Signature Debit vs. PIN Debit: Which is cheaper?

Debit cards aren’t going anywhere.

Mobile payments, virtual currencies, and real-time transactions may be at the cutting edge of payment technology, but they still can’t hold a candle to the popularity of the classic debit card. According to a 2013 Federal Reserve report, debit cards accounted for 38% of all non-cash transactions in 2012 (compared to 21% for credit cards), and the number of debit card transactions increased more than that of any other non-cash payment type from 2009 to 2012. Today’s young people in particular aren’t interested in credit cards or cash; they prefer debit cards by a large margin.

What does this mean? It means that as a business owner, you will undoubtedly benefit in the coming years from having an understanding of the way debit card fees work. Sure, the fees taken out of debit transactions are much smaller than those taken out of credit card transactions, but they add up over time. Why pay more than you need to?

There are two basic debit transaction types.

Well, technically, there are three: signature debit, PIN debit, and card-not-present debit. But since you have no control over how the customer verifies a card-not-present debit transaction, we will be focusing exclusively on signature debit and PIN debit. First, let’s define these terms:

• Signature debit transactions occur when a customer swipes a debit card through a credit card terminal and then signs a printed receipt or a digital signature capture device to verify the transaction. These transactions are most often initiated when a customer swipes his or her debit card through a terminal and then chooses to process the card as “credit.”
• PIN debit transactions occur when a customer swipes a debit card through a credit card terminal and then enters a PIN on a keypad in order to verify the transaction. These transactions are commonly initiated when the customer chooses to run the swiped card as “debit.”

The key difference between a signature debit transaction and a PIN debit transaction is the processing network that each one uses. Signature debit transactions are routed through credit card networks like Visa or MasterCard, while PIN debit payments are processed by ATM/banking networks like ACCEL, STAR, NYCE, or SHAZAM. PIN debit payments are often referred to as “online” payments because the networks they use (banking networks) correspond to the type of account attached to the card (a banking account). Predictably, signature debit payments are commonly referred to as “offline” payments.

Signature and PIN debit transactions have interchange fees just like credit cards.

As with credit transactions, the processing network—whether it’s a credit network or an ATM network—charges a basic amount per transaction to process a payment. This baseline cost will vary depending on three factors: the size of the card-issuing bank, your business type, and the method of capture.

In addition to these basic fees, you will also pay your merchant account provider an extra markup per transaction on each debit payment. The amount paid to your provider will vary if you are on tiered pricing, but it will remain fixed and predictable if you are on interchange-plus pricing. For this reason (and many others), you are encouraged to negotiate for interchange-plus pricing whenever possible.

So, how much are the baseline interchange fees for debit payments? You can see them in the linked tables below:

Signature Debit Interchange Fees (documents via Visa and MasterCard)

PIN Debit Interchange Fees (document via Wells Fargo)

Simple, right? No? Okay, let’s go over these tables in greater detail.

The following was taken from the first link, which contains Visa’s table of interchange fees for check card (debit) transactions. It shows the interchange rate for a sample signature debit transaction:

The left column titled “Fee Program” refers to a merchant’s business type as assigned by a merchant account provider. There are many different fee programs for different merchant types; for example, there are programs for “CPS/Restaurant, Debit” and “CPS/Supermarket, Debit.” In this case, “CPS/Retail, Debit” is a classification reserved for a general retailer. This program will apply to a very large number of small businesses.

The middle column shows Visa’s interchange rate for an exempt Visa Check Card processed by a CPS/Retail, Debit-classified merchant. An “exempt” card is any card issued by a bank that holds less than $10 billion in assets—in other words, a regional bank or credit union. So, in this example, if your customer swipes a Visa debit card that was issued by a bank that holds less than $10 billion in assets, then the applicable interchange rate for that swipe will be 0.80% of the transaction amount plus an additional $0.15.

The third column lists Visa’s rate for regulated check cards. A “regulated” card is any card issued by a bank with more than $10 billion in assets. This would include most large, recognizable banks like JPMorgan Chase, Wells Fargo, Bank of America, and so forth. These cards are not exempt, meaning that a “regulated” rate will apply to them. In accordance with federal law, this rate is fixed at 0.05% plus $0.21 for all providers. This means that Visa, MasterCard, and the ATM/banking networks all must honor this regulated rate when accepting cards issued by non-exempt banks.

