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All debit cards are not created equal: Understanding online and offline debit

More and more campuses are offering payment card functionality with their campus card program. Students enjoy the flexibility of using the card for payment at both on and off campus locations just as they would any other bank-issued card. But while virtually all of the payment options are debit products, there are major differences between debit products. To understand the options available to your card program, an understanding of the debit card landscape is essential.

An easy way to distinguish debit cards from other payment tools is to think of the payment or repayment cycles. With credit cards, the cardholder “pays later.” With stored value cards the cardholder “pays before.” And with debit products you “pay now.”

Although all debit cards fit the “pay now” category, there are key differences. The two major types of debit cards are known by a variety of different names but the easiest way to keep it straight is that one type is authorized by a personal identification number (PIN) while the other is authorized by the customer’s signature. This difference led to one of the commonly used terms for the two types: PIN-based debit and Signature-based debit.

PIN-based debit

Though it is sometimes hard to imagine that we survived without debit cards, there was a day when we paid for nearly all of our non-cash/non-credit purchases with paper checks. When the ATM networks proliferated, it seemed a logical extension to enable the ATM card’s use at the point of sale.

These cards drew directly against a customer’s bank account and had very little likelihood of overdraft. Additionally, an electronic transaction was far less expensive to process than a paper check. Because the systems required PIN authorization, PIN pads were required at the point of sale. Because of this added expense, grocery stores were among the first to adopt PIN-based debit as their transactions were higher dollar value and very heavily dominated by paper checks.

Most of the regional ATM networks offered PIN-based debit. Names like NYCE, Interlink, Cirrus, Honor, MAC, CashStation, Pulse, and others could be found on the backs of ATM cards across the country. Consolidation and acquisition has left only a few major players in the PIN-based debit world. As an example, Concord EFS owns and operates the largest network, STAR, that has absorbed older players like Honor, CashStation, and MAC.

PIN-based debit is also referred to as online debit, and in some cases, electronic funds transfers (EFT). With these systems the customer’s account is debited immediately following the transaction. Merchants typically pay a flat fee for the transaction regardless of the dollar value.

Signature-based debit

The other debit alternative evolved, not from the ATM cards and networks, but from the credit card world. MasterCard and Visa dominate the signature-based debit market capitalizing on the deployed base of merchant acquirers, terminals, and transaction processing networks used for credit transactions.

Though signature-based debit products do not rely on ATM networks for typical debit transactions, they do offer ATM card functionality. Virtually every one of these cards offers ATM access via PIN to complement the debit functionality via signature.

Signature-based debit is often referred to as offline debit. Transactions do not debit the customer’s account immediately as they do in online debit, but typically within 24 to 48 hours. Merchants pay a discount fee (a percentage of the transaction’s dollar value) as they would for credit card usage for the privilege of accepting the card.

Summary

Perhaps the best way to encapsulate the discussion is with this paragraph from the Federal Reserve Bank of Kansas City’s document, Guide to the ATM and Debit Card Industry:

“To complete this section, it may be useful to emphasize the similarities and differences between online and offline debit transactions. Both transactions are conducted at a POS terminal. Both represent payments in exchange for goods or services. But online debit requires the use of a PIN and funds are debited immediately, while offline debit does not require a PIN and funds are not debited immediately. Online debit transactions are processed over an EFT network. By contrast, offline debit transactions are processed over credit card networks. Online debit allows the consumer to obtain cash back at the point of sale, while offline debit does not. Finally, consumers and merchants face differing fees for online and offline debit.”

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