PIN vs Signature Debit Cards: Similarities, Differences, and Fees
Many small businesses don’t realize that although PIN and signature debit transactions may seem similar, they are actually quite different. In fact, a customer using the same debit card at a retail outlet—for the same amount—may translate to different transaction fees for the merchant, depending on the verification method they choose.
As such, merchants may end up choosing a more expensive payment method if they aren’t aware of the various debit card processing fees. In 2021, the average debit card interchange fee was 0.65% of the transaction amount or $0.23 per transaction. Typically, the card company, the type of debit card used, the size of the card-issuing bank, etc. determine the costs of debit card processing.
In this article, we’ll compare the similarities, differences, and fees of PIN and signature debit cards so you can figure out how to lower your debit card processing costs.
Let’s get started.
What Is a Signature Debit Card Transaction?
A signature debit transaction refers to a debit transaction that’s run as credit. At checkout, when a cardholder pays by debit card but chooses “credit” at the point of sale (POS) and signs a sales receipt (physically or electronically) for verification, this is known as a signature debit transaction.
In this case, the transaction is routed via the card network’s interchange (e.g., Mastercard, Visa, Discover, American Express, etc.), much like a credit card. The merchant will, therefore, have to pay the interchange rate that will apply depending on the card brand used.
It is worth noting, however, that the debit card will still be linked to the cardholder’s bank account and not to a line of credit (as is the case with credit cards). The funds will be deducted from the cardholder’s checking account—usually within a day from the date of processing. The merchant will be submitting the transaction, at the end of the day, along with other card transactions, and will receive the funds after settlement.
What Is a PIN Debit Card Transaction?
In a PIN debit card transaction, a cardholder chooses “debit” at the POS terminal and enters a personal identification number (PIN) for verification. The transaction is routed via a PIN network (e.g., Interlink, Pulse, Maestro, Star, etc.) used by your credit card processor, which determines the transaction fees.
Since these transactions are not routed via credit card networks, their interchange rates don’t apply here. The debit network authorizes the transaction and funds are immediately deducted from the cardholder’s checking account (linked to the debit card). The merchant receives the funds in a few days.
PIN vs Signature Debit Cards: Similarities and Differences
Both PIN and signature debit card transactions are used to transfer funds from one bank account to another. But that’s as far as their similarities go. There are, however, quite a few notable differences between the two:
- Verification. As mentioned earlier, signature debit card transactions require the cardholder to sign a sales receipt, while PIN debit card transactions require them to enter a PIN number to verify their identity.
- Authorization. PIN debit transactions require electronic authorization i.e., balance checks are performed to ensure the account is sufficiently funded to cover the transaction. That’s why PIN transactions are sometimes called online transactions. In contrast, signature debit transactions (also called offline transactions) don’t involve balance checks. If a cardholder’s account is overdrawn, the merchant won’t receive the funds.
- Speed. While funds are debited from a cardholder’s checking account in the case of both PIN and signature transactions, the settlement generally happens more quickly for PIN debit card transactions. This also reduces the occurrence of chargebacks to an extent.
- Security. PIN transactions are generally more secure than signature debit card transactions. Only in the event that a PIN gets stolen, are you at risk. However, in the case of signature-based transactions, retailers often waive the signature requirement for smaller transaction values—typically under $25—in keeping with industry standards. Plus, signature debit transactions are widely used for riskier transactions like mail orders, over-the-phone, and eCommerce payments (without actually signing anything).
PIN vs Signature Debit Cards: Which Is Cheaper?
To understand which payment method might be cheaper for merchants, we’ll need to first take a look at the fees involved in each type of transaction.
Pin Debit Card Transaction Fees
As mentioned earlier, PIN transactions are routed through debit networks like Maestro or Interlink, so merchants will have to pay PIN debit network fees. These typically have a lower percentage fee component and a higher fixed fee component compared to interchange fees. Thus, PIN transactions are likely to cost less to process bigger amounts, and cost more to process smaller amounts.
It’s worth noting, however, that transaction fees are likely to vary depending on the PIN network that processes a purchase—something that merchants have no control over. So, unless your credit card processor imposes it, you are unlikely to encounter a flat fee for every PIN transaction.
Signature Debit Card Transaction Fees
Signature-based debit transactions, in contrast, mimic many aspects of credit card processing. Since they are routed via credit card networks like Visa or Mastercard, merchants will be charged interchange fees in addition to the processor’s markup. Interchange fees typically have a higher percentage fee component and a lower fixed fee component, so signature debit transactions generally cost less to process smaller amounts.
Which Payment Method Is Cheaper?
Unfortunately, there isn’t a clear winner here. In general, PIN debits tend to be cheaper for merchants whose average ticket sizes are higher, while signature debits tend to be cheaper for merchants whose average ticket sizes are lower. Let’s explain that with an example.
Suppose your processor’s markup is 0.15% + $0.06.
Visa’s interchange fees for unregulated CPS/retail purchases are 0.80% + $0.15.
To calculate the cost of processing a Visa signature debit card, we must add Visa’s debit interchange fees to the processor’s markup. This comes to 0.95% + $0.21.
Now, when it comes to PIN debits, the processor’s markup is generally a fixed fee per transaction, say $0.12.
Interlink’s standard base rates are 0.80% + $0.15.
To calculate the cost of processing an Interlink PIN debit transaction, we must add the two, which come to 0.80% + $0.27.
As is clear from the example above, merchants with lower transaction amounts may end up paying more using PIN debit transactions, while those with higher ticket sizes are likely to pay more for signature transactions.
There are a few other things that merchants should consider when deciding to accept debit cards.
The Durbin Amendment cap
The size of the debit card-issuing bank may have an impact on the processing costs. Per the Durbin Amendment of 2010, banks having more than $10 billion in assets will have to cap their transaction fees at 0.05% + $0.21. On the other hand, those with less than $10 billion in assets need not do so.
As a consequence of the Durbin Amendment, card brands have had to create two sets of fees: one for unregulated banks, and one for regulated banks. Note that in the examples above (used to illustrate the cheaper payment method between PIN and signature), we have assumed unregulated pricing.
The Durbin Amendment cap presents a challenge for business owners with small average ticket sizes, typically under $10. Considering that many consumers prefer to use debit cards to pay for smaller transactions, the $0.21 transaction fee is a substantial cost for merchants.
The cost is certainly an important consideration, but it’s not the only one. When it comes to deciding whether to accept debit cards at their business, many merchants are tempted by the likelihood of cutting down on chargebacks as well. There are a couple of reasons for this.
- Initiating a chargeback on a debit card is inherently more complex and cumbersome than filing a chargeback on a credit card.
- If a cardholder has used a PIN debit transaction, banks typically won’t rule in favor of the customer in case of a dispute. This can actually help to minimize instances of friendly fraud.
As you may have realized by now, PIN and signature debit card transactions both have their uses. Some merchants may find signature-based transactions to be more cost-effective while others may find PIN transactions more suitable.
Ultimately, the cost of processing debit cards will depend on the transaction amount, the card network, the PIN network, and the processor’s markup. It’s best to choose a single option—PIN or signature—based on your average ticket size and stick with it. Toggling between the two may be confusing for your employees and may be counter-intuitive.
By far, the best way to lower your debit card processing costs is to choose a merchant services provider like Payment Depot that offers subscription-based pricing with absolutely no markups or hidden fees. No matter how much you process, you’ll pay a monthly subscription fee, which means the more you process, the more you save.