What's The Difference Between Signature and Online Debit?

There are two types of Debit processing:

  • Online PIN based, which requires that the Merchant utilize a Pin Pad device attached to the processing terminal, and further requires that the customer successfully enter his "pin number" into the pin pad before the transaction may be completed.
  • Signature or "Check Card", which essentially permits both Merchant and customer to process the transaction on any Visa or MasterCard branded Check Card exactly as if the card were a credit card. A Pin Pad device is not required.

From the cardholder viewpoint, there is absolutely no difference whether the Merchant processes the debit card via online or signature. The same funds still come out of the same existing pool pool of funds either way.

For the Merchant, however, there may be a major difference in his expense incurred to process the transaction, depending on the amount of the transaction. Read more information on Debit Interchange fees here.

Read an excellent article from the Chicago Federal Reserve regarding costs and benefits of two types of debit card authorization methods.

How Does Pricing Between Signature and Online Debit Differ?

Signature debit, i.e. without a pin pad, is billed to the Merchant exactly as if the transaction was a credit card transaction. Just as with a normal credit card transaction, the Merchant will pay discount rate percentage plus per item fees. One important distinction, however, is that the discount percentage should be (but isn't always) considerably less than the percentage paid since Interchange, the wholesale cost to the processor, is much lower. However, many processors choose not to pass these substantial savings onto the Merchant and instead charge the Merchant the identical rate credit or debit.

CAUTION: Lots of processors like to quote ridiculous unrealistic low rates like 1.25% in hopes of luring unsuspecting rate-conscience Merchants to sign up with them. What they're talking about is the rate the Merchant will pay for Signature Debit which is fine and good. If the Merchant assumes, and this is the key to the scam, that this will be his rate for all transactions, he's in for a rude awakening! In reality, the Merchant will only see that number for a tiny fraction of his sales volume, and he'll end up paying dearly and then some for the rest of his business. This is the processing industry version of the old "bait and switch" ploy.

In the case of online pin based debit, the fee structure is entirely different. Instead of a percentage rate which obviously means the higher the ticket the higher the fee, pin based debit is charged one flat fee regardless of ticket amount. This fee consists of two parts: A 'switch' fee, plus the fees associated with whichever of the many national debit networks processes that particular transaction. Often, processors only quote the Switch Fee on the processing proposal in order to gain a competetive advantage over other processors who more honestly quote the switch and network fee together. The total flat fee is generally in the $.55 to $.65 cent range regardless of ticket amount, depending on geographic area and other factors.