One unexpected result of new, lower signature-debit interchange rates many insiders expect to go into effect next year could be a boost in merchants’ acceptance of contactless payments, one analyst contends.
Tap-and-pay technology, which has languished for the past couple of years without gaining further penetration, might become more attractive to merchants that favor lower-cost PIN debit over signature debit, Ed Lawrence, a director with New York-based Auriemma Consulting Group, tells PaymentsSource.
The Federal Reserve Board next year will release new rules that will determine “reasonable and proportional” debit-interchange rates as a result of the Durbin amendment within the Dodd-Frank Wall Street Reform and Consumer Protection Act President Obama signed into law July 21.
Many observers expect reductions in debit-interchange rates as a result, and Lawrence predicts the new rates will bring merchants’ signature-debit costs into closer alignment with those of PIN debit. Such a change may cause many merchants to cease steering customers toward the use of PINs at the point of sale, Lawrence says.
“If PIN-debit and signature-debit rates are the same, we are likely to see merchants like Wal-Mart and Target begin to push signature debit and even contactless at the point of sale because these transactions are quicker and simpler than PIN debit,” he says.
Contactless-payment technology, which requires a chip-equipped card that triggers a unique code for each transaction, also adds another layer of security above swiped signature-debit transactions, which are more vulnerable to card skimming and other types of fraud, Lawrence says. Higher fraud rates are one of the reasons signature-debit rates tend to be higher than PIN-debit, he notes.
Moreover, a PIN-debit transaction requires additional steps from the customer, who must enter a PIN and confirm the sale amount, Lawrence explains. Checkout clerks usually also ask customers if they want cash back on a PIN-debit transaction, which is a drag on checkout lines and requires more training than swiping or tapping a debit card.
“PIN-debit transactions take more time at the point of sale, and merchants would probably be happy to skip that whole series of steps,” Lawrence says.
“So far, many large merchants have held off on adopting contactless payment, but if signature debit interchange rates come down, many of those will have a stronger case for switching to contactless-payment technology at the point of sale,” he says.
The problem of low penetration of contactless payment terminals and contactless cards persists, but there is “a window” of opportunity over the next couple of years for contactless to experience a resurgence, if signature-debit and PIN-debit rates equalize, Lawrence says
“Mobile payment is coming to the U.S. within a couple of years, and whether it uses contactless technology or not, contactless payment is a valid bridge that may gain broader appeal as a result of lower debit-interchange rates,” Lawrence says.
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