First, the only cards that provide this debit or credit option are debit cards with a credit card company logo – also called check cards or electronic checks.  Online (not to be confused with ecommerce) debit transactions require a PIN authentication (like an ATM transaction) and are processed through debit networks (i.e., NYCE, CIRRUS).  Offline debit transactions require a signature and are processed through card association networks (i.e. Visa or MasterCard).  All transactions from a debit card are tied to the cardholder’s bank account.

The Bank Side

Card issuing banks earn most of the revenue when their cardholders use their cards, whether they are debit or credit.  Some banks entice customers to use their check card by offering incentives, such as rewards and cash back.  Most rewards programs require the consumer to use the credit/signature option, which enables the bank to collect interchange fees from the merchant, helping to offset the cost of the rewards.  Acquiring banks also earn revenue when either the credit or debit option is used.

Overall, card issuing banks prefer PIN-based debit transactions, hands down.  Even though they pay debit transaction fees, banks save money by not paying fees to the card associations.

The Consumer Side

Consumers like using debit cards mostly to avoid writing paper checks.  Many brick and mortar retailers no longer accept checks and banks are following suit.  Banks in the U.K. decided to phase out their check clearing process by 2018, citing cost savings.

As stated above, consumers can be enticed with rewards.  With Bank of America’s ‘Keep the Change’ program, check card purchases (using the PIN or credit option) are rounded up to the next dollar and the difference is transferred into the account holder’s savings account.  The bank then matches the transfer amounts up to $250 a year.

Using funds that already exist (i.e. in a checking account) for purchases instead of buying on credit also helps keep the cardholder out of future debt.  The cash back option is free with debit purchases and the funds are also deducted immediately from the cardholder’s account – instead of a few days later for credit card purchases.  For cardholders who monitor their bank accounts closely, this option is best for them.  However, banks do charge fees for insufficient funds on debit transactions.

From a fraud perspective, PIN-based transactions are the most secure.  However, cardholders are not protected from fraudulent debit transactions as they are with credit card transactions.  If a thief uses a cardholder’s debit card and cleans out their bank account, the cardholder will likely not be able to recover those funds (aside from legal action).  If a cardholder uses Verified by Visa, an optional service requiring a personal password, the cardholder is protected under the Fair Credit Billing Act when making purchases online.

By choosing the credit option, as with normal credit cards, cardholders also have the right to do a chargeback if there are issues with a return, fulfillment or satisfaction with a purchased product or service.

“…cardholders are protected under the Fair Credit Billing Act”

The Merchant Side

Merchants prefer PIN-based debit transactions for a few reasons.  Debit network fees are lower, there is an instant guarantee of funds and funds settle faster into the merchant’s bank account.

Merchants, particularly ecommerce, like offline debit transactions since they are able to tap into consumers who receive prepaid debit cards or payroll cards, or are unable to obtain credit cards.  For those consumers, card branded debit cards are the only option for electronic payments.  Meanwhile, settlement takes a little longer with offline debit transactions, but usually only by a few days.

While consumers can often make larger purchases with credit, there is always the chance that the customer will do a chargeback.  Unfortunately for merchants, chargebacks are allowed with offline debit cards, since transactions are processed through the credit card networks and cardholders are therefore protected under the Fair Credit Billing Act.

The Card Associations and Merchant Processors Side

Offline debit card transactions are processed through the card networks so the card associations, like Visa and MasterCard, prefer this option – for obvious reasons. Merchant processors earn revenue from either option, but there could be more revenue for them with offline debit transactions (depending in the pricing structure).  For this reason, some processors fail to offer the PIN-based option to merchants.  Sometimes it may be due to an inexperienced salesperson, or the processor not fully understanding the merchant’s processing abilities.  While other times, the merchant processor does not even offer the option, hoping the merchant will be none the wiser.

Merchants’ Choice

What merchants do have is the choice to be able to offer PIN-based transactions (again, if their processing system is enabled to accept PIN-based debit) and thereby incurring lower processing fees.  Some merchant processors don’t offer this option, so merchants may need to ask.  PIN-based debit transaction fees are typically less than for credit card transactions, but PIN pad equipment is required.  Hopefully soon, some form of PIN-based option will be available for ecommerce as well.

