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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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Here are some descriptions of Canada's Interac Direct Payment system from their web site at http://www.interac.ca/ Given Canada's population is one-ninth that of the USA, Interac is far more widely honored and used than any of the PIN-based debit POS systems in the USA.

"Interac Direct Payment is offered at over 328,000 merchant locations across Canada. Consumers use their banking card to pay for goods and services at the point-of-sale rather than carrying cash."

"Interac Direct Payment reduces the risk of cash loss and theft
If a banking card is lost or stolen, the funds remain inaccessible without the Personal Identification Number (PIN). Both the card and your confidential Personal Identification Number are required to complete a transaction."

"Interac Direct Payment is faster and more confidential than writing a cheque. Interac Direct Payment is not only faster, it is a more confidential method of payment than cheques, which frequently provide the consumer's name, address and telephone number. Also the cardholder may require additional pieces of identification to complete the use of a cheque."

"Interac Direct Payment prevents overspending. Interac Direct Payment allows cardholders to access funds that are already in their account at the time of purchase and keep track of their spending. There is no cumulative bill at the end of the month. Cardholders receive a transaction record provided at each point-of-sale that allows them to track their spending easily. Cardholders can only spend what is already in their account."




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That some merchants were refusing "Check cards" is news to me.

Another distintion not to be overlooked is that you have somewhat less legal rights (e.g. for defective goods, etc.) when you purchase with a debit vs. a credit card.

Also there are arguably times when it is good to be able to spend money you don't have -- for a true emergency (such as that to-die-for dress going on sale <grin>)
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Here is a very good story from Australia:
"A joint report by the Reserve Bank of Australia (RBA) and the Australian Competition and Consumer Commission (ACCC) into the fee structure of electronic payments system - currently run exclusively by the banks - has concluded that banks are charging too much in 'interchange fees' with their customers wearing the cost."

The complete story is at http://www.infochoice.com.au/banking/articles/articles.asp?AID=7108&CID=93&L=0
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Highlights from another story - this will REALLY underscore just how much of a horrid rip-off VISA and MasterCard check cards are compared with PIN-based POS debit:

"Banks like the Visa and MasterCard debit cards because they make more money from them.

"In the suit, the plaintiffs say that processing Visa and MasterCard debit cards like credit cards costs $1.49 per $100, compared with nine cents for conventional, online debit cards, which are processed instantaneously after a consumer enters a personal identification number, the report said.

"It added that retailers say they're forced to pay billions of dollars a year in extra processing charges, costs that are passed on to their customers. Officials from Visa and MasterCard were not immediately available for comment."

The complete story is at
http://story.news.yahoo.com/news?tmpl=story&u=/nm/20020606/bs_nm/financial_creditcards_report_dc_1
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Another distintion not to be overlooked is that you have somewhat less legal rights (e.g. for defective goods, etc.) when you purchase with a debit vs. a credit card.

This is very true. I learned the hard way when DH and I rented a hotel room for one night, payed with the debit card and found out we were charged three nights' stay when the statement arrived. Another couple that stayed at the same hotel on the same night had the same thing happen to them, but they wisely used a CC to pay for the room. They just called the CC company and told them to remove the extra charges.

It was like going straight to hell getting the debit reversed. Of course we were essentially without the funds in our checking account until the matter was resolved. The bank was not very helpful (what do they care?) and I had to threaten to hotel (part of a large chain by the way) legal action before I got my $$ refunded. I'm sure it was a scam.

I will never use a debit card unless it's a local merchant I have dealt with before and never for a large amount of $$.

Kim
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Another thing to keep in mind is that it's easy to get credit cards that give the customer a piece of Visa/Mastercard's take. I haven't seen any debit cards that offer 1 percent cashback - do they exist? I would think that a bank wouldn't be able to afford to offer them.

dan
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USAA's Check and Cash Card rebates 0.50% of all "credit" (non-PIN) purchases.
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Another thing to keep in mind is that it's easy to get credit cards that give the customer a piece of Visa/Mastercard's take. I haven't seen any debit cards that offer 1 percent cashback - do they exist? I would think that a bank wouldn't be able to afford to offer them.

Why not? If they can afford to give credit card holders cash back, why couldn't they also pay debit card holders the same? As GoCowboys has pointed out, US Bank and USAA offer cash back on check card use. USAA also offers a slew of services with its no-fee checking account, and still manages to be quite profitable.

-z
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Hi Kim, Yes, many hotels, car rental places, and gas and resturants, will put in a higher intial amount when they first charge your account, because that way if you charge more than orignally thought they have that money anyways basically, but then after 3 days or so it gets reduced down to whatever it is you were charged. Say, you went to a resturant and your bill was $30, they would authorize it for $40 to cover tip and then if you immediately called the c/c company you would have less $40 available, but in @3 days the charge would be redu ed to whatever you did actually charge and sign for, hence always keep your reciepts. Espically hotels, say you go on vacation you rent a car go to a retsurant get gas and a hotel , you will be maxed out before you even charged it up because they will autorize it for much more than you will most likley charge. Happens a lot you go on vacation and your card gets declined even thu you havent overspent and you out of luck as it would clear thru to the right charges till you almost on your way home from vacation.
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Yes, many hotels, car rental places, and gas and resturants, will put in a higher intial amount when they first charge your account, because that way if you charge more than orignally thought they have that money anyways basically, but then after 3 days or so it gets reduced down to whatever it is you were charged.

