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A French payments exec says JPMorgan Chase would be justified in telling clients it's safer to make debit card purchases with a signature than using a PIN.
April 22
JPMorgan Chase & Co. has taken an out-of-the-ordinary approach to encourage customers to use their signature rather than their PIN when making debit card purchases.
There's no cash-back incentive or promise of a big-screen television or travel reward. Instead, JPMorgan Chase is appealing to a more basic human desire: safety.
The problem, security experts said, is that PIN debit transactions are actually much more secure than signature debit purchases.
Signature debit is considerably more lucrative for a debit card issuer, however.
In a recent mailing issuing Chase-branded debit cards to former Washington Mutual Inc. customers, the banking company strongly suggested clients "always select 'credit' " when paying with their debit card.
"We know it's confusing," JPMorgan Chase wrote in a box highlighted as being "important."
"It's not a credit card, so the money still comes out of your checking account. But by choosing 'credit,' you won't have to enter your PIN in public."
A spokesman for JPMorgan Chase said Tuesday that "the theme of the letter was to reassure customers of the security and safety of using their debit card."
The letter also emphasized JPMorgan Chase's real-time fraud monitoring and encouraged users to sign up for free security alerts.
A bank spokeswoman said the mailer is standard for all Chase debit card reissuances.
But several security experts, when read the Chase letter by a reporter, said the company had implied that it's safer to use a signature when paying with a debit card — which the experts said is not so.
"From a technical security standpoint, there's no question about it, a PIN adds a level of safety, which is why ATM transactions have required a PIN for years," said Avivah Litan, a security analyst at Gartner Inc.
But banks do collect higher interchange fees from merchants on signature debit transactions.
"PIN is actually more secure, but PIN does not generate as much revenue to the bank," said Adil Moussa, an analyst at Aite Group in Boston. "If they get you to use signature debit, then they are going to make much more money."
On a $100 transaction, for example, it's the difference between making 5 cents to 10 cents versus $1, Moussa said.
Many banks have added rewards programs, or upped the ante on existing ones, that encourage consumers to use their debit cards — and to sign for the purchases.
TD Bank, the U.S. arm of Toronto-Dominion Bank, ran a short-term promotion this year that offered customers up to $50 back for grocery purchases made using their debit cards with signatures.
Citigroup Inc.'s Citibank, meanwhile, offers customers enrolled in its ThankYou Network a sweeter deal for signature transactions.
Citi clients get 1 point for every $2 spent on signature debit purchases, compared with 1 point for every $3 spent on PIN transactions. The ThankYou rewards points can be redeemed for restaurant and retailer gift cards, travel deals and other merchandise.
But JPMorgan Chase's tactic stands out among the crowd.
"The reason why this one is different is they are implying it's less secure to put your PIN in," Litan said.
"That's telling you that putting your PIN in is a more dangerous transaction. I've never seen it advertised that way."
The security pitch is also a less-expensive way to promote signature debit, Moussa said.
"Instead of trying to use rewards, it's easier to scare somebody into using signature," he said. "Rewards and punishment are the two drivers of human behavior."
The reason PIN is considered safer is because it's generally harder to steal (or guess) someone's four-digit code than it is to forge a signature.
In a signature transaction, "you don't have to enter another means of verification that you are the cardholder, so anybody can grab your card and run it, and if the clerk doesn't check [the signature], it's coming out of your account," Moussa said.
However, he acknowledged that PIN debit isn't foolproof.
"Is it safer if somebody is right behind you and can see what you just entered and can enter it later? No," he said. "It reduces the risk by a certain fraction. There are plenty of methods out there that if they want to get your information, they can."
And JPMorgan Chase is factually correct in stating that a consumer won't have to enter his or her PIN in public if "credit" is chosen at the time of checkout.
But "if you're not going to use your PIN in public, where are you going to use it?" asked J. Craig Shearman, vice president for government relations at the National Retail Federation.
Merchants, unsurprisingly, interpreted the letter as an attempt to squeeze more fees out of them.
"It's clearly an effort to drive up interchange revenue," Shearman said.
"Now that consumers have started to move away from credit cards to avoid fees, the banks are doing everything they can to reap fees from debit cards," he said.
Interchange fees have become a hot political issue. Merchants have long claimed that they should have more say in how the rates are set, a process that is controlled by the major card networks Visa Inc. and MasterCard Inc., both of which used to be wholly owned by their bank issuers (which retain significant stakes in the now-public companies).
A handful of bills are pending in Congress that would, among other things, require the card networks to negotiate the fees with merchants and allow merchants to offer discounts for using certain forms of payment that would result in lower fees (such as PIN debit or cash).
Vermont and Georgia also have bills on the issue pending.
Bryan Derman, a partner at Glenbrook Partners LLC, a financial services consulting firm in Menlo Park, Calif., said he understands why JPMorgan Chase would want to reassure consumers about the security of debit in general.
Consumers tend to be more sensitive to risks associated with debit than credit "simply because debit draws upon their own funds held in deposit," he said.
"It would be particularly hard to argue about a transaction being fraudulent if somebody entered the PIN number on the card," he said.
"I sort of see what Chase is driving at, but at the same time, there's another motivation in terms of the fact that signature transactions will earn a higher rate of interchange."