In the end however, if the option is there, it is still up to the consumer to choose.  Even if a POS system defaults to debit or credit, a merchant cannot dictate which option the consumer is to use.

This blog refers to debit and credit transactions in the U.S. at this time. Fees and acceptance rules vary in other countries.

In late January, NY Attorney General Cuomo made some strong moves in the battle against post-transaction marketing.  His office reached an agreement with Fandango, in which the online movie ticket retailer will no longer engage in any marketing practices that enroll consumers in membership/discount clubs – without the consumer’s approval.   Additionally, Cuomo launched an investigation into 22 well-known online retailers who deceptively enroll consumers in these membership clubs.  Cuomo stated that while the enrollments in the discount clubs weren’t “illegal per se,” they could be considered deceptive practices.  The investigation resulted from monumental consumer complaints who say they were lured by coupons or cash-back offers while buying things such as flowers and movie tickets and then enrolled in clubs which charged their cards monthly without their consent.  Complaints included the difficulty in finding out who to contact to cancel the membership once it is discovered.

Affinion, Vertrue and Webloyalty, the three main discount club sellers (all based in Norwalk, CN), have been accused of improper conduct numerous times before and have even been sued or are currently under investigation by several states over their sales tactics. Last June, a federal judge in Massachusetts approved a settlement agreement to a class action lawsuit against Webloyalty.  Up to 20 million people are eligible for refunds from the company.  In 2006, a multi-state lawsuit against Affinion (formerly Triligiant) resulted in $14.5 million in consumer restitution and penalties. They are now in the hot seat for possible violations of its settlement order.

A report on aggressive sales tactics issued by the U.S. Senate Committee on Commerce in November said the three companies have taken $1.4 billion from customers in a little more than a decade. The billing information is generally passed through to the club sellers without the consumers’ direct consent.  Online retailers linked to the sellers earned revenue as well.  According to the report, 19 online retailers generated more than $10 million and 69 online retailers generated between $1 and $10 million in revenue.  Classmates.com received more than $70 million from these practices.  The report also stated that more than 450 retailers were partnered with the three companies.

In its agreement with the NY Attorney General, Fandango has agreed to suspend contracts with all discount club sellers.  The company also agreed to pay $400,000 into a consumer redress fund. Fandango will also adopt the following reforms:

• Review and approve all Fandango incentive offers made in connection with online purchases and require any contracted discount club seller to provide the numbers of New York customers enrolled and complaints received from those customers
• Explicitly warn consumers that the incentive is offered for joining a separate company’s membership club
• Explicitly notify consumers when they are redirected to a discount club seller’s site that they are leaving Fandango’s Web site
• Ensure that all cash-back or rebate offers made by contracted membership club sellers comply with New York state rebate laws by providing redemption forms and information at the time of the offer

The subpoenas from Cuomo’s office seek information about each retailers’ practices of sharing consumers’ account information with membership program companies; their knowledge of any deceptive solicitations; and compensation from the membership companies.  The downside to Cuomo’s (or any individual state efforts) is that any resulting legislation will only affect consumers in that state.

In addition to Fandango and Barnes & Noble, retailers being investigated include Orbitz, Buy.com, Ticketmaster, MovieTickets.com, FTD, Shutterfly, 1-800Flowers, Avon, Budget, Staples, Priceline, GMAC Mortgage, Classmates.com, Travelocity, Vistaprint, Intelius, Hotwire, Expedia/Hotels.com, Columbia House, Pizza Hut and Gamestop/EB Games.

Vistaprint, Priceline, Expedia and 1-800-Flowers.com said they severed ties with the companies last fall.  William Lynch, President of Barnes & Noble.com states that they “welcome the NY Attorney General’s review because it will show that Barnes & Noble does not, nor has it ever, shared customer debit or credit card information with discount clubs.”

Some companies are staying with the clubs, despite complaints. Orbitz.com said in a statement that it had “improved its sign-up process with Webloyalty in a way that will ensure consumers know they are consenting to membership in a paid club.”

As part of a continuing investigation by the Commerce Committee, Senator Rockerfeller (D-WV) has sent letters to Visa, American Express, and MasterCard requesting information relating to cardholder inquiries about unauthorized charges stemming from “data pass” and any efforts made by the companies to reduce the number of chargeback requests from cardholders. The letters also requested information regarding continuity programs that trigger a high chargeback percentage.

