A Funeral for Signature-Based Card Transactions

Signature was a legacy of a security system that really hasn't had any teeth in decades, say experts. Why did it take so long to eliminate?

A Funeral for Signature-Based Card Transactions

A Funeral for Signature-Based Card Transactions

Charles Keenan

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people's living rooms thanks to the relaxation of surcharging rules.

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So long signatures. This Sunday, the Grim Reaper is coming for you.

The card networks, which recently announced the end of their requirement for chip card and contactless transactions at the point of sale (POS), have said — in so many words — that it's time to move on from the signature as a form of authentication, which lost its utility as a fraud-fighting technique long ago.

The signature has had a good run, and it won't be totally dead come April 1. That's when Mastercard, Visa, Discover and American Express will drop the requirement for merchants to collect and store signatures for POS transactions where a card is present. Merchants not accepting EMV cards will still be required to collect signatures. Yet realistically, it's the beginning of the end for the signature-based transaction, which is now set to go the way of the knuckle-buster.

A legacy system

Since 1958, when BankAmericard — the precursor to Visa — rolled out its credit card network with merchants, the signature has persisted in some form. In the days of plastic cards and carbon-copy receipts, signatures did serve a purpose, with merchants required to verify someone's signature on a sales slip with the one on the back of a card.

Yet in recent years, the signature has become more symbolic for the majority of transactions, at least when it comes to authenticating them. Over time, large merchants, for all intents and purposes, stopped checking signatures against the card. For these transactions, it was worth assuming the liability of chargebacks in order to speed up checkout lines — plus, they could always check the cardholder’s name against an ID card if they needed to.

Meantime, the signature's authenticity has been quietly mocked by consumers themselves. Many customers, in lieu of a signature, have resorted to drawing smiley faces or incomprehensible squiggly lines. While signatures have higher fraud rates than PIN-based transactions, the networks were comfortable enough with other security tools for authentication.

Among consumers transacting within a banking or payment app - 69% were comfortable authenticating by passcode / 63% were comfortable authenticating using a fingerprint

"Signature was a legacy of a security system that really hasn't had any teeth in decades," says David Robertson, president of the Nilson Report, an industry newsletter.

The networks began experimenting with ending signature requirements earlier this decade in less risky merchant categories, such as dry cleaners and movie theaters. Grocers first had transaction limits of $25, after which a signature was required. This was later raised to $50.

Yet even for larger amounts, the signature had become superfluous. "It really doesn't add value," says Brian Riley, director of Mercator Advisory Group's credit advisory service. "The wheels didn’t fall off when it was no longer required."

Various technologies have helped reduce the reliance on signatures. One key advance has been machine-learning algorithms, which have allowed the card networks to better detect fraud and minimize false positives. EMV cards have also helped reduce fraud at the POS, given that cards are so hard to counterfeit today.

For mobile transactions, tokenization and biometrics are now used to verify identity. The move to mobile also underscores signature's obsolescence. TSYS' 2017 U.S. Consumer Payment Study found that among consumers transacting within a banking or payment app, 69 percent of them were comfortable authenticating by passcode with 63 percent comfortable using a fingerprint.

Online also has played a role in necessitating authentication methods other than signatures. "It's a natural shift toward digitalization," Riley says.

Another incentive to adopt EMV

For merchants not accepting EMV, the drop of the signature presents more pressure to upgrade and start accepting chip cards. There were about 460 million chip cards and 2.5 million physical merchant locations that were chip-enabled as of December, according to research by Visa. Both the issuing and merchant side of the transaction have enough critical mass to push EMV acceptance elsewhere, Robertson notes.

"It will be another reminder to merchants that signature is going away and you are either on board or not on board as everyone moves to get those stragglers," he says.

Another reason for the dropping of the signature requirement might have to do with competition. One of signature debit's main competitors has been the EFT networks, which generally offer lower merchant fees. In recent years, these networks, such as NYCE, Pulse and Star, have instituted 'PINless debit,' obviating the need for customers to enter their four-digit PIN code. This form of debit gives merchants a compelling alternative to signature-based debit: cheaper and faster transactions with lower fraud rates. Large retailers have been especially keen to route transaction through cheaper pathways.

Steve Mott, principal of BetterBuyDesign, a payments consultancy, characterizes the move to drop signature debit as a tacit admission by the networks that the signature, particularly on the debit side, had big drawbacks in terms of fraud losses and expense to merchants.

"It's a watershed moment for the industry in acknowledging how bad signature debit was in particular, and how they need to move on from signature as a form factor for payments," says Mott.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Charles

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people’s living rooms thanks to the relaxation of surcharging rules.

His work at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker, and U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.

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