What is a PIN-Debit Transaction?
How Does a PIN-Debit Transaction Work?
When you pay for goods or services with your debit card, you have an option for the payment to be processed in two different ways: as an offline transaction via a credit card processing network, or as an online transaction via an EFT system, requiring a personal identification number (PIN) to complete the process.
When processed as an online transaction, the exchange of funds is completed using an EFT network, such as Star, Pulse or Interlink, depending on which EFT system your bank is associated with as a member bank. The cost of the transaction typically amounts to an interchange fee of 1% of the total purchase price, which is charged to the vendor/merchant.
Why Does a PIN-Debit Transaction Matter?
$20.5 billion in interchange fees were charged to merchants in 2010. Now they are at the center of debate among lawmakers, banks and merchant unions in the U.S. On one side of the argument are the banks, which claim the interchange fees are necessary to cover the costs of processing transactions and providing fraud protection. On the other side are the merchants and vendors, who claim the rising interchange fees are increasingly cutting into their profits, forcing them to raise the prices of their goods and services.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress, and included in the Act was an amendment to address interchange fee reform (the Durbin Amendment). Under this amendment the Federal Reserve is now authorized to review and reform debit card transaction fees. One such proposal will cap interchange fees at $0.12 per transaction, a 73% reduction from the average charge of $0.44 per transaction. As a consequence, consumers can expect a loss of financial perks like free checking accounts, the end of rewards programs for debit cards and an increase in fees for ATM withdrawals from out-of-network banks.
If interchange fee reform is not passed, the cost of the fees will be borne by the consumer, as merchants continue to increase the prices on their goods and services to make up for profits lost to fees.