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As a follow-up to a prior thread about a Federal Court's certification of a huge antitrust lawsuit by many of America's biggest merchants against VISA and MasterCard, I'd like to compare PIN-based Point-of-Sale systems with the signature-based VISA and MasterCard check cards.

In many nations overseas, there are nationwide PIN-based Point-of-Sale (POS) purchase systems. I will post a few links to these systems so you can read about them.

The US has several regional PIN-based POS systems and the nationwide PLUS system. The per-transaction processing cost is a FLAT FEE and is quite modest (around 25 cents per transaction), although some fast-food outlets charge a higher fee (which they pass on to customers as a surcharge) because their fee includes a third-party fee to cover the cost of leasing their PIN-based POS terminals. PIN-based transactions are significantly less prone to fraud than signature-based transactions. The money comes directly from your checking account.

VISA and MasterCard offer "check cards" which are honored at most (BUT NOT ALL) merchants which accept VISA and MasterCard credit cards. Transactions are signature-based rather than PIN-based, so the rate of fraudulent transactions can be much higher than with PIN-based debit cards.

Car rental agencies, and in some cases airlines or hotels, have been known to refuse to accept VISA/MasterCard "check cards" and this is well-documented at various consumer opinion web sites and news stories.

In the years when VISA and MasterCard were building their credit-card business, merchants were willing to pay a percentage of each transaction (i.e. 2% to 3%, depending on the specifics of their contract with their VISA/MasterCard processing bank) because credit was being extended to the customer.

Now that VISA and MasterCard are aggressively marketing Check Cards which do not involve a bona fide extension of credit, they are still charging high processing fees on the total purchase amount - they will NOT offer a "flat fee" transaction cost similar to that offered by PIN-based POS operators.

On a $200 purchase, this might mean that Target/Sears/Barnes & Noble is being charged $4 by VISA to process a simple check-card purchase that would cost 25 cents if processed as a PIN-based debit.

These firms have a right to protest particularly since VISA and MasterCard have in fact allowed some travel-related businesses (car rental firms are most notorious for this) to "opt out" of accepting the signature-based Check Cards.

Most VISA and MasterCard transactions are processed in "batches" rather than in real-time, meaning the debits are not presented against a cardholder's account immediately. From the standpoint of merchants, this means there is a greater risk of getting cheated out of the money owed by the purchaser who has insufficient funds in their bank account.

VISA and MasterCard, and their member banks, have been aggressively running promotions to get customers to switch from PIN-based to signature-based purchases because the fee gravy train is so lucrative. They have engaged in a lot of other anticompetitive measures to prevent the growth of PIN-based POS systems, and as they now have primary ownership of the nationwide CIRRUS and PLUS networks there is an inherent conflict of interest which will ultimately result in higher fees being imposed on consumers.

Summary: PIN-based POS is generally less expensive to administer, reduces fraud by using a security PIN, reduces risk of the merchant getting cheated because of nonsufficient funds in a purchaser's bank account, and is the most common system for making cashless purchases outside of the United States.

Signature-based check cards involve charging the merchant a fairly high percentage of a total transaction (rather than a flat fee), have much higher risk of fraud because of the ease of forging another's signature, increases the risk of a chargeback due to lack of money in the purchaser's account, and is charged to the merchant at the same high rate as a credit-card transaction.

VISA and MasterCard have a very lucrative gravy train and would love to collect their percentage take on the majority of transactions in the USA.
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