Two months after the Federal Reserve Board announced a cap on interchange rates for debit transactions, we are seeing hints about how banks and card processors can be creative in offsetting the loss of revenue caused by the lower debit fees.
One new card offering, a combination card called the DUO™ card, recently debuted from Fifth Third Bank. As far as combo cards go, that makes Fifth Third first! Confused? Read on.
Figure 1 illustrates how traditional debit cards work. Most consumers mistakenly think their debit cards can already act as both credit and debit cards. When cashiers ask debit card payers if they want "debit or credit," what the cashiers really want to know is whether the consumers want to punch in a PIN (PIN debit) or simply sign to complete the purchase (signature debit). Either way, the payment is processed as a debit transaction against the cardholder’s bank account. And either way, merchant fees are lower than they would be for a credit card transaction (especially with the new cap on debit interchange fees).
Figure 2 shows that the combo card is both a PIN debit and a true credit card. Now, when cashiers ask "debit or credit?" they mean exactly what they say: should your payment be processed as a PIN debit or as a credit card transaction? The combo card eliminates the signature debit option entirely. Since 60% of debit card users prefer to skip the hassle of PIN entry and it is hard to use a PIN online anyway, most consumers will likely choose "credit" when given the choice. This clever invention will help the bank increase the number of credit card transactions while reducing the number of debit transactions. You, the merchant, may pay less in debit card fees, but more in overall processing fees.
From the consumer's view, the new combo card might be attractive. From the merchant’s view, the cost of processing cards goes up. From either point of view, the combo card is just one example of what may be a pending avalanche of new card offerings. Stay tuned.
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