PIN vs. Signature Based Debit Transactions

Last week, when I was writing the article on reward checking accounts, I noticed that some banks not only require a number of debit card transactions in a month in order to get the higher yield, but also explicitly say qualifying transactions must be PIN (personal identification number) based, while others insist only signature based transactions will be counted as reward transactions. Since most bank issued debit cards support both methods, why some banks prefer one over the other?  To answer this question, we need to understand the difference between the two payment methods.

Signature Based Transactions

Like credit cards, debit cards bearing the Visa or MasterCard logo can be accepted at any point of sale (POS) terminal where credit cards are accepted, as long as the cardholder authorizes the transaction by signing the sale receipt. One of the arguments made by Visa or MasterCard for signature based debit transactions is security. According to an early interview with Visa, by signing up the purchases, debit cards offer the same level of fraud protection as credit cards do: You are not liable for any unauthorized transaction if you choose to sign the transaction. The reason that the payment processing network, such as Visa or MasterCard, favors signature based debit transactions is quiet clear: signature based debit cards usually impose higher interchange fees (interchange fees are the integral part of credit card or debit card fee structure and they amount to a percentage of the total transaction) on each transaction. That is the big revenue generator for  at payment processing networks. In addition, the transaction also require more processing time (usually takes a couple of days before the debit hit your bank account), thus, higher cost will be passed on to merchants who accept debit cards.

PIN Based Transactions

A PIN based transaction does not require a signature. It is authorized after cardholder enters the PIN via a PIN pad (whether it is build-in pad or an external one). Unlike signature based debit transactions which usually take a couple of days to processing, authoring PIN based debit transactions is completed right at the time the sale is made via POS networks such as Star, Pulse, and NYCE, and, therefore, settlements occur much faster and chargebacks are reduced. But this is not the big difference between signature and PIN based transactions. The main difference, from both the card issuers and merchants point of view, is costs associated with PIN based transactions. Usually, a fixed fee is imposed on each PIN based transaction, which means costs are not proportional to the the values of the transactions. Obviously, if the value of the transaction is small, the relative percentage of fees charged in PIN based transaction will be higher comparing to signature based method.

Though I don’t use a debit card and I prefer signature based credit card transactions myself, it seems PIN based debit card transactions are getting popular for several reasons:

  1. Lowered processing fees;
  2. Faster settlements;
  3. Reduced frauds;
  4. Shorter checkout lines.

Despite these advantages, both signature and PIN based debit cards will coexist. If you are using a debit card that is tied to a reward program, either rebates or high-yield checking, make sure you check with your bank to see exactly how you are going to qualify for the rewards by using your debit card.

Are you using a debit card? If so, PIN or signature, which do you prefer?

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6 Responses to “PIN vs. Signature Based Debit Transactions”

  1. frugal living |  Mar 24, 2009 at 1:46 am

    I was told that all debit card transactions are either PIN based or Signature based transactions:
    I went to my local gas station, bought gas and soft drinks. At the cash register I swiped my new debit card. Nothing on the screen asked for a PIN number, nor did it ask for a signature.

  2. Shawn Levasseur |  Mar 31, 2009 at 3:56 pm

    These days, smaller transactions don’t require any signature or PIN, just swipe, get approval, and go. Some places that do this have thresholds from $5 to $25 dollars. I suspect that these transactions are treated as if they were signature transactions (Credit Card networks), and not PIN transactions (ATM networks).

    This has made the act of taking plastic in places where speed of service is a big deal (Fast Food drive-thrus, express checkouts at groceries) a practicality.