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Flipping Durbin
I was speaking with a major debit card issuer recently about the effects of Durbin and he said “It’s flipped.” He was talking about the former issuer practice of heavily promoting signature debit flipping, post Durbin, to greater issuer interest in PIN debit.
The impact of the first flip has been intense and substantial. Forecasts and models are one thing, the reality is another. The Durbin margin compression has now hit the monthly financials and the pain is real, creating renewed interest in PIN debit.
But that’s not the only flipping thing about Durbin. Durbin flipped the tables on network exclusivity. Regulated FIs who had exclusive deals with the associations are working toward their April 1st deadline to finalize their second network. The competition among networks to win these issuers, who under the Durbin non-exclusivity rules must select a second network, has been intense. Every day I’m scanning the industry press for big announcements.
There is a third major Durbin flip that stands to reshape payments industry dynamics.
Durbin also flipped the control of routing from the issuers to the merchants. Instead of issuer’s picking the routing choice that provides them the greatest revenue, now merchants have the power to choose the routing that provides them the lowest cost (interchange + fraud + network fees + other fees).
- Merchants with interchange pricing, typically big merchants, will benefit the most. Other merchants, who have blended pricing will not benefit.
- EFT networks whose value propositions and pricing have focused on serving issuers are now looking to develop strategic relationships with major merchants.
- Merchant routing power is resulting in merchant negotiating power and incentives. Networks can offer merchants a “deal” on network / switch fees, e.g. VISA announced volume-based lower fees, if merchants give them more volume.
Sandra Chesnutt is SVP Marketing for Acculynk, provider of PaySecure. PaySecure brings PIN debit to the internet.
An Insiders’ Guide to Debit for e-Commerce Post-Durbin
Three months into the Durbin era, both regulated issuers and merchants are well into their reactions and counter-reactions and industry observers are sorting out the winners and losers. One clear winner is internet PIN debit. PIN debit brings the lowest cost of card acceptance to e-commerce merchants and highly attractive economics to issuers due to lower fraud and chargebacks. A leader in online debit transaction authentication, Acculynk’s CEO Ashish Bahl responds to questions about how the Durbin Amendment has impacted the PIN debit industry.
From the mainstream news we know that issuers have reacted to Durbin by re-evaluating their debit and credit strategies. From an insider’s perspective, what trends are you seeing?
With the lower interchange, most issuers are upside down on their CNP debit transactions – the interchange revenues are not enough to cover fraud and chargebacks making the regulated issuer a net loser on signature debit transactions.
We see issuers continuing to look at fee increases, but more importantly for the industry, issuers are looking to move high-credit-rated customers to credit while moving lower-credit rated customers to PIN-only cards. The impact of PIN-only cards could be to drastically reduce the number of cardholders able to shop online. PaySecure’s patented graphical, online PIN pad allows PIN-only consumers to continue to transact online. The second factor of authentication with internet PIN debit ensures a clean, profitable transaction.
As issuers realign their debit and credit strategies what’s the net impact for merchants?
Even though Durbin leveled the playing field for signature and PIN debit interchange, merchants will begin to see an increase in high-cost transactions coming from consumers who migrated to smaller credit unions and other unregulated issuers. Merchants will also begin seeing increased credit transactions as issuers push credit over debit. That said, merchants are benefitting from Durbin as they now have the opportunity to steer transactions to the lowest cost payment type. Merchants have to be more savvy and proactive in steering consumers to transaction types like PIN debit that reduce fraud and chargeback costs both online and at the point of sale.
Now that PIN debit has become even more important, what are the competitive options for an issuer or merchant interested in internet PIN debit?
The market opportunity for delivering clean, low-fraud transactions to merchants and issuers has attracted interest to this space. We see several startups in the industry offering innovations in authenticating debit transactions. Issuers and merchants will have carefully assess these authentication innovations.
One essential way to measure a payments innovation is to look at how simple it is for consumers to use and for merchants and issuers to adopt. Another important way is to look at how quickly a payment type scales and how pervasive it becomes by building value in the chain. The last thing you want is to incorporate a payment type that takes time and effort and does not really offer you any value. A good example would be the alternative payment types that proliferated only a few years ago. Many did not scale and were gone within a year or two. We are seeing the same effect as businesses attempt to bring convoluted authentication methods to the industry.
Acculynk has offered simplicity to consumers, merchants and issuers which is a strategy that has really paid off for us. In just two and a half years we are live with nine major EFT networks, all major acquirers, over 3,000 merchants and 7,000 issuers. Millions of consumers in the US use the PaySecure graphical, scrambling PIN pad to authenticate their debit transactions online. Additionally, Acculynk will be going live with several countries outside the US by year end which is very good news for merchants who would like to generate lift through online sales outside the US
Sandra Chesnutt is VP Marketing for Acculynk, provider of PaySecure. PaySecure brings PIN debit to the internet. Ashish Bahl, Chairman and CEO of Acculynk, has 25 years’ experience in the payments industry.