So, according to this sample rate, a CPS/Retail-classified merchant who accepts a swiped Visa debit payment from a customer would pay either 0.80% plus $0.15 or 0.05% plus $0.21 in interchange fees for that transaction, depending on the size of the customer’s card-issuing bank.

The same factors apply to a merchant who accepts a MasterCard payment:

In this case, a merchant operating under MasterCard’s “Merit III Tier 1” fee program will pay an interchange fee of 0.70% plus $0.15 for an exempt debit transaction. As noted above, a non-exempt transaction (not shown in this table) would receive a rate of 0.05% plus $0.21.

How does this compare to PIN debit? Let’s look at a sample from the PIN debit interchange chart:

As you can see, PIN debit interchange costs are calculated in a similar fashion to signature debit interchange costs. The merchant’s assigned category—in this case, a small-ticket retailer that primarily processes transactions under $15—is on the far left. This merchant’s rate for an exempt debit transaction is 1.00% plus $0.04 per transaction, while the regulated rate of 0.05% plus $0.21 is identical to those charged by signature debit networks. It’s worth noting, however, that PIN debit transactions also come with “switch fees” that range from $0.03 to $0.08 depending on the PIN network and merchant category.

Okay, so how do you save money on debit payments?

As you may have already realized, the most cost-effective debit payment option for your business will vary based on a wide variety of factors. There’s no best overall solution for all merchants. However, there are a few basic steps you can take to achieve the lowest swipe rates available to you:

1. Insist on interchange-plus pricing through your merchant account provider.

Many merchant account providers will claim that they can save you money with a flat low rate for all of your debit transactions. In some cases, they may be right. But if you want to get the most competitive price on debit swipes, you need to have a flat, transparent markup over interchange for each transaction rather than a blanket rate for all card swipes.

This is especially important when it comes to regulated debit transactions. For instance, if a provider quotes you a flat rate for all debit swipes of 0.5%, that might sound like a fair deal. After all, you’ll be saving on most of your exempt transactions, which can often exceed 1% in basic interchange fees. However, the processor’s 0.5% rate would potentially be a huge markup over regulated debit cards, all of which process at 0.05% plus $0.21. Under this model, you’ll almost never benefit from accepting regulated debit cards, which are much more commonly used by consumers than exempt debit cards.

2. Know your merchant category code.

Or, more simply, understand which row in the far-left column of each interchange chart applies to your business. This is the only way to know which rates on the interchange chart will apply to your debit transactions. Your provider should be able to give you this information.

3. Compare interchange rates for your merchant category code across all networks.

This is where interchange-plus pricing comes into play. If you have negotiated for a flat markup above interchange on each debit transaction, then you will save money by processing debit transactions at the lowest possible interchange rates.

For both PIN and signature debit, the interchange rate for a regulated debit transaction is fixed at 0.05% plus $0.21. However, PIN debit transactions also add a switch fee to each transaction, meaning that PIN will always have a slightly higher base cost on regulated debit transactions. As a rule, then, you will save money on regulated debit transactions by processing them as signature debit rather than PIN debit.

Exempt cards, on the other hand, have varying interchange rates. You will need to compare between signature and PIN networks to determine which has the lowest interchange rate for exempt cards.

4. Establish hard-and-fast rules for accepting debit cards at your business.

Once you have determined which networks offer the lowest interchange rates for your business type, the final step is to ensure that you and your employees understand how to process cards at the lowest rates. When swiping debit cards, it might be helpful to think of each debit transaction as either a “large bank” card or a “small bank” card. If a customer hands you a card that has clearly been issued by a large, regulated bank—again, any bank with over $10 billion in assets—then you should process it as a signature debit transaction. If a customer hands you a card from a small, exempt bank, then you should know beforehand which network will give your business type the lowest rate for an exempt card and process accordingly.

In many cases, it may be impractical to expect your employees to correctly distinguish between exempt cards and regulated cards. If this applies to you, then you should probably just make an educated guess about which card types are most frequently used by your customers and operate under that assumption. For instance, if most of your customers seem to use small, local bank cards, then you should encourage whichever debit method has the lowest exempt rates.

Debit rates are incredibly confusing, and the difference between PIN and signature debit often comes down to a few pennies per transaction. But by doing a little homework and following some best practices, you can ensure that those pennies remain in your checking account.

Do you have any questions about signature debit vs. PIN debit? Let us know in the comment section below: