By Scott Henry
A PIN pad for every countertop. Those words might be as effective an economic stimulus as anything else we have tried over the past year or so. Just about everyone - merchants, payments industry businesses and individual consumers - have felt pinched by the impact of the credit crunch.
For consumers, sky-high interest rates are prompting more and more cardholders to dump their credit cards in the drawer and rely increasingly on debit cards instead.
For example, the National Retail Federation released a survey in November 2009 that indicated 45 percent of consumers planned to use debit or check cards to pay for gifts this past holiday season. Those planning to use credit cards for similar purchases fell to 28 percent.
In May 2009, Visa Inc. reported that in the three months ending Dec. 31, 2008, spending volume on debit cards exceeded that of credit cards for the first time. By the end of June 2009, debit accounted for more than 70 percent of all Visa transactions.
Not only is debit card use increasing at the expense of credit cards, but consumers are more often opting for PIN debit. First Data Corp.'s SpendTrend report for November 2009 showed that PIN debit use was up 12.8 percent compared to the same period in 2008, while credit and signature debit were up just 5.8 percent.
In the 2008 Study of Consumer Payment Preferences conducted by BAI Research and Hitachi Consulting, it was reported that PIN debit is "preferred by 45 percent of consumers, while 35 percent prefer signature (20 percent have no preference).
Those preferring PIN debit consider it more secure, faster and easier to use than signature. Consumers preferring signature debit do so for the security, lack of fees, their inability to remember a PIN and, in some cases, rewards programs."
Is it any wonder that consumers are often steered to signature debit when they check out at the grocery store? As the Boston Globe reported in late 2007, banks "prefer the credit option for debit cards because they make more money in fees.
For example, on a $200 transaction, a bank would make $1.99 if the customer chooses 'credit' and signs his or her name; according to one estimate that would be more than three times the 60 cents they make from customers who choose 'debit' and enter a PIN."
Merchants who are missing out on the trend toward PIN debit are paying for it in additional interchange fees. According to a Federal Reserve report on interchange published in May 2009, interchange fees for PIN debit "typically average 35 cents to 50 cents per transaction; interchange fees for a typical signature debit transaction are about 1.2 percent of the transaction value; and interchange fees for a typical credit card transaction for Visa and MasterCard are in the range of 1.5 to 2 percent of the transaction value."
It may seem counterintuitive to tell merchants how they can lower their transaction fees, but remember, anything that helps merchants achieve greater profitability will increase loyalty and retention.
There's no doubt consumers today are more aware of card fraud issues than they were three or four years ago. Millions of cards have been replaced due to breaches of retailer and processor data centers, as well as payment networks.
PIN debit is inherently more secure than signature debit, which requires just a signature that few store clerks attempt to verify. According to the 2009 Debit Issuer Study, commissioned by Discover Financial Service's Pulse network, POS losses for PIN debit were just 15 cents per card issued in 2008, compared to $1.81 for signature debit.
Nevertheless, when you're selling PIN debit you need to be ready to answer questions about skimming incidents in which criminals have been able to surreptitiously obtain card data and associated PINs.
These incidents have been attributed to the compromise of pre-Visa PIN entry device (PED)-approved systems. Amazingly, there are still PIN pads in use that predate any security certification. As of July 1, 2010, these pre-Visa PED systems must be removed from service.
Today's Payment Card Industry (PCI) PED systems feature certified tamper prevention and tamper detection schemes designed to ensure that efforts to compromise systems will be immediately visible and unsuccessful. Merchants can use their new systems as a compelling marketing point to show customers that security is a priority.
There is no merchant scenario that can't accommodate a PIN debit solution in this day and age. PIN debit can easily be added by selling merchants PCI PED devices containing an internal PIN pad or by adding a secure PIN pad to an existing terminal. With security requirements becoming ever more stringent, many merchants must upgrade their terminals anyway, so why not provide them with solutions that offer more flexibility and payment options?
Among those options are:
ISOs and merchant level salespeople able to offer merchants a variety of PIN-entry device options will ensure maximum adaptability and security. When you combine the cost savings associated with PIN debit with increasing card volume, given current consumer trends and the higher security standards for PIN debit transactions, you've got a winning formula for sales now and in the future.
Scott Henry is Director, North America Product Marketing, for VeriFone. He can be contacted at firstname.lastname@example.org.
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