Debit Focus for Issuers post-Durbin
Last week was the 2011 ATM Prepaid & Debit Forum where the presenters and panelists were talking about the body blow to issuer’s revenues dealt by Durbin and the subsequent bloody nose from the consumer poke over debit card usage fees.
These are three big trends I heard over the course of the three days, as the FIs (financial institutions) and card issuers look forward:
1. Consumers, fueled by press attention, are watching closely.
2. There exists a consumer perception that banks are meant to serve them rather than operate as a profitable business venture.
3. Debit, as a consumer capability, is popular with consumers.
Given the above, FIs understand they need to offer debit profitably – in an environment where how they choose to do so could be amplified and potentially criticized. The following are strategies I heard talked about from banking executives.
The issuers I spoke with felt their organizations planned to replace interchange revenue with a fair structure of fees based on activity and profitability by customer, but were a little cautious based on recent events. The conversation moved on from fees to other strategies:
- Focus on building stickier relationships, or the upsell opportunities to get more of the customer’s business.
- Focus on the customer lifetime; building a relationship with a consumer and growing revenues as the individual grows financially.
- Focus on product and service innovation, delivering more of what the consumer sees value in and is willing to pay for.
- Focus on reducing current cost structures. Most agreed that while this is not necessarily a simple fix, this strategy offers the most compelling opportunity to impact the bottom line quickly. Consider this scenario: an issuer with 200 million cards could potentially save almost $2 million* in a few months by enabling PIN debit for internet transactions. Considering that the issuer’s cost of implementing PIN debit is nil, the savings in fraud costs could be a meaningful contributor to returning profitability to debit.
Sandra Chesnutt is VP Marketing for Acculynk, provider of PaySecure. PaySecure brings PIN debit to the internet.
* (Assumes five online transactions per cardholder, $70 average transaction, reduction of fraud and chargeback costs to the issuer of 10 bps and additional estimates for per cent choosing PIN over processing as credit and the percentage of merchants that have enable PIN on their check out.)
Is Debit Dead? Hardly
Is the $5 debit fee the death knell of debit? Recent headlines would have a reasonable person assume that debit will dive, not thrive. With the introduction of regulated debit interchange, banks will attempt to steer consumers to credit as it is more profitable for them than debit.
On the other side, credit card transactions are more expensive for merchants who are not about to cede the gains they made with lower debit interchange. So, just as banks responded to the Durbin changes, merchants will counter respond to FI’s ‘$5-debit-to-credit’ strategy.
Scenario 1:
General debit spend declines, and credit is a beneficiary. Merchants, seeing the high spread between debit and credit interchange rates, create incentives to push debit spend for consumers. Debit thrives.
Scenario 2:
Premium bank customers are not charged the debit fees and continue to use debit. Smaller banks and credit unions pick up dissatisfied consumers who want to use their debit card and do not want to pay the fees. Debit thrives.
Scenario 3:
Large merchants move quickly to adopt POS and internet PIN debit to combat fraud costs. Signature debit becomes an insignificant and archaic online payment method. Consumers have a clear choice of credit or debit, and while some move to credit, many who prefer debit over credit continue to use debit. Debit thrives.
Meanwhile, with debit interchange capped, merchants are now aggressively lobbying for similar caps on credit card interchange. In that case, the fraud reducing second factor authentication provided by PIN debit gains even more traction as it benefits both banks and merchants.
Sandra Chesnutt is VP Marketing for Acculynk, provider of PaySecure. PaySecure brings PIN debit to the internet.
Internet PIN Debit Means Increased International e-Commerce
While we are thrilled to bring EVERTEC on board as a partner and serve the Puerto Rican and Caribbean cardholders, I would like to take a moment to share what this partnership means to US-based internet retailers.
Currently, most internet retailers have obstacles gaining customers outside of the U.S. Many developing international markets are PIN-only and do not currently have a viable CNP solution. PaySecure’s online graphical, scramboling PIN pad allows for the use of PIN debit with in-country payment brands utilized on U.S. e-commerce sites.
As just one example, by enabling EVERTEC’s ATH PIN debit cards, U.S.-based e-Commerce merchants will benefit from incremental sales to new consumers in Puerto Rico, the Caribbean basin and Latin America.
The merchant opportunity for new sales lift is significant:
– Over 75% of card payments in Puerto Rico are made with PIN debit through an ATH card.
– Over 90% of ATH debit cards are PIN-only, they can only be used online with PaySecure.
– ATH debit cards work at most US POS checkouts, PaySecure allows these consumers to make online purchases at the same merchants.
