What really happens when you select "debit" or "credit" with your Visa card

In the NYT today, a piece that explains exactly what goes on behind the scenes when you're at the checkout stand and select "debit" or "credit" with your Visa bank card. Short version: two ways to screw you!


  1. The story is interesting but nobody’s really being screwed.

    Yes, Visa and Mastercard have a lot of monopoly-like power to set the fees and maybe the fees are higher than they should be. But it’s very telling that even after the merchants legally won the right to reject signature-based debit transactions and still accept PIN-based transactions (something Visa/MC previously prohibited them from doing), only one major merchant (Costco) actually implemented that capability.

    This suggests that most merchants believe they are still getting good value by accepting signature-based transactions: less cashier time wasted making change, less “shrinkage” (i.e., missing cash), less trips to the bank, and happier customers with vastly increased purchasing power.

    The merchants will continue to fight to keep the fees from getting out of control, but these fees aren’t really any different from any other cost of doing business. According to the article, for example, “the National Retail Federation says the interchange fees cost households an average of $427 in 2008.” But how much did stores’ electrical bills cost households? How much did the stores’ advertising cost households? How much did the stores’ shipping costs for goods cost households?

  2. I dunno about other places, but here (NorCal) Costco doesn’t even accept Visa/MC to begin with. The only reason Visa/MC branded debit cards work is because (IIRC) technically they’re actually ATM cards. Or they are if you swipe them in debit mode. If you try to use a ‘real’ Visa/MC credit card they won’t take it.

  3. Interesting that #2’s comment didn’t show up before mine, since that Powell’s link takes a big bite out of my argument (particularly interesting that they cite advertising and utilities–two of the same examples I used!). So I guess I’ll concede that the fees are a bit unreasonably high.

    As for #4, I believe you’re correct that Costco doesn’t accept Visa/MC signature-based cards (whether credit or debit) at all. Visa and MC own PIN-based processing networks, however, called Interlink and Plus (in Visa’s case) and Maestro and Cirrus (in MC’s case), and more and more debit cards are relying on Interlink and the link for PIN-based transactions as opposed to the older independent PIN-based networks like Shazam, MAC, NYCE, Star, etc.

    My understanding from the NYT article is that Visa used to have a policy that you couldn’t accept Interlink PIN-based transactions at point-of-sale unless you also accepted Visa signature-based transactions. So I’m guessing that prior to the settlement Costco didn’t accept Interlink. The settlement allowed Costco to accept Interlink without Visa, and you’d think that other merchants would drop Visa and keep Interlink in place if the Visa fees were really so much ridiculously higher than Interlink. But apparently the value to most merchants of accepting Visa transactions (which presumably allows them to accept Visa credit cards as well as Interlink debit cards) is worth the extra fees they end up paying on the debit side.

  4. One of the medium-size credit card processing banks is First National Bank of Omaha. They do something incredibly viscous with the Visa Debit cards they issue to their account holders. If you have their Visa Debit card and are paying at a business that uses them as their processor, they will not allow a debit transaction! It will sort of act like the payment is declined! You can only do a credit transaction!

    One of their largest customers, the afore-mentioned Costco, has tried to get them to change this (because a large number of Costco’s Omaha client based can’t do debit transactions) but, of course, the bank says “No way! We want the money!”

  5. Up until recently, Target didn’t require either PIN or signature for purchases under a certain amount, $10 or $20. Same with some gas pumps.

    1. Many big merchants have merchant agreements that allow for no signature for purchases under $25. Most drug stores and many grocery stores are that way. NYC taxis are that way. Those transactions get processed as signature-based transactions, though, with the higher fees.

  6. I might be wrong on this since it’s been several years since I did this kind of work, but my understanding was that you are given additional protection on Credit transactions ran through your debit card, similar to the protections Visa/Mastercard give you for your credit card purchases.

    Which is why I always sign my receipt instead of putting in a PIN when I’m buying a new TV or laptop.

    1. [M]y understanding was that you are given additional protection on Credit transactions ran through your debit card, similar to the protections Visa/Mastercard give you for your credit card purchases.

      There’s a good comment on this issue under the post at the Consumerist. Their blog doesn’t give a good way to link to a specific comment, so I’ll just post the whole thing here (this is from EarlNowak, if you want to find the original):

      All transactions made with a debit card (sign or pin) are governed by the Electronic Funds Transfer Act and the implementing Federal Regulation E.

      All transactions made with a credit card are governed by the Truth in Lending and the Fair Credit Billing Acts. Without getting into details, these acts provide (in this lawyer’s opinion) far superior consumer protections and chargeback rights than what is required by Reg E.