In this case, more than 3 days had passed. It should never have shown up on my bank statement, the statement was issued more than a week later. This was almost certainly a scam.

Kim
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Why not? If they can afford to give credit card holders cash back, why couldn't they also pay debit card holders the same?

My understanding is that PIN debit cards don't have the same built-in profit that credit cards do. I looked at US Bank, and their check card rebate requires that you pretend that it's a credit card rather than a debit card by hitting "credit" on the keypad when you check out. Is USAA the same way? I'm pretty sure this means that the merchants get hit with the regular credit card fee rather than the lower debit card fee, and therefore that your merchant is helping to finance your rebate.

It's not an unreasonable opinion not to care about any of this, and figure that whether a merchant pays fees doesn't matter to us the consumers. But this does affect our prices. I remember that for a while, gas stations were giving a cash price and a credit price. Most consumers hated it. But I thought it was great, because it passed the credit card fees on to me and gave me a choice on whether to pay it, rather than having to pay for everyone else's choice.

In addition, while in big cities it doesn't really matter, in smaller places it's a big issue whether money goes to local merchants or to Visa/Mastercard. Since local economies benefit when the money stays at home, and since Visa/Mastercard does nothing for my community, my vote is with the local merchants.

dan
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My understanding is that PIN debit cards don't have the same built-in profit that credit cards do. I looked at US Bank, and their check card rebate requires that you pretend that it's a credit card rather than a debit card by hitting "credit" on the keypad when you check out. Is USAA the same way? I'm pretty sure this means that the merchants get hit with the regular credit card fee rather than the lower debit card fee, and therefore that your merchant is helping to finance your rebate.

Exactly. But the idea that banks couldn't provide bonuses on check cards (when used through the credit system) because there wasn't money there was what I was commenting on. Yes, the merchant is helping to finance the rebate, but this is a bit of the prisoner's dilemma -- I could push debit and save the merchant some money, but that really isn't going to do anything to prices; instead, a large scale action such as the one that is being attempted now is required.

In addition, while in big cities it doesn't really matter, in smaller places it's a big issue whether money goes to local merchants or to Visa/Mastercard. Since local economies benefit when the money stays at home, and since Visa/Mastercard does nothing for my community, my vote is with the local merchants.

Maybe. Visa, as a for-profit company, does make some money, although fees are shared with contracted banks; MasterCard, as a not-for-profit association of banks uses what money it needs to operate and then shares the rest. When USAA (also an association, not a corporation) makes money from the use of my card (and also pays me a rebate), the 3 or 4 million active duty, retired and separated military members and dependents who are members of USAA also benefit (through lower costs for insurance and profit distributions). They are my community, so my view is a little different. If you have a small-town bank, you could also argue that the some of the fees that Visa/MC charge stay in your community as well.

Is the check card rebate an efficient way to keep consumer's costs down? Probably not. But as long as banks are collecting fees from merchants, it makes sense to do business with a bank who is going to share the fees.

-z
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On a $100 purchase, VISA and MasterCard impose processing fees of $1.49 plus whatever processing fee is imposed by the credit-card intermediary. The fee is a percentage of the transaction, rather than a flat fee, although I think there is a minimum of about $0.25 to use VISA/MasterCard - and the fees are identical for both Credit Card and Check Card transactions, even though credit is not being extended with the Check Card. VISA and MasterCard prohibit merchants from imposing a surcharge to the customer for using Credit or Check Cards, except for a handful of exceptions like government agencies.

On a $100 purchase, a PIN-based debit transaction has a processing cost of $0.09. Unfortunately, a few merchants (i.e. fast-food outlets) impose surcharges of around 50 cents which pay for the rental cost on the Point-of-Sale terminal and for the 9 cent transaction-processing fee. They are allowed to impose surcharges by the PIN-based POS networks.

Some Check Card issuers like USAA Bank and US Bank provide rebates on Check Card transactions because they choose to pass on to the customer the portion of the 1.5% fee that is being collected from the merchant.

By contrast, PIN-based transactions don't have a huge markup other than the 9-cent processing cost.

In fairness, one weakness in the merchants' argument is that while they correctly note the high cost imposed by VISA and MasterCard vis-a-vis the PIN-based debit transactions, it is difficult to get sympathy from customers since they won't necessarily receive lower retail prices by using PIN-based cards....and merchants don't necessarily want to deal with even more currency and coins.
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I see no reason to use a debit card. I dont want to carry my check book around with me and have to write down every transaction.
Plus, I have a 1% INCENTIVE to use my Credit Card for most everything I buy. And I DO !

I have "earned" over $155 since 3/01 by using my credit card for nearly all purchases. Yes, the rebate is in Shell Gasoline but they are so convienent for me thats not a problem. And despite what many have said, the prices here are competitive.

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Why not? If they can afford to give credit card holders cash back, why couldn't they also pay debit card holders the same?

Because most credit card holders pay more interest than they earn in rebates. And most debit card holders are earning interest on the money sitting in the bank.

I wonder how US Bank and USAA can afford it.
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Well, for folks like me who pay their balances in full every month, there is no reason not too. And in fact, using a credit card lets my money sit in the bank and earn interest LONGER...up to a month and a half longer. It adds up....
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