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VISA DEBIT: SHOULD YOU SIGN OR NOT
Posted by: Darrell Castle
January 08, 2010
Topic: Bankruptcy
The January 5, 2010 edition of the New York Times, in an article entitled "How Visa, Using Card Fees, Dominates a Market," covered a story that is very familiar to anyone who uses a debit card instead of checks or a credit card. When you make your purchase, the merchant asks whether you want to put in your PIN code or sign your name and sometimes he simply asks,debit or credit. It seems like a pointless decision for most people and some will say "I don't care, whatever is easiest for you" or "it doesn't matter to me." However, behind the scenes billions of dollars are at stake.
When a customer signs a debit card at a retailer, the merchant pays your debit card bank on the average of 75 cents for every $100 you spent, which is more than twice as much as when you punch in your PIN. The difference nationwide is so huge that Costco will not allow customers to sign debit cards at the checkout lines and Wal-mart and Home Depot try to steer customers to use their PIN.
The competition between card companies like Visa and MasterCard usually centers around how many banks they can get to issue their cards. These card companies then set the fees that merchants must pay to the cardholder's bank. Higher fees, of course, mean higher profits for the banks which means higher prices across the board because merchants pass the bank fees on to customers. Since it is to the bank's advantage for the card companies to charge more to the merchant, the charges keep going higher because of competition between Visa and MasterCard. The competition is good for banks but bad for merchants and their customers. Merchants say that they cannot refuse higher fees because lost card rights would kill sales.
Visa no longer provides credit for customers to buy merchandise. The credit is provided by the banks which issue the cards. The banks used to own Visa until it went public in 2008 and now Visa simply acts as an electronic processing center for the transactions between merchants and banks. The fee that goes to Visa averages 5 or 6 cents per transaction. That may seem like a small fee but the National Retail Federation said that the transaction fees cost households an average of $427 per year.
The U.S. Justice Department is currently investigating the rules imposed on merchants and lawsuits have been filed by merchant groups against card companies seeking relief from the fee setting system. Several bills have, of course, been introduced in Congress seeking relief for merchants.
