Debit-card debate: Use a PIN or sign? Either way it will cost you

Some of us do it every day: We swipe our debit card then either sign our name or enter a PIN number -- and (voila!) the purchase is done. But little do consumers know that when they sign for a purchase they are costing retailers significantly more than if they enter their PIN -- a fact that could end up costing consumers in the end.

According to a recent New York Times report, banks and retailers are enmeshed in a tug of war regarding debit-based fees. It turns out that when a customer signs for a purchase using their debit card, the retailer pays the bank almost twice as much in "interchange fees" than they would if they had entered a PIN instead. Visa, in particular, has built a dominant position in the debit-card market by steadily increasing the rates it charges merchants when a customer makes a purchase with their debit card. Those fees, which the Times says averages 1% to 3% of each transaction, are then passed along to the bank that issues the card. The fees can really add up: interchange fees account for $45 billion in revenue, the newspaper says.
If the retailer is the one stuck with the tab, why should consumers care? Because this behind-the-scenes wrangling can eventually impact their bottom-line, too. Retail-industry trade groups say these fees drive up prices for all customers, not just those paying with plastic.

"Consumers don't even know they're being subtly manipulated," says Russ Haven, legislative counsel for consumer advocacy group NYPIRG. "Every time you engage in a transaction, there are winners and losers."

In this case, the winners are undoubtedly the banks. No matter how you complete a debit transaction, the banks get paid. But they get paid more if you sign rather than enter your PIN number.

Guess what the banks want you to do? Well if it's not clear, take a look at the numerous bank rewards programs out there that are being offered to consumers who sign for their debit purchases.

So does this mean you should always choose to enter your PIN because it costs the store less? Not so fast. Banks have come up with a stick to match the carrot of debit-signature reward programs: Many of them charge you for the privilege of paying with a PIN-based transaction.

According to recent research conducted by NYPIRG, between one-quarter and one-third of banks in New York state charge customers a fee of between 35 cents and $1 per PIN-based debit transactions. Russ Haven says this figure most likely holds true for banks elsewhere in the country, as well.

Even though the fees being charged may not seem to amount to much, they more than make up for the money banks would have made if you signed for your purchase instead of entering your PIN. According to the Times, these fees are fractions of a penny for every dollar you spend. If you pay an entire dollar for the privilege of entering your PIN number to buy an inexpensive item like a cup of coffee, not only are you out a buck, but the bank just hit the jackpot.

To find out whether your bank charges you for PIN-based debit purchase, look at your statement or ask to see the bank's schedule of fees. If they're on the up and up and don't charge a fee, enter that PIN all you like. If they do charge, there's no reason to enrich them further by making PIN-based transactions.

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