      (This is a matter of pedigree- Reg E was originally designed for ATM transactions, automatic billpay or so-called “e-check” payments by phone. The use of debit cards to pay for goods at a point of sale and transfer funds directly to a retailer’s bank is a relatively new invention. So you don’t have the protection on, say, faulty goods or fraudulent purchases that you get with a credit card, where the law was designed to protect consumers from the outset.)

  7. FWIW – The question isn’t what happens after you “select “debit” or “credit” with your Visa bank card.” A visa bank card IS a debit card – directly connected to your checking account. The whole article is about debit cards, credit cards are only mentioned in passing.

    Banks take a bad debt/fraud risk for credit cards and consumers get much better protection against bank fees (you can’t bounce a credit card) and there federal fraud protections that do not exist for debit cards.

  8. That explains why my bank encourages the use of the credit option. Which I go along with, because I actually get a rewards plan.

  9. Few Merchants I have spoken with have ever heard of two-sided markets, much less read the research on payment card networks done over the last decade using this methodology. For the Merchant, the only issue is the cost of service; interchange. In their world increased volume means increased negotiating power, which generally results in lower costs. The current “war on interchange” is, in many ways as much, an emotional struggle as it is a financial struggle. From the perspective of major retailers, not being able to exercise control over their vendors, customers, business operations and margins by demanding a lower fee on credit card usage, represents a loss of control. One point that seems missed is: does the current payment system deliver a quality service at a fair price? The answer will depend on who you ask; the Financial Institute and Payment Card Network, or the Merchant. On one hand the FI’s point out that there are costs associated with the system and that providing the service deserves a profit from those who use the system. On the other hand retailers, as expressed in a video currently posted on the NACS website, positions the service has having no value; “They don’t call them swipe fees for nothing”. In the current debate one cost that does not seem to be addressed is the value associated with issuing and marketing cards programs to consumers. The FI’s point to other costs like risk and non payment, but seldom focus on the issuance, enrollment and the marketing (consumer reward) aspect of the card programs. If the Merchant is so incensed by outrageous interchange fees, then why do they hesitate to compete by offering alternative payment programs? The answer may be that the costs to compete are simply higher then the services being delivered. If this is the case then Merchants might want to issue an apology to the Payment Card system and thank them for a quality service delivered at a fair price, this being a suggestion few retailers are ready to accept.

  10. the nytimes article isn’t very helpful from a “what do I do as a consumer?” point of view. which one screws the world least? hard to say. since PIN transactions cost me after a few per month, I never opt for them. I can’t tell if that’s a good or bad thing, big-picture wise.

  11. I’m a little confused:

    In a store, I’m never given the “option” to sign or put in my pin. However, I am frequently asked “credit or debit?” Is this the same thing? And, if so, why is signing for a card called “credit?”

    Is it actually working like a credit card — that is, I won’t be charged until they turn in the receipts or something? I don’t think so, because afaik, there is no APR on my debit card.

    I always select “debit” because that’s what it is, and I don’t want to use it as a credit card and rack up any mysterious charges.

    Further, the article didn’t mention “credit or debit,” only “sign or pin.”

    Any help resolving my confusion?

  12. Pretty sure that

    credit = sign
    pin = debit

    my bank assured me there were no charges associated with “credit”, and sure enough, i’ve used it for years without a problem- AND my bank has called me right away when i use it on a trip, in case someone had stolen the card, AND this is a local, community bank, not some mega-corporate bank with deep pockets. DEBIT usually comes with limits, like 6 transactions a month… at least from what I’ve seen, so I avoid it. But I’d still like to find out what, exactly, are the real costs of both- the article was vague on what our choices as consumers actually are…

  13. “DEBIT usually comes with limits, like 6 transactions a month”

    Huh? Maybe you’re thinking of a credit card being used as a debit card?

    I’ve had a debit card linked to my checking account for years, and use it several times a day, from ATMs to groceries to coffee. PIN transactions always, except when they don’t have a keypad and have me sign.

  14. I’ve never owned a credit card. This is from 2 different banks I’ve been a member of over the years- both had monthly limits to PIN-entered debit transactions.

    But maybe that’s because I use small, local banks.

  15. Credit or Debit?
    Credit is when you sign for the transaction. Credit is also routed through the system as if you were using a credit card and is not immediately coming out of your checking account. With a signature you have the same protections as if you had used a credit card which might be nice for large purchases.
    Debit is when you enter your pin number and is deducted from your checking account.
    I wish the article had also discussed the cost of using debit vs. credit for the consumer. When using your card as a credit it can often give the banks an opportunity to charge ‘overdraft protection’ when you do not have the funds to pay for the charge. The same transaction as a debit(pin based) should be denied based on your banks policies and could stop you from spending 35 bucks for a tiny purchase that was not needed.

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