The club sellers claim their practices are legal but have promised changes.  Following the Commerce Committee report accusing them of acting unethically, all three club sellers began requiring customers to re-enter all 16 digits of their credit card number for enrollment.

Continuity plans, upsells /cross-sells and post transaction marketing can be a BIG benefit to online retailers and club program marketers, as long as they are executed ethically.  Consumers who get burned end up losing trust with all online retailers and marketers using similar sales tactics.  So even if an online retailer is on the up-and-up, sales and conversions can be hurt by the negative experiences customers have had with other online retailers and marketers.

By forging relationships with well-known companies who have a substantial online presence and customer base, direct marketing companies are selling club memberships, which incur monthly fees, to online shoppers at checkout. Unfortunately, not all of the online shoppers are aware that they purchase these memberships.  The memberships, masked by offers such as cash back rewards, future purchase discounts or free magazine subscriptions, are frequently tied to trusted web sites.  Shoppers only discovered they were enrolled in the clubs after finding unauthorized charges, ranging from $9 to $20, on their credit card statements – sometimes after they had been charged these fees for a few months.

“The memberships, masked by offers such as cash back rewards, future purchase discounts or free magazine subscriptions, are frequently tied to trusted web sites. “

After discovering and investigating these unauthorized charges, most online shoppers found the club enrollment process deceptive and misleading.  What is angering cardholders most is that their credit card information was passed on to third parties without their consent.  Unfortunately, the consent was hidden in the small print (they likely did not read) when they accepted the online offer.

High volumes of consumer complaints to the Better Business Bureau, state attorney generals and consumer advocate groups about these controversial sales tactics prompted an investigation by the U.S. Senate Committee on Commerce, Science, and Transportation, chaired by Senator John D. (Jay) Rockefeller (D-WV).  The investigation, launched in May, 2009, researched three Connecticut-based direct marketing companies – Webloyalty, Affinion and Vertrue – their online retail partners and the web sites which sell club memberships to online shoppers.  Their findings thus far were published on November 16, 2009.

Some of their findings discovered:

• These business practices have created over $1.4 billion in revenue from online consumers
• More than 450 e-commerce sites have partnered with Webloyalty, Affinion and Vertrue
• E-commerce companies who partner with these direct marketers also share in revenues from these memberships
• 88 e-commerce companies have earned more than $1 million of the $1.4 billion in revenue
• Since 1999, online shoppers have been enrolled in more than 35 million memberships
• A majority of consumers contact the call centers for the 3 leading direct marketing companies to question the unauthorized charge on their cards and subsequently request cancellations

These offers are called “post-transaction” because they appear after online shoppers enter their billing information but before a transaction is confirmed.  Misleading “yes” and “no” buttons cause consumers to think they are completing the original transaction, but instead they are entering into a separate financial purchase.  If the shopper accepts the offer, the billing information is passed on to the third party who manages the monthly memberships.  These offers have been found on well-known – and trusted – sites such as Expedia, Orbitz, Priceline, Hotels.com, Fandango, Buy.com, and Classmates.com (who reported more than $70 million in revenue from the memberships).

In an interview with MSNBC, Webloyalty CEO Rick Fernandez stated that Webloyalty made sure the terms and conditions were clear to online shoppers in the post transaction process.  However, online consumers who have been enrolled in the club memberships without their knowledge don’t agree.  These marketing and sales practices are causing negative effects on e-commerce and tarnishing consumer loyalty in the web sites and companies who employ these marketing practices.  Complaints from online shoppers, and now the release of the Senate report, are forcing e-commerce companies to revise these marketing tactics towards a more conservative approach – or to end the partnerships with these firms all together.  Affinion claims that the activities in the Senate report describe Webloyalty’s practices and claims that Affinion has changed their business practice but did not describe what changes were made.  Vertrue, also known as Adaptive Marketing LLC, stated that they are “strengthening” its practices to provide consumers with “clear, conspicuous and repeated disclosure” of their terms and conditions.

Online merchants should consider the effects of similar marketing and sales tactics before deploying them.  Online shoppers prefer to shop with merchants they can trust – a strong influence contributing to online shopping behavior and consumer loyalty.