This chart puts into perspective the potential lift to e-commerce by taking advantage of internet PIN debit cross-border sales.
Assuming only 10% of ATH PIN debit card holders make online purchases at PaySecure supported US merchants in the first year, the potential increase to e-commerce sales is impressive.
Ashish Bahl, Chairman and CEO of Acculynk, has 25 years’ experience in the payments industry.
Acculynk puts its toes in warm International waters
With Puerto Rican consumers spending $8.5 billion in annual debit card expenditures compared with $3 billion in annual credit card expenditures at the POS, debit cards are the big fish in Puerto Rican waters. In fact, many consumers throughout the Caribbean region are not active credit card users, although they do have access to PIN-only debit cards. Until now, these same debit card users were limited to POS transactions and, without an internet PIN debit option, were unable to transact on the internet.
Now that Acculynk has partnered with regional powerhouse, EVERTEC, the two companies will bring millions of debit card consumers in Puerto Rico and surrounding areas the ability to use their PIN-only debit cards for e-commerce.
Enabling debit cards for e-commerce represents a major innovation in the region’s payments infrastructure and could potentially drive millions of dollars in online revenues for U.S.-based merchant sites and is a boon for local issuers.
Cross-border transacting is a hot topic for e-merchants who foresee opening up their e-commerce markets beyond US borders as a significant lift to sales. Without signature debit as an option, the sole way to use PIN-only debit cards on the internet is with Acculynk’s patented, scrambling PIN pad.
Partnering with EVERTEC ATH network is a first step to internationalize PaySecure® and Internet PIN debit. Online shoppers based inside or outside the U.S. enter their PIN on a graphical PIN-pad at the merchant checkout, and only need their existing debit card and a PIN number to complete the transaction. There are no hardware devices, passwords, enrollment requirements or redirection to another website for payment.
Sandra Chesnutt is VP Marketing for Acculynk, provider of PaySecure. PaySecure brings PIN debit to the internet.
Same Day ACH: Too Little Too Late?
The Automated Clearing House got into the real-time payments game last year with the introduction of FedACH SameDay, which allows debits from certain payees to be processed over ACH same-day instead of next-day. Faced with competitive solutions and merchant and consumer demand for real-time payments, it makes sense for ACH to offer same day settlement – particularly as it seeks a foothold in the mobile and P2P markets.
Keeping “business in the bank” is a rationale for FedACH SameDay, rather than having the transaction go to an alternative payment provider that offers same day processing. An added benefit with same day settlement, banks can pinpoint fraudulent transactions sooner with faster clearing. Pre-Durbin same day ACH seemed like such a good idea, then down went Tempo and decoupled debit. The question now is will FedACH SameDay gain any momentum at all with mobile and P2P or is it the Betamax of payments?
So far, the initiative has gained minimal bank participation for a variety of reasons, including the absence of third-party software support, perceived (or real) concern about cannibalizing wire transfers and debit transactions, the lack of NACHA rules (required to mandate participation), additional fees for the originating bank, and a limitation on the types of transactions that can be processed – certain ACH debits, such as check-based conversions and Internet and telephone-initiated entries, but not credits. Progress is being made on two fronts, as Aptys Solutions and Fiserv recently announced plans to support FedACH SameDay on their platforms and NACHA is beginning to form work groups that could result in a request for comment in the fall on possible rules for same-day ACH.
Financial institutions already have a real-time, in-house payment solution with internet PIN debit that requires no additional software and runs over the established EFT rails. Debit cards are ubiquitous, with over 500 million in the U.S. alone,[1] and unlike ACH, there is no consumer enrollment. Internet PIN debit satisfies both merchant and consumer demand for a real-time payment solution, making it ideal for banks seeking an e-commerce, mobile and P2P payment strategy, while preventing fraud with PIN authentication. While the kinks of FedACH SameDay continue to be worked out, banks have the option of getting into the real-time payments game now with internet PIN debit. Plus, while banks are looking to recoup fees wiped out by Durbin doesn’t it make sense to support a payment method that brings them fees rather than costing them fees?
Sandra Chesnutt is VP Marketing for Acculynk, provider of PaySecure. PaySecure brings PIN debit to the internet.
[1] Visa had 397 million in circulation as of Sept. 30, 2010, and MasterCard had 123 million in circulation as of Dec. 31, 2010.
Source: Credit Card Statistics, Industry Facts, Debt Statistics, http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php.
Think 'fraud costs' when thinking about Visa's new fixed pricing
With Visa’s announcement of a new fixed “network participation” fee, Joseph Saunders, Visa’s chairman and CEO, noted that Visa’s new pricing structure “offers merchants an even greater incentive to route more transactions over our network by providing them an opportunity to lower their per-unit transaction costs and take advantage of economies of scale that are now more readily available to them.” He continues, “We thought very clearly” about “what our competition would do…We think we have put ourselves in a position where we are more than capable of responding.”
