Q: The terms "PIN-based" and "signature-based" often come up in discussions about debit card acceptance. What do these expressions mean? And how do the payment options differ?

A: The terms refer to the two distinct ways in which debit payments are processed: online and offline. Online debit transactions call for customers to endorse payments by submitting their personal identification numbers (PINs) at the point of sale, while offline transactions require shoppers to sign sales receipts.

The following information can help you understand more about PIN-based and signature-based debit transactions, and how each payment option can benefit your business.

Online Debit
PIN-based debit transactions are fast, convenient and secure. In brick-and-mortar environments, shoppers initiate online debit payments by swiping their debit cards through magnetic card readers. The customers then key their secret codes into encryption devices called PIN pads. The transactions are authorized in real time, funds in the customers' accounts are captured immediately, and money is transferred into storeowners' accounts in two to three business days. Merchants pay a nominal transaction fee. And because the customers authorize their purchases with PINs, the risk to merchants of chargebacks is virtually nonexistent.

To accept online debit payments, you must have a merchant account, a debit processing service, a payment terminal, a receipt printer and a PIN pad. Many payment processing companies offer both credit and debit card services, but you must be approved for them separately. You can obtain a terminal and printer with an integrated PIN pad or purchase a discrete, free-standing PIN-entry device and connect it to your payment system. Just remember that your customers must be able access the device and enter their codes in private.

Practically speaking, this type of debit transaction is currently available in the physical world only, not the Internet. A number of financial institutions have introduced technology that may advance the development of PIN-based debit processing on the Web, such as digital certificates, smartcard solutions and compact disc-based systems. But no widely-accepted operating standards have yet to be established.

Offline Debit
Unlike online debit transactions, offline debit payments do not involve PINs. Offline debit cards (or check cards) are typically issued by credit card companies through their participating banks. The cards may be used everywhere credit cards are accepted, including over the Internet.

In the physical world, customers who choose to make offline debit purchases must hand over their check cards. Merchants swipe the cards through their payment terminals and complete the debit sales the same way they process credit card transactions. The customers then sign sales drafts that authorize the merchants to charge their accounts.

On the Web, customers enter check card information into browser-based forms, just as they would for credit card purchases. The data is encrypted, captured by transaction processors and sent to the credit card processing networks for authorization. Transactions normally settle in two to three business days.

Because check card transactions are processed through the same networks as credit cards, they often incur the same discount rates and transaction fees. If your business is already equipped to process credit card transactions (for instance, you have a merchant account, a credit card processing service and either a terminal and printer or payment-processing software), you should also be able to process offline debit payments.

Making the Choice
Both forms of debit acceptance let merchants offer payment flexibility to their customers, which in turn can capture impulse buying, generate higher-ticket purchases and improve customer loyalty. But PIN-based debit transactions offer added advantages, such as:

  • The option to provide cash back to customers, which increases store traffic.
  • A fast way to move shoppers through the checkout line.
  • Virtual elimination of chargebacks and fraud.
  • Higher transaction approval rates.
  • Potential for additional revenues from surcharges.

The benefits are clear. With minimal investment, brick-and-mortar merchants can use PIN-based debit transactions to help increase their sales and profits.

But what does the distinction between signature-based and PIN-based debit mean to your business? If you're an Internet merchant, check card acceptance can give you access to buyers who may not qualify for credit cards, such as teenagers. Plus, you receive funds from approved transactions quickly and securely. Perhaps most important, you can accept signature-based debit payments with relative ease because they're processed much like credit card sales.

If you own a business in the physical world, you enjoy the flexibility to process signature-based debit payments as well as PIN-based transactions, which provide increased security and opportunities to generate additional revenues.

Contact a payment service provider with experience in debit processing to learn about the payment options that best suit your business--and discover how debit card acceptance can help improve your company's bottom line.

Cardservice International Senior Vice President of Sales John Burtzloff is in charge of sales strategy and execution and thus is responsible for managing all aspects of the company's marketing, communications, telesales, check guarantee, new accounts and sales support activities.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.