Customer Confusion About Debit Card Fees a Growing Issue

With the holidays looming and a recently released NRF survey indicating that debit cards are now more popular than credit cards, it's conceivable that consumers' confusion and indignation over debit card fees found on their bank statements could soon become a significant issue for retailers -- if it isn't already.

Back in July, the National Retail Federation (NRF) filed comments with the Federal Reserve Board arguing that many banks do an inadequate job of disclosing to customers that they might be charged a fee if they enter a PIN number when using a debit card in a retail store. Customers who see the debit card fee on their bank statement may incorrectly believe it is the retail store charging them the fee, and, oftentimes, go to the retailer to complain.

At the time it filed comments with the Federal Reserve in July, NRF Senior Vice President and General Counsel Mallory Duncan remarked: "Customers come to us with their bank statements and express their surprise -- to put it mildly -- that they have been charged for entering their PIN. Once we overcome their disbelief and explain the true source of the charge, the customers' anger is immediately directed at their banks. But this job should not be the retailer's responsibility."

Customers using a Visa or MasterCard-branded debit card issued by their banks have the option of signing for a debit transaction or punching a PIN number into a keypad next to the cash register. Retailers prefer PIN transactions because the secret PIN number is an added security feature (while a signature can easily be forged), and the interchange fee for a PIN transaction is much lower than a signature-based transaction -- around 20 cents per transaction compared to upwards of two percent of the sale when a customer signs. Many banks have responded to this fact by charging customers a special fee for a PIN transaction to help make up for the lower interchange fee. Banks' practice of charging a fee for PIN use discourages consumers from using the cheaper, more secure form of payment, according to NRF.

The article "Duking It Out," from the September issue of Stores, reported that a study conducted by the New York Public Interest Research Group "found that 89 percent of banks in the New York area charge fees if the transaction requires the customer to enter a PIN. The fees average about 70 cents, and can be as high as $1.50 per transaction. While the survey spotlights only New York banks, this issue is raising eyebrows from coast-to-coast."

NRF noted in its comments to the Reserve that rules and conditions for PIN fees are often included in the fine print of annual statements, written in legal jargon along with myriad other disclosures.

In addition, monthly bills often make the fees appear to be charged by the retailer rather than the bank that issued the debit card, NRF argued. In a hypothetical example cited in the comments, a statement might include a line item indicating "Greenway Supermarket - Debit Purchase - $54.13" reflecting the amount of an actual purchase, followed by "Greenway Supermarket - PIN Debit Transaction Fee - $1.00" The second entry reflects a fee charged by the bank, but customers often read it as a fee charged by the retailer.

"We know this because our customers come into our stores, statement in hand, and demand that we refund the dollar we allegedly have charged them for entering their PINs," Duncan said in a statement at the time.

Retailers who offer patrons a choice between signing or entering a PIN number for a purchase should prepare themselves for consumer confusion (read: complaints) over debit fees since an NRF survey reported that debit cards will be used more than ever before this holiday season.

According to the NRF 2004 Holiday Consumer Intentions and Actions Survey, conducted by BIGresearch, the use of debit/check cards is soaring, with 34.7 percent of shoppers planning to use debit or check cards as their primary form of payment during the winter holidays, up from 30.7 percent last year. The survey also found that fewer consumers would use credit cards to pay for merchandise this holiday season (29.5 percent versus 30.1 percent in 2003).