Update: The Federal Reserve didn’t live up to its original proposal and has rewarded banks to the detriment of small businesses. Instead debit card fees have been reduced to 21 cents (only for major banks though) on average plus a minuscule fraud charge of 0.05 percent (which adds a penny or so to the fee). The 21 cents is set in stone and the change will happen on Oct. 1st, but the Federal Reserve hasn’t finalized the fraud amount. Of course, the banks are out to make it substantial, so we will see. But it is better than nothing.  I still believe pay-at-table -machines is the future, but the extra 9 cents may cause a slower change. I will keep you up to date if the fraud charge changes.

The restaurant industry won at just the right time. Recently, merchants were able to get enough votes in the Senate to block the postponement of interchange fee reform (also called swipe fees) for debit cards. Therefore, on July 21st of this year, the Federal Reserve has been empowered to cap the fees at 12 cents (the average is now .44 cents). It is expected to do so. The interchange fee is what restaurants pay when someone pays with a debit card. But at this point, nearly all full service restaurants will not benefit unless they move over to pay-at-the-table credit card machines such as Verifone’s Pay on the Spot.

Let me explain the current status quo:

Even though debit cards purchases now make a third of non-cash transactions and the percentage is growing, most restaurants run debit cards through offline network (which credit cards travel through) and pay the discount rate. The reason for this is because restaurants do not enable customers to enter their PIN through a PIN pad. Indeed, when a customer enters the PIN for a purchase, the purchase is run through the online system costing merchants 44 cents on average up to now. On the other hand, when a customer signs the receipt rather than uses a PIN, merchants pay the discount rate (around 1.79%) and a transaction fee ($.25).  It used to be, for transactions over $15, it made sense for a merchant to encourage customers to use their PIN instead of a signature (even though they cannot force them) when they pay with debit cards. The higher the bill the more the restaurant pays banks and credit card companies. Now, a PIN saves money EVERY time as the fee will be more with a signature (and that’s not including the discount rate percentage of 1.79%).  How important is this?

For a restaurant, we may be talking thousands of dollars per year.

Let’s say the bill is $100. If a customer used his or her debit card and entered his or her PIN, it should cost the restaurant $ .12 in the near future. If the customer signed on a debit card purchase, for $100 the restaurant pays  $2.04 (100 * .0179  + .25 fee = 2.04). You are paying $1.92 extra for the customer’s signature.

It matters over a year. I am going to through out some normal figures for an imaginary full service restaurant, Restaurant MIDDLE, which is doing a little better than average. MIDDLE is a full service restaurant that has $ 1 million in sales per year, $ 600,000 of which are non-cash. 60% of the non-cash purchases are made with debit cards, but only one-third (50%) of the total amount is from debit cards, as with more expensive orders people tend to use credit cards. We are still talking about $300,000. The average check is $22 dollars. If we round off, over a year it’s somewhere around 13,500 transitions or about 35 per day.  Now let’s look at what happens if they provide a signature or enter a PIN.

SIGNATURE for Debit Card Purchase:

($22  * .0179) + .25 =  ~ $.65 per transaction

ENTER PIN for Debit Card Purchase:

Federal Reserve caps debit interchange fees at $.12, which is likely.

Restaurant saves $ .53 every transaction where a customer uses his or her PIN code. Over 13,500 transaction in a year, that adds up to a $7,155 difference, which is way less than what the Verifone’s Pay On the Spot credit card machines go for ($600). If it is incompatible with MIDDLE’s POS system, the owner would more than tempted. Of course, very expensive restaurants may not make that leap as it isn’t the custom yet. I think most full service restaurants could pull it off without customers minding.

I am of the opinion that customers won’t mind the change if explained to them in a clear way. I think customers can see that there is not much advantage in giving your card over to a server. Much however is up in the air, and we will see if restaurants take the leap.

Restaurant Signature Debit

Ticket Range Est. % of Debit Trans

<$9.99 83.5%

$10.00-$24.99 68.2%

$25.00-$49.99 55.16%

$50.00-$99.99 39.14%

>$100.00 26.84%