Study: PIN Debit Cheaper, Less Fraud-Prone Than Signature

PIN debit transactions are cheaper than debit card transactions secured by signature, incur lower fraud losses, and generate slightly higher average tickets, according to a survey of issuing banks. Taking into account processing costs as well as the cost of back-office fraud-management, chargebacks, settlement, customer service, and accounting functions, the banks said a signature-debit transaction costs them 22 cents on average, compared to 11.6 cents for a PIN-based payment. Such costs, they said, make up 90% of the total cost they incur with both PIN and signature products. Marketing costs, which according to the survey apply exclusively to signature-debit portfolios, widen the cost gap further, says First Data Corp., which sponsored the survey. First Data owns the Star electronic funds transfer network, which links 1.7 million point-of-sale and ATM locations for PIN debit acceptance. The Denver-based processor also handles signature-debit transactions. The study found that average net fraud losses on signature debit cards are four times higher than on PIN-based cards. This multiple is considerably smaller than the one found in a survey conducted by Dove Consulting and released last month by Pulse EFT Association, a rival network to Star, which found signature fraud was 15 times greater. (Digital Transactions News, Oct. 12). In a somewhat surprising result, the survey reveals the average ticket on PIN-debit cards is almost $2 higher than that for signature debit, $40.32 vs. $38.34. PIN-debit transactions usually settle on the same day, whereas signature-debit card transactions have settlement times closer to those of checks. Also, rewards and other incentive programs some banks attach to signature debit cards could be expected to encourage higher spending than on PIN debit cards. But First Data officials say the cash-back feature on PIN debit cards results in a higher ticket for the product. As a result of the study, banks may find that their signature-debit portfolios, which earn far higher interchange income than PIN-debit, may not be quite as profitable as they thought, First Data says. “From a revenue vs. cost perspective, the net benefit of signature and PIN may be considerably closer than the issuing financial institution may have originally anticipated,” said Debra Janssen, president of First Data Debit Services, in a statement. The “2005 POS Debit Issuer Cost Study,” which was conducted by First Annapolis Consulting, surveyed 11 banks falling into various portfolio-size categories, from fewer than 100,000 active cards and fewer than 20 million annual transactions up to more than 500,000 active cards and 100 million transactions yearly.