Despite chip and pin and its promise to secure card transactions, what makes the PEN still mightier than the PIN? The answer has something to do with interchange fees and security (zero liability for cardholders).
Banks earn more when their cardholders use their cards with the PEN (signature) or when their cardholders use their debit cards as credit cards (by hitting the credit button in a POS).
Card schemes promise zero liability to cardholders except for cards issued outside of the U.S. or if a PIN is used as the cardholder verification method for the unauthorized transaction(s). This then makes the PEN mightier than the PIN. Are you now sufficiently
confused? Well, I hope confused enough to start a healthy discussion thread...
You are absolutely right; issuers earn more for signature credit & debit transactions than PIN transactions. I don't think consumers understand the differences in liability between the two; they simply want to make a purchase as quickly as possible. Merchants,
on the other hand, particularly smaller merchants, don't understand the advantages of accepting PIN debit transactions. Processors have been known to discourage the acceptance of PIN debit transactions, offering more attractive pricing for signature debit
& credit transactions in the hopes that the merchant won't realize what they are missing. Merchants have even been told that PIN transactions will slow the checkout process. There's a reason, however, that Wal-Mart & other large merchants have modified their
POS devices to prompt for a PIN on debit transactions; they know it's less expensive and that knowledge will eventually spread.
The current financial meltdown, however, combined with impending regulation for credit card issuers in the US, may expedite that process. Consumers are spending less with credit and more with debit as their fears about economic instability increase; they
are even starting to save money again. It's a good thing, too, because issuers will be tightening credit standards if the credit card reform act passes. Fewer consumers will have access to easy credit, and will be forced to rely more heavily on debit cards
Thanks, Karhryn for your comment. However, consumer protection agencies also promote the usage of the PEN, rather than the PIN because of the security aspect. Specially for debit cards since money that's used is the cardholder's money and not the bank's.
There is an opportunity for banks to be more innovative in offering security to debit cards regardless of whether they are pin or pen authenticated. The old Issuer mentality is to innovate only in the realm of giving more rewards to cardholders since almost
all consumer satisfaction studies state that rewards is the primary basis that drives consumer satisfaction. This is entirely true for credit cards. As is evidenced by American Express being ranked number 1, consumers do not mind paying hefty annual fees as
long as they perceive earning something while spending. These consumer satisfaction studies do not really cover debit cards, which are, in my opinion, tied-in with customer satisfaction relating to Bank services (not cards).
No. 1 ranked American Express also is the perfect proof that lower interchange fees don't mean much to consumers. So, what strikes me about the interchange fees is that VISA and Mastercard have priced their interchange fees too low for pin-based debit cards.
This is partly due to the online authentication delivered with pin-based cards. If card schemes are truly confident with the chip and pin security that they deployed, then why not give cardholders the zero liability for pin-authenticated card transactions?
Isn't this confusing?
Debit card usage has increased year after year. Students' card spending is mostly debit card spending. With the economic crisis, specially noting what caused the economic crisis, debit card spending and the usage of debit cards will become more and more
important. It would not surprise me if card issuers will be mandated to provide more security to debit cards. There again is an opportunity for card issuers. They can provide this security to debit cards now and avoid being perceived as part of the problem.
I've read it all, and my head hurts!
© Finextra Research 2014