Pay with a Signature at the Point-of-Sale

Adam Rust

Pay attention if you have a card that charges a fee for “PIN” transactions: savvy consumers can easily avoid paying a fee to swipe their prepaid debit card at the point-of-sale.

The point-of-sale signature strategy is a bit “under-the-radar.” I doubt that many of the financial advice websites will offer this tip. They will not because it only matters for consumers who use one of several prepaid debit cards that are currently available. Nonetheless, it is not something that takes much time.

The plan works because of how banks and payment processors run transactions at retail stores.

Point-of-sale payment terminals instruct cardholders to enter “debit” or “credit” when they swipe their card. Many people do not realize that the machine cannot detect the nature of your card. With a few exceptions (the newer terminals), most devices rely on the information you give to them to determine how the transaction goes through the payment rails.  

If you have a prepaid debit card that charges you for a PIN transaction, then enter “credit.” Sometimes you will need to sign with a signature. Other times, if the transaction amount is low enough, the charge will be processed automatically.

You will know if your transaction is being run over the dedicated debit card rails if they ask for a PIN. If you get that far, then ask the cashier to cancel and then start over again. You want to be asked to make a signature.

Some readers may now feel skeptical. You might be asking “Isn’t it all the same? Why would a prepaid debit card account charge for one type of transaction but not for the other?”

It is not the same. It matters to the banks because the card networks (VISA, MC, AMEX, Discover) direct more in the way of fees when you use a signature for your purchase. The charge is known as “interchange.” Retailers pay interchange when you use a card to buy something. In exchange for interchange, they get to use the networks. Accepting credit and debit cards is worthwhile to retailers because they know they can sell more when they offer the ability to pay with a card. It is preferable to accepting a check because a certain percentage of checks bounce.

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Paying at the Point-of-Sale with Signature

Indeed, in today’s economy, any retailer that uses only cash is something of a dinosaur. Everyone expects to be able to use a card when he or she buys something.  

However, the fact that signature earns more for banks than does a PIN means that their interests align with those of consumers. Thus, even if you have a card that charges a fee for a PIN, you can get around that cost without worrying that your bank will flag it.

You are probably not paying by PIN very often in the first place. Have you ever noticed how often you use PIN vs. signature? I bet you do not give it much thought. In fact, unless you are a person with one of those card accounts that levies a PIN fee, you may never have contemplated the question at all.

The statistics bear it out. PIN swipes make up a bit more than one-third of all card network payments. The chances that you will pay by PIN are even lower with small-dollar transactions.

In 2016, the Federal Reserve published a report detailing how often consumers sign versus use a PIN for a transaction. Because of data limitations, they had to be careful to describe PIN debit as a “single-message” network transactions and a signature under the term “double-message.” However, the Fed noted that these descriptions were “mostly” correct. They found that PIN

·         90 percent of all prepaid debit card transactions avoided the fee cap. 

·         The average fee for a card not covered by the fee cap was more than 50 cents, whereas the average fee for capped transactions was only 25 cents.

·         The value of transactions made with prepaid debit cards averaged 36.87 cents.

The Fed created a special rule that capped the amount of interchange fees on prepaid debit cards. However, the Fed did not make small banks subject to the rule. The majority of prepaid card accounts come from small banks, and as a result, a bank receives more than the capped amount. In fact, some of the big banks can also skirt the cap if they design their cards so that it is impossible to have a negative balance.

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