Beefed Up PIN-Steering

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25 March 2010
Some recent shopping trips demonstrated to me that the payment card interchange battle between merchants and card issuers/payment brands is taking a more aggressive turn. This intensified battle is not limited to the halls of Congress, it is also taking place on the front lines, in retail stores. As many of you already know, merchants prefer consumers to use PIN-based transactions, due to their relatively low acceptance fees. For this reason, many merchants have begun to undertake "PIN-steering" -- the use of POS devices to encourage the use of PIN debit, or at least make it more of an effort to use signature debit/credit. A common example is the POS device asking you to "Please enter your PIN" immediately upon swiping your MasterCard- or Visa-branded debit card. Implemented correctly, this PIN-steering can be quite effective. My recent experiences provided some interesting examples. The first was at Whole Foods, where I tried using my contactless Visa debit card, hoping to speed up check-out (I was late for a party). I tapped the card on the contactless reader just above the POS device, and the transaction was interupted by the device asking me to enter my PIN. Yikes, this utterly destroyed the whole point of using a contactless card. This is bad news for Visa, but not as bad as when Best Buy took the more draconian PIN-steering measure of ripping out its contactless terminals last January. The other example was perhaps more intriguing. While in the self-check out line at IKEA, I swiped my airline rewards credit card. Since I used a credit card, there was no POS device prompt asking me to enter my PIN. However, a message did pop up, letting me know that if I used a debit card instead, I would receive a 1% discount. Wow, I really had to think about that one... I ended up using my credit card anyway, as I was too frazzled to do the math in my head comparing the 1% discount vs. the value of the airline points. According to the Nilson Report, the weighted average acceptance fee is 2.06% for a credit card, 0.74% for a PIN debit card -- a 1% discount is more than offset by lower interchange. This math allows IKEA to implement the best PIN-steering measure of all -- money in consumers' pockets.

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