We have done some thinking ourselves.
In the CNP space, where fraud is especially rampant, Visa is enticing merchants to ignore their secondary network and planning to gobble up transactions as signature debit. Yet Visa still seems to have no answer for combating fraud on the back end. In the highly-evolving CNP world one thing is certain: fraud is increasing. Let’s look at the economics for merchants under Visa’s scheme. On a $70 online transaction, a merchant could see Visa reduce fees to say $0.02 and expect fraud and chargeback losses of $0.25 (36 bps per transaction)(1) for a total cost per transaction of $0.27 before interchange and other processing fees. The same online transaction, as PaySecure – Internet PIN debit , could result in likely EFT fees of $0.03 and fraud and chargebacks of $0.03 (2) , for a combined cost of $0.06 before interchange and other processing fees. In the above example, PIN debit generates a $0.21 benefit to the merchant over signature debit.
Secondly, Visa has ignored the effects of Durbin on regulated issuers. Many regulated issuers will find it difficult to profitably support signature debit for CNP transactions, again, due to the cost of fraud and chargeback losses on a per transaction basis. By driving more merchant transactions to Visa signature debit combined with Durbin caps, issuers will be faced with rising CNP losses within their debit portfolios. Issuers suffer an estimated 54 bps (1) in fraud and chargeback losses on CNP signature debit transactions. With the new regulated Durbin interchange for debit cards, issuers cannot support “naked” online signature debit transactions. Since Visa’s pricing change does not address the fraud losses incurred by regulated issuers, banks will still issue more PIN-only debit cards and restrict online signature debit transactions.
Internet PIN debit is able to eliminate more fraud to issuers and chargeback expense to merchants than Visa can subsidize on a per transaction basis.
Sandra Chesnutt is VP Marketing for Acculynk, provider of PaySecure. PaySecure brings PIN debit to the internet.
1) According CyberSource’s 12th Annual Fraud Report, 2011, online fraud is 90 bps per transaction. Distribution of percent of fraud between issuer and merchant, 60% and 40% respectively, based on partner information.
2) Calculated as 77% reduction derived from testing and historical results using Acculynk’s patented graphical, scrambling PaySecure PIN pad.
Fraud and chargebacks now the critical driver for debit card issuers
Under the final Federal Reserve Board rule, interchange fees for debit transactions are capped at $.21 per transaction plus 5 basis points (bps), with a potential $.01 upward adjustment for fraud prevention. As these rules apply to issuers with total worldwide assets of more than $10 billion, this ruling has the ability to affect almost 70 percent of debit cards issued. Although exempted from the regulations, industry experts and observers believe that community banks, credit unions and all other issuers falling below the $10 billion will not be unaffected by changes resulting from the Durbin regulation and may be pressured to lower transaction revenues likewise. At these rates, revenues, on a standalone basis, may be insufficient to cover the fraud and chargeback handling costs associated with CNP signature debit transactions. For the majority of issuers in the regulated category, the margin compression of going from approximately 170 bps in card not present (CNP) interchange to a targeted cap of $0.21 and five bps (~35 bps)[1] erodes the profitability of signature debit.
To fully analyze the effect of Durbin caps on the economics of both online signature and online PIN debit, costs related to fraud and chargebacks must be considered. Fraud for signature debit is historically higher than PIN debit. For example, point of sale (POS) fraud losses are almost four times higher for Interchange signature debit than for POS PIN debit.[2] From an e-commerce perspective, CyberSource reported average fraud losses of 90 basis points for e-commerce transactions.[3]
Internet PIN debit brings the benefits of PIN to the web, namely a reduction in chargebacks and fraud that benefits all stakeholders across the payments value chain.
With its historically higher fraud characteristics, signature debit transaction revenues, in many cases, would not cover transaction costs as illustrated in the schematic above. With internet PIN debit, chargebacks have been shown to be reduced by 77 percent with virtually no fraud to date.[4] When and the cost of handling chargebacks is also taken into account, analysis shows a marked difference between the economics of online signature debit compared with online PIN. As the diagram below shows, the difference in fraud and chargeback rates results in a significant delta in transaction profitability.
1 Interchange is calculated on a $70 ticket.,
2 According to the Federal Reserve System, 12 CFR Part 235, Debit Card Interchange Fees and Routing, Draft Notice.
3 Cybersource 12th Annual Fraud Report, 2011.
4 Derived from testing and historical results using Acculynk’s patented graphical, scrambling PaySecure PIN pad., 12 CFR Part 235, Debit Card Interchange Fees and Routing, Draft Notice.
