Felix Salmon

Signature debit refuses to die

By Felix Salmon
October 15, 2010

I took the subway downtown from work today, since it was raining rather heavily, and saw an ad for something called Chase Commuter Cash. The idea is that you enroll your Chase debit card in the scheme, use that debit card to pay for your Metrocards and then get $10 back from the bank for every $150 you spend.

Now Metrocard vending machines are, by their nature, a huge security hole when it comes to credit cards. They’re completely anonymous, you don’t need to sign anything, you don’t need to show ID: all you need to do is swipe and maybe punch in your Zip code. Which isn’t much of a security check:

When paying by credit card it may ask you for a zip code. I just use the New York Zip code 10007. It has always worked for me so far.

As such, you’d think that Chase would be urging all its customers to use the much more secure PIN code when they pay with debit cards. But you’d think wrong. In order to get the cash back from Chase, only ” transactions made without using your PIN” qualify.

The reason, of course, is that Chase gets higher interchange fees if you press the “credit” button on the machine and don’t put in your PIN, even though you’re using a debit card. Why are the interchange fees higher for credit than for debit? To make up for all the extra fraud, of course. But clearly Chase doesn’t seem to be worried about that.

All of this is prima facie evidence, of course, that the interchange fees for signature debit are far too high. But it’s also a way of getting the public into the habit of hitting the “credit” button whenever they use their debit card — something which will ultimately only serve to increase the amount of fraud in the system.

Signature debit is an abomination which ought never to have existed in the first place and which really ought to be abolished rather than encouraged by the very banks who will ultimately suffer ever-greater losses as a result of its use. But the banks, desperate for fee income, are ignoring the obvious fact that what they’re doing simply is not sustainable.

I’m reminded of airlines’ bag-check fees:

Here’s an indisputable truth: The more baggage fees that the big airlines pile on their customers, the faster their overall revenue is collapsing. In fact, the only carriers that escaped a double-digit revenue decline in the second quarter were the two that still allow all passengers to check at least one bag for free…

“Baggage fees are the kind of shortsighted things that are killing us,” the top U.S. executive of a European airline told me recently. “The accountants we have are great at tracking the ‘ancillary’ revenue we generate whenever we invent something like a baggage charge. But they have absolutely no way to match that against our potential overall revenue exposure if travelers book away from us. And no one holds them accountable for their one-way accounting. It’s a scandal.”

For “baggage fees” read “signature debit” and I suspect that we’re seeing exactly the same thing with the commercial banks. No good can come of this, over the medium term. Which only goes to prove that bankers are no better at building long-term value than they ever were.

3 comments so far | RSS Comments RSS

In the U.S.

I think there is more to signature debit transactions than just them wanting a higher interchange fee. It was started so people could use their checking account at places that take Mastercard & Visa instead of writing a check. A lot merchants that takes Mastercard & Visa don’t have terminal that take pin based debit cards. A few banks charge for pin debit transaction and even a few merchants charge for a pin transaction. Fraud can still happen with pin. Look what happen with Aldi’s they only take pin based debit cards. The U.S. will get chip & pin someday not right away. The U.S. would had to revamp are debit card & credit card system works so consumers can choose how they want their debit cards ran through the credit card network or the star/nyce atm network. On the credit card side, make sure the pin transaction count as purchase not a cash advance. It has happened in the U.K. that a U.S. credit card was used at merchant using a pin & they were charged a cash advance fee. This is according to a post I read.

For clarifications
Debit card with a Mastercard or Visa can be used as a signature or pin transaction at merchants & atm. For pin transition merchant must have point of sale terminal to accept them.

Posted by gpatrick850 | Report as abusive

“All of this is prima facie evidence, of course, that the interchange fees for signature debit are far too high…To make up for all the extra fraud, of course.”

Felix is assuming that signature debit interchange fees are around the same total amount as fraud losses from signature based debits, or perhaps that’s what the banks say. However, as Dean Baker would point out, that is what the banks SAY.

“Signature debit revenue is a wash against fraud losses from the same, so why do they continue?” – is this true? What about the likely possibility that signature debit interchange fees are a net profit to the banks, even after taking into account signature debit fraud losses?

In fact, a Fed study from 2001-2003 indicates that signature debit fraud costs an average of 0.16 cents more per $40 transaction than PIN debits, compared to 57 and 34 cents in interchange revenue per $40 transaction, respectively. This would indicate that fraud losses have very little to do with interchange fees, and thus there is every reason for debit card issuers to push signature-based debits – 67% more revenue against 20% more fraud losses. (http://www.chicagofed.org/digital_asset s/publications/chicago_fed_letter/2005/c fldecember2005_221.pdf)

I’d love to see the results from this Fed survey: http://www.federalreserve.gov/newsevents  /files/merchant_acquirer_survey_2010092 0.pdf

Posted by SteveHamlin | Report as abusive

While signature fraud might occur more frequently than PIN fraud it is harder to prove PIN fraud than signature. A person can clearly prove they did not sign for something via a receipt than they can show it wasn’t them who entered a PIN without a visual comformation (i.e. a security camera).

Posted by iflydaplanes | Report as abusive

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