When you use your debit card do you sign your name or enter your pin?
Do you know if your decision makes a difference? Do you know which one is better for you?
Nudge is a book grounded in economics, which means it argues incentives are a powerful tool for shaping human behavior. Nudge is also a book ground in psychology, which means it does not assume that people always see incentives or fully understand their implications.
The New York Times reports on an interesting example of these two points: Debit cards that require either a customer signature or a PIN number. Different companies involved in the payment chain have conflicting preferences about which ones customers should use. Customers, of course, have their own preference — the debit card that leads to the lowest overall price for whatever product they are buying. The problem is that most don’t know which card that is.
The basic dilemma is as follows. The company that issues the card, say Visa, wants to sell its product to banks and assigns different retailer fees for different cards. To sign agreements with banks, it wants to promise higher fees. Banks like the high fee cards too since those fees accrue to them. And they certainly don’t want to make it too obvious to customers which cards those are. Retailers, on the other hand, want cards with the lowest fees, since they can hold onto more money in the form of a profit or market share that they can gain by offering larger discounts to customers. However, retailers are in a bind. By not accepting higher fee cards, they risk the possibility that they will not be able to offer any type of card payment to their customers, putting them at a disadvantage to retailers that do offer such convenience. Besides, retailers can often pass the cost of the higher fees along to the customers in the form of higher prices on goods. That’s a big problem for customers for the simple reason that it’s very hard to see exactly how much using the more expensive card raises overall prices. Consequently, it’s hard to know which card is a better option for their wallets.
The more expensive debit card is the one that requires a signature. Some retailers have decided to fight back against Visa by not allowing people to sign their signature or defaulting them to the PIN option. Some have filed a lawsuit against Visa, and the Justice Department is looking into whether the system of payment forms is anti-competitive.
While all of these events are encouraging — it’s nice that some big players recognize their incentives, and that at least some of them overlap with their customers’ — it’s unfortunate that customers themselves aren’t easily able to exert their power in the marketplace and take action themselves. Most don’t know which card can help save them money on their purchases (one story in the Times, even a heavily emailed one, won’t overcome this level of ignorance), and organizing to push for a different fee system is very difficult.
For now, if you use a debit card, opt for the one that requires your PIN. And if you are designing an incentive structure somewhere, ask yourself if everyone involved understands it.