Way back when debit cards first came on the scene, they were primarily used at the issuing entities ATM to access cash during off hours. Because they were unbranded, they had very few applications for use other than a handy way to get at your money. Now, as you might already know, banks, like other businesses, are in the business of making money so let's take a look at what happened to debit cards.
I won't get into all the complicated processes that took place but let me just give you the overall picture of what took place. Along came Visa and MasterCard knocking on the doors of banks and said "hey, we've got a great idea for you to increase your revenue stream". "Really?", said Mr banker "how can we do that"? The card brands told them that simply all they had to do was add either a Visa or MasterCard logo to their cards therefore making them usable anywhere Visa or MasterCard credit cards are accepted. Customers would love it because instead of writing checks for some of their purchases, they could just swipe their card and the end result would be the same (i.e. money coming directly out of their corresponding bank account). And, for the bank (issuing entity) they would then be able to start earning the Interchange Rate on all these transactions. Just to give you an example of what that means to the banks, Visa Interchange Rate on a generic type Visa logo type card right now is 1.54% + $.10. So, in other words, on a $100 transaction, the issuing bank would make $1.64. That really starts to add up quickly when you consider the sheer volume of transactions that take place daily.
Well, the banks loved this but here's the other issue to address. Take a look at the back of your debit card. You will find debit network names there like NYCE, Pulse, Star, Interlink and so on. Do you see them? Well, at the point of sale, if the merchant had you enter your pin number into the pinpad, the transaction gets routed through the appropriate and available network and the issuing bank makes NOTHING. The processing fees then go directly to the network that was utilized. Now, to the customer, it really makes no difference whether they use their pin number or just have the merchant swipe it like a credit card. The end result of the transaction for the customer is the same... the money comes out of their account.
Now, the title of this article is "Unplug your PinPad Today and Save Cash" so let's now look at what I mean by that from the merchants perspective and relative costs. Back in the days before the Durbin Amendment (see other articles I have written on the topic) it was imperative for the merchant to try, as often as possible, to get customers to input their pin number. The simple reason is that it would save the merchant quite a bit in fees. So, let's take a look at some numbers to demonstrate what I mean. As indicated above, the current Visa Interchange Rate for a CPS Retail Visa card is 1.54% + $.10. So, for ease of calculations, let's look at the results of a $100 transaction. Let's say that the merchant is set up on a Tiered pricing model and is being charged 1.68% + $.25.. If the card is swiped as a credit card, the cost to the merchant is $1.93. If, on the otherhand, the pin number was entered and the Star network was used, the current interchange rate is.75% + $.15 (however, it also provides for a Cap of $.65). And, assuming that the processing provider is charging $.25 on pinned debit transactions, this same $100 transaction will cost the merchant $.90... that's a whole $1.03 in savings. So, as you can see, it really benefits the merchant to do all they can do to get pin numbers.
Okay, now let's fast forward to today's environment and how the picture has changed since the legislation mentioned above has been implemented. Swiped debit cards from "regulated" issuers (which are the majority of them) have a maximum rate of.05% + $.21 which is quite a change from the past. But, keep in mind, the "pinned" debit networks still exist so when a debit card utilizes those networks, the merchant will still be charged accordingly. Now let me address the situation from the merchants cost perspective The only reason for you, the merchant, to continue using the pinpad is if you are on some form of antiquated "Tiered" pricing model. Because, the pinned debit transaction will still be your least costly pricing. The processor will still be making their $.25 per or whatever they are charging you. But now, however, when you swipe the debit card like a credit card without the pin number, the processor is making out like a bandit because their cost is.05% + $.21. I've even heard of some processors encouraging their Tiered pricing merchants to unplug their pinpads to make for "speedier checkouts"... YAH RIGHT!!!
So, what I'm saying here, in an effort to wrap up this article is keep using your pinpad if you're on a Tiered structure (until you get switched to someone that cares more for you and puts you into the more transparent form of Interchange Plus pricing). If, on the otherhand, you are already priced on Interchange or Cost Plus pricing, unplug the pinpad, TOSS IT and just keep swiping everything and enjoy the savings.
I hope you have found this article enlightening, helpful and profitable. If so, I would greatly appreciate you passing it along to other business owners that you may know.
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