Today's Feature Story
There's has been a lot of media attention given to the recent NY Times article regarding Visa's push of the less secure signature debit over the more secure PIN Debit. Here's Mick Arran, of OpenSalon's Take on Visa's Take on Signature vs. PIN Debit. Take the time to read it. I love his mix or sarcasm, sardonicism and petulance...but first, allow me to "sarcastically" refresh your memory about why Visa is pushing Signature over PIN. This from a study conducted by Dove Consulting, a division of Hitachi Consulting for PULSE. The study was done in 2005, providing more than ample warning to Visa that they should be protecting the integrity of their brand by protecting consumers and merchants from fraud. Yet, five years later...they are still pushing signature debit over PIN Debit and won't allow genuine PIN Debit on the web...even though they certified our PIN Entry Device for eCommerce use.
One of the most revealing findings was that the added security of using a personal identification number to authorize debit card purchases makes that method of payment approximately 15 times more secure than signature debit transactions, both in terms of losses per transaction and losses per sales volume. Costs associated with PIN debit fraud at the point of sale currently amount to $.001 per transaction, or .29 basis points. By comparison, losses related to signature debit are $.016 per transaction, or 4.21 basis points.Here's the article from OpenSalon:
Well if that doesn't explain why Visa is pushing Signature Debit over PIN Debit, I don't know what possibly could. What's that you say? Visa makes more money off insecure transactions? But wouldn't they still make money off PIN Debit and protect the integrity of their brand? Oh, nobody knows that they are doing this. Well, thanks in large part to the NY Times article, I think that is about to change. "From Now On, Use Your PIN!"
This is for those people who think maybe that all the credit scams of recent years are of recent vintage. Hardly. Credit card scams in particular have been going on as long as credit cards have been in existence. They'd barely broached the idea before the creditors were figuring ways to scam the consumers who used them. Watch carefully now. Which shell is the pea under?
Every day, millions of Americans stand at store checkout counters and make a seemingly random decision: after swiping their debit card, they choose whether to punch in a code, or to sign their name. It is a pointless distinction to most consumers, since the price is the same either way. But behind the scenes, billions of dollars are at stake. When you sign a debit card receipt at a large retailer, the store pays your bank an average of 75 cents for every $100 spent, more than twice as much as when you punch in a four-digit code.
Signature debit cards dominate debit use in this country, accounting for 61 percent of all such transactions, even though PIN debit cards are less expensive and less vulnerable to fraud.
Got that so far? Punch in a PIN, a 30c charge. Sign your name, 75c. multiplied by millions and millions and millions over decades. How, you ask, did they do it - besides hiding from consumers how much extra it was costing them to sign their names? Like this: they bribed the banks who service their cards.
How this came to be is largely a result of a successful if controversial strategy hatched decades ago by Visa, the dominant payment network for credit and debit cards. It is an approach that has benefited Visa and the nation’s banks at the expense of merchants and, some argue, consumers.
Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard set the fees that merchants must pay the cardholder’s bank. And higher fees mean higher profits for banks, even if it means that merchants shift the cost to consumers.
Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.
As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.
How we doing? Still with me? Essentially, VISA bribed banks to push their cards by offering to give up their piece of the action on the higher-paying signature cards. They were so successful that unnecessary and insecure signature cards dominate the market and bring in $billions$ in fees on top of the stratospheric and usurious interest rates they're already charging. (Thank you, South Dakota.) Mafia loansharks used to call this a "vig kickback" - a bonus for big customers to keep them tied to you. Public prosecutors pre-Reagan used to bring charges against companies that did this. They called it "kickbacks" too. Now it's just BAU.
In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.
“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”
And this didn't start under Bush, or even Reagan. This has been going for almost 50 years. And dig: VISA gets paid even though it doesn't do anything.
Visa does not distribute credit or debit cards, nor does it provide credit so consumers can buy flat-screen televisions or a Starbucks latte. Those tasks are left to the banks, which owned Visa until it went public in 2008.
So what do they get paid for?
Instead, Visa provides an electronic network that acts like a tollbooth, processing the transaction between merchants and banks and collecting a fee that averages 5 or 6 cents every time. For the financial year ended in June, Visa handled 40 billion transactions. Banks that issue Visa cards also pay a separate licensing fee, based on payment volume.
They're a middleman, that most glorious, well-paid, useless occupation. They don't even process the transactions. They just route them. And for this they get paid by both sides. What a gig.
“It’s a penny here or there,” said Moshe Katri, an analyst who tracks the payments industry for Cowen and Company. “But when you have a billion transactions or more, it adds up.”
With debit transactions forecast to overtake cash purchases by 2012, the model has investors swooning: Visa’s stock traded at $88.14 on Monday, near a 52-week high, while shares of MasterCard, at $256.84 each, have soared by more than 450 percent since the company went public in 2006.
The company thinks all this just might be a "perspective problem".
“At times we have a perspective problem,” said William M. Sheedy, Visa’s president for the Americas. “Debit has become so mainstream, some of the people who have benefited have lost sight of what their business model was, what their cost structure was.”
We're not sure what specific "people" Mr Sheedy is talking about but we think it might be the merchants who accept the cards and pay all the extra fees consumers haven't got stuck with. Yet.
Visa officials said the costs of debit for merchants had not gone down because the cards now provided greater value than they did five or 10 years ago. The costs must not be too onerous, they say, because merchant acceptance has doubled in the last decade.
That's just the merest tad disingenuous. What with the economy running largely on credit for almost 3 decades now, since Reagan and the Pubs made it possible for corpo's to break unions and flatten ordinary wages below inflation and often below the poverty line and then keep them there for 30 years, merchants really haven't left themselves any choice but to accept credit cards. If all sales had to be cash, there wouldn't be any sales.
However, in the 90's debit cards came along as a convenience for consumers and a safeguard for merchants and banks: debit cards only work if there's cash in the account. Well, VISA didn't miss the chances with those.
“Visa and MasterCard have morphed into a giant cookie jar for banks at the expense of consumers,” said Mitch Goldstone, a plaintiff in the case.
Fees were not an issue when debit cards first gained traction in the 1980s. The small networks that operated automated teller machines, like STAR, Pulse, MAC and NYCE, issued debit cards that required a PIN. MasterCard had its own PIN debit network, called Maestro.
Merchants were not charged a fee for accepting PIN debit cards, and sometimes they even got a small payment because it saved banks the cost of processing a paper check.
That changed after Visa entered the debit market. In the 1990s, Visa promoted a debit card that let consumers access their checking account on the same network that processed its credit cards, which required a signature.
To persuade the banks to issue more of its debit cards, Visa charged merchants for these transactions and passed the money to the issuing banks. By 1999, Visa was setting fees of $1.35 on a $100 purchase, while Maestro and other regional PIN networks charged less than a dime, Federal Reserve data shows. Visa says the fee was justified because signature debit was so much more useful than PIN debit; at the time, roughly 15 percent of merchants had keypads for entering a PIN.
Merchants said they had no choice but to continue taking the debit cards, despite the higher fees, because Visa’s rules required them to honor its debit cards if they chose to accept Visa’s credit cards.
The entire structure, it seems is driven by the middleman. VISA is calling the shots and taking the nickels that go with it. In the trillions.
Bribery. It's the American way.
But VISA has paid off the banks and it would seem that banks are the only sector of the economy in whose welfare the Obama Administration can manage to interest itself, so it's unlikely we'll see any changes in this systemic rip-off anytime soon. Until we do (hah!), use your damn PIN number.