Pin Debit vs. Signature Debit, Which to Use When

You can save money by knowing when to charge a debit card as a pin-debit, and when to charge a debit card as a credit card or a signature debit.

Difference Between Credit, Debit, and Check Cards

True debit cards can only be accepted when a merchant is able to accept a pin number from customers using a pin pad. However, most debit cards today are actually check cards that are mistakenly referred to as "debit cards". The difference between a debit card and a check card is that a check card has a Visa or MasterCard logo in the lower right-hand corner, where a true debit card does not. A merchant account allows a merchant to accept debit, credit, and check cards, but different rates and fees may apply to each card.

Credit Cards
Credit cards typically have a transaction fee and a discount rate, that is charged when a transaction is run.

Debit Cards
Debit cards typically have a single transaction fee called a pin debit fee, that is charged when a transaction is run. Money is debited directly from a customer's bank account, and there is no percentage fee charged. Sometimes a customer may have a charge imposed by their bank to run a PIN-debit transaction.

Check Cards
Check cards are unique in the way that a merchant may charge a check card using a pin number or a signature, and they will be charged differently depending on how they choose to process the transaction.

Offline Debit - When a merchant processes a customer's check card without using a customer's PIN number, the transaction is called an offline debit transaction.

Online Debit - When a merchant processes a customer's check card using a PIN number, it is called an online debit transactions.

When to use debit as a pin (online) or signature (offline)

Knowing when to charge a customer's check card as a pin-debit transaction (online), or a signature debit transaction (offline) is the key to saving money, and is dictated by a your average ticket.

If a customer has a preference about how they would like to be charged, you really have no choice but to comply with their wishes. But if the customer shows no preference, it is up to you to decide which way is best, and here's how to figure it out.

Calculate the average ticket for your business. For the rest of our tutorial we will assume that you business's average ticket is $50.

Figure out your average cost per transaction for both online and offline debit card transactions. An example of how to do this is below.

Average Cost Per Credit Transaction
To figure the average cost per offline debit transaction, simply multiply your average ticket by your debit discount rate, and add your per transaction fee to that number.

For example:
If your debit discount rate is 1.7%, and your per transaction fee is $0.25, your average cost per offline debit transaction would be $1.10- which is:

$50 (average ticket) * 0.017 (debit discount rate converted to a decimal) + .25 (per transaction fee) = 1.1

Which is:
50 * 0.017 + .25 = 1.1

Average Cost Per Online Debit Transaction
It is easy to figure the average cost for an online debit transaction because there is usually only one flat fee, called a pin debit fee. For this example we will assume that your pin debit fee is $0.50.

Applying Average Transaction Costs to Save

From the example above you can see that an average offline debit transaction will cost $1.10 to process, where an average online debit transaction will only cost $0.50. Processing this transaction using the online debit method will yield a savings of $0.60.

Next you need to find the price point where it is less expensive to charge customers using an online debit transaction instead of an offline debit transaction. To do this substitute your discount rate and transaction in to the formulas above, and figure out the average ticket amount that would yield a slight savings when a transaction is processed as a offline debit. This is the price point you would use to determine when to charge a card as an online debit (having the customer enter their PIN number), and when to charge a card as an offline debit (swiping a debit card as a credit card).

For example:
Using the information above we can conclude that the from $1 - $14.50 it would be less expensive to run a offline debit transaction, and from $15+ it would be less expensive to run an online debit transaction. Below is the breakdown of the discount rate of 1.7% and the transaction fee of $0.25 applied to the ticket ranges stated.

Ticket Range of $1 - $14.50 - Charge Range of $0.28 - $0.50

Justifying Cost of Equipment

Businesses with higher average tickets will recoup the initial investment of purchasing a pin pad more quickly than businesses with lower average tickets.

For Example:
From the example above we can see that the savings from processing online debit transactions, instead of offline debit transactions, will yield a savings of $0.60 per transaction. If you were to purchase a pin pad at $150, it would take you 250 online debit transactions to recoup your initial investment (150 / .6 = 250). Each transaction after the 250 break-even point will be profit.

When to charge a debit transaction as online or offline is not something that most business people think about day to day, but it is something that can have a substantial impact on you cash flow. Examine your transactions to determine which method to use when charging cards. You may be pleasantly surprised by the results.