN Debit Transactions

First of all, when you use your PIN, you will find that the transaction is settled more quickly than if you sign for a purchase. While money comes out of your checking account whether you use a PIN or a signature card, with a PIN it often comes out a little faster. Your PIN transaction can be settled at the end of the day through the ACH. This can reduce the chance of chargebacks on the card, which is a plus for many merchants.

For merchants, a PIN transaction from customers is more desirable than a signature transaction. This is because there is normally a fixed fee when it comes to PIN transactions. For larger purchases, your use of a PIN when making a purchase means that the cost per transaction is lower, since the fee does not increase with the purchase amount. However, by the same token, a small transaction made with a PIN can be more costly for the amount. Indeed, if your purchase is only a couple of dollars, the PIN transaction may actually cost more than the purchase! This is why some smaller retailers will only accept card transactions if your total order exceeds a certain amount. It is also worth noting that a few banks charge account holders a small fee for each PIN transaction.

However, if you have a rewards checking account, PIN transactions may not be your preferred option. This is because many banks require you to make signature transactions if you want to earn rewards. You PIN purchase may not actually help you gain reward points or be eligible for cash back programs. The reason that debit rewards programs prefer signature transactions is relatively clear when you realize how much money can be made payment processors when you sign for your debit card purchases.

Signature Debit Transactions

The alternative to using your PIN when you swipe your debit card is signing for your purchase. However, when you sign, the merchant is stuck with higher fees. Payment processors charge merchants a fee that amounts to a percentage of the sale. So, the bigger the sale, the higher the fee. With signature transactions, the merchant always has to consider the cost.

You, however, appear to benefit with signature debit transactions. It takes longer for these to settle through the ACH system, so, in some cases, it might actually take a couple of days for your signed debit transaction to be deducted from your checking account. Additionally, if you have a rewards checking accounts, signing for your purchases can help you see rewards build up a little bit faster. You also need to check the terms of your debit agreement, since fraud protection similar to that experienced by credit cards may only be offered on signed purchases.

In the long run, though, signature debit transactions may actually cost you a little bit more. Your rewards debit card might come with an annual fee for participation in the bank’s program. It could take a long time to build up the rewards to offset that cost. Another issue is that of higher prices. Many merchants who pay transaction fees for your signature transaction pass the costs on to you. Merchants often build in the cost of signature transactions into prices, resulting in higher prices for everyone.

For a long time, many smaller merchants resisted accepting credit and debit cards because of these fees. However, because plastic is so pervasive in our society, it is harder and harder for many businesses to avoid accepting debit cards. It has become a necessity, with the increased business (or, at least, the fact that they are not losing as much business) offsetting, to some degree, the fees that need to be paid.

Which Should You Choose?

In the end, whether you choose a PIN or signature transaction is up to you. You might be required to make a certain number of signature transactions to take advantage of special deals and promotions (like $50 for opening a checking account), or you may want to take advantage of the likelihood that your transaction will not clear your account for a couple of days.

On the other hand, you may want to make a PIN transaction because it is sometimes considered a little more secure at the terminal. Additionally, if you are interested in reducing costs for your local businesses, a PIN transaction might be your preference.