Signature-Debit Transaction

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Paul Tracy

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Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

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Updated August 5, 2020

What is a Signature-Debit Transaction?

A signature-debit transaction, also known as an offline transaction, is a payment method that uses a debit card to transfer funds from a checking account to a merchant across a digital credit card network.

How Does a Signature-Debit Transaction Work?

When you pay for goods or services with your debit card, you have the option to process your payment in one of two ways: 1) as a signature-debit transaction via a credit card processing network, or 2) as an online transaction via an electronic funds transfer (EFT) system.

Signature-debit transactions are processed much like credit card transactions. They are sent over one of the major credit card networks -- Visa, MasterCard, Discover, etc -- depending on which credit card network your bank is associated with as a member bank. The cost of the transaction, called an "interchange fee," is typically 2-3% of the total purchase. The interchange fee is charged to the vendor/merchant, not the bank.

Why Does a Signature-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.

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