Bankers question Dillons’ requirement of PIN-only debit transactions

Millions of dollars are at stake for banks and retailers whenever a consumer uses their debit card at the register, and a battle over the money is underway.

Every customer who pays with a debit card traditionally has had two choices: They can type in a four-digit personal identification number (PIN) at the register or they can swipe their card and sign their name.

Today, a Wal-Mart customer can use either their PIN or signature as a method of payment at the register, but company spokesman Randy Hargrove said the retailer saves 5 cents on every transaction where a PIN is used instead of a signature.

Wal-Mart wants to take the choice away. In May, Wal-Mart filed a lawsuit against Visa, claiming Visa won’t let it require PIN transactions on all chip-enabled purchases.

The retailer is not seeking damages but rather the ability to require the payment method it prefers. For a company that reported $298.4 billion in U.S. revenue for fiscal year 2016, the difference between PIN and signature transactions can add up fast.

Earlier this year, Dillons also decided to allow only PIN transactions on chip-enabled debit card purchases – exactly what Wal-Mart wants to be able to do.

Kroger, Dillons’ parent company, has said the change was made to comply with the EMV (Europay, MasterCard, Visa) chip card changeover initiated last year in the U.S.

Jane Deterding, owner of the Citizens Bank of Kansas, has questioned the company’s motive.

“Customers should be able to use a debit card as a PIN transaction or as a signature transaction,” Deterding said. “There are various benefits of each, which is why it should be the customer’s choice.”

Who gets the money

Essentially, it costs retailers money when a signature credit transaction is processed by a card-issuer like Visa or MasterCard.

Banks generally make a certain percentage off each credit or debit transaction when one of their cards are used.

Sheila Lowrie, a spokeswoman for Kroger, said the company is looking out for its customers while also being EMV compliant.

“Dillons currently requires PIN transactions on all chip-enabled debit cards because the PIN is the most effective means to ensure the safety of our customers’ personal bank accounts,” Lowrie said.

Like Wal-Mart, Dillons stands to benefit financially with PIN usage.

Lowrie said Dillons saves 2 cents on every hundred dollars from PIN transactions since it began mandating them. For the first quarter of 2016, Kroger reported net earnings of $680 million.

“When you look at credit card companies and banks, they make a substantially higher portion of fees if you swipe your card as a credit card,” Lowrie said. “It’s a percentage based on the total transaction.

“If it’s a debit transaction, banks don’t make any money on that transaction.”

The rates for these transactions change and are based on what are called interchange reimbursement fee rates, a complicated set of exchange rates that are set by the payment network, like Visa or MasterCard, for instance. As an example, according to current Visa interchange rates listed on Intrust Bank’s website, a supermarket could pay 30 cents on a debit transaction.

The amount would change with the type of retailer being patronized, the type of payment card used, the amount of the purchase, and whether it is a debit or credit transaction.

For banks, a credit transaction is generally recognized to be more lucrative, but agreements can vary.

Deterding said that Citizens Bank of Kansas generally makes close to 20 percent less on a PIN transaction compared with a signature transaction.

One Wichita-area banker said his institution makes 1.35 percent when a customer uses the bank’s card for a non-PIN transaction and 0.3 percent on a PIN transaction.

‘Right to choose’

A Visa spokeswoman declined to comment specifically on the Dillons situation, but did offer a statement on the topic of consumer choice.

“Visa cardholders have always had the right to choose whether to sign or enter a PIN for their debit transactions at checkout,” Sandra Chu of Visa said in an e-mail. “Nine out of 10 cardholders feel it should be their choice, not the store’s, whether to sign or use a PIN. …

“While retailers have the right to encourage consumers to use a payment method the retailer prefers, retailers should not be able to take away the consumer’s right to choose what works best for them.”

Hargrove, the Wal-Mart spokesman, went so far as to call signature transactions “fraud-prone,” adding that Visa simply wants to make more money by processing signature transactions.

Retailer Home Depot also filed a lawsuit against Visa and MasterCard, similar to Wal-Mart’s, this month.

“We believe Visa’s position is creating an unacceptable risk to our customers,” Hargrove said. “We think their actions and rules are inconsistent with federal law.”

MasterCard spokeswoman Beth Kitchener said the payment network is an advocate for consumer choice.

“The MasterCard liability hierarchy provides our customers – banks and merchants – with the incentive to adopt the highest levels of security,” Kitchener said in an e-mail. “There is no requirement for the use of signature or PIN. Customers make their own decisions based on their business needs. We support choice.”

Kitchener said MasterCard’s stance is that limiting customers to PIN-only debit card transactions is not illegal, but that “limiting choice is never a good idea.”

The bottom line

With society moving more and more to a non-cash system of payment, who gets their cut and who’s liable in the case of fraud are topics that will surely continue to be discussed and litigated in the financial and retail industries.

Chuck Stones, president of the Kansas Bankers Association, said he fielded a call last month from a Topeka banker who was shocked to learn that a PIN was required for a debit card purchase at Dillons.

“What I’ve been told is that (the PIN requirement) is a violation of the agreement (Dillons) has with Visa,” Stones said. “My understanding, from what bankers have told me, is that Visa is in negotiations with Kroger about what they’re doing.

“I know of a few bankers here in Topeka who are upset about this.”

Neither Kroger nor Visa will say whether it is in negotiations to reach a new agreement on consumer payment method.

Lowrie and Hargrove said the majority of transactions at Dillons and Wal-Mart are PIN-based.

“Since Dillons became compliant with the guidelines from EMV, we have seen a slight reduction in the overall cost to process all transactions,” Lowrie said. “PIN transactions are the best way we can verify the customer is the actual cardholder.

“This step is also a component of being EMV compliant and protects the retailer from assuming financial liability in the case of fraud, per the (EMV) guidelines.”

This story was originally published June 22, 2016 at 5:49 PM with the headline "Bankers question Dillons’ requirement of PIN-only debit transactions."