Saturday, November 12, 2011

A Look at the Future of U.S. PIN Debit

We are now in the PD era (post-Durbin) and one of the big questions amidst the new world order of lower debit pricing and merchant routing choice is the future of PIN debit.  As operations teams at the global and regional payment networks prepare for massive change, executives are contemplating strategies to compete for debit maket share.  With Visa controlling the vast majoritiy of the signature debit market today, I am sure they would be happy if PIN debit disappeared completely from the face of the earth.  The other networks see a great opportunity to move share away from Visa onto their own networks.  Issuers are taking note of the myriad of changes as well.  Thanks to the efforts of a certain sentor from Illinois, issuers' profitability on signature debit products was reduced dramatically and financial institutions are rethinking debit strategies to make up for lost profits.  On the other side of the equation, merchants are in a quandary.  In the past, they traditionally preferred PIN debit over credit because transactions were less expensive and fraud rates were significantly lower.  However, in PD world online and offline pricing is the same, although merchants still have the benefit of reduced fraud.  So what will happen to PIN debit and the associated networks and technologies that support it?
Let us understand that consumers are the guiding stakeholder in a transaction.  As always the consumer will dictate how they pay, whether it's by credit, debit, PayPal, check, cash, wampum, etc.  Merchants will need to accept any type of payment consumers want to use so they don't lose sales, but would prefer  steering customers towards payments that create the greatest value or cost the least.  It's the acquirer/ISO's role to help facilitate these various types of payments.  That said, networks, issuers and merchants all have tremendous influence on consumers and the eventual routing of transactions.
The major global networks, Visa in particular, have made some interesting moves in the PD environment.  First, in August Visa announced a plan offering retailers incentives such as a liability shift and relaxation of PCI recertification requirements to drive widespread adoption of contactless EMV.  Many see this as a strategic move to help initiate standards in the mobile arena.  However, others look at widespread adoption of contactless technologies as a way to eliminate "the PIN" and potentially PIN debit altogether.  In a move that may actually lose the Visa volume but protect valuable issuers, the global network eliminated the Small Debit Rate program for regulated transactions potentially shifting small ticket volume away from the network.
The rationale was to protect issuers that were subsidizing lower interchange on small tickets that are now not making enough money on total signature debit volume in the PD environment.  At the time of this article, we have not see a response from the other networks regarding aggresive debit pricing and none have offered pricing lower than the maximum allowed by the new regulation on traditional regulated transactions - which is equivalent to signature debit pricing for regualted transactions.  These networks are in a challenging situation as they balance signing and retaining issuer partners with merchant accpetance.  At first glance, other than fraud being lower with PIN there is not much of a differentiator between PIN and signature costs to merchants and revenue to issuers.
Issuer's activities PD will most likely have the greatest influence on consumers.  Most issuers are removing rewards programs from their signature debit products and some are even charging fees to maintain certain accounts.  It has yet to be seen if any issuers will cap signature transactions due to risk or issue a greater quantity of PIN- only cards, but either of those moves would increase consumer calls for PIN pricing currently equivalent, issuers most certainly will prefer PIN transactions due to decreased fraud levels.  The magnitude of savings will drive issuers to promote one debit scheme over another.  More to come as issuers' long-term strategies play out.
U.S. merchants are trying to determine the future of commerce as well.  As retain, ecommerce and mobile channels converge, many businesses are rethinking their infrastructure.  Retail PIN debit is expensive due to the cost of Pin Pads.  Mobile and eCommerce PIN debit is being made easier by the likes of technology providers such as Acculynk that provide encrypted dynamic pop-up PIN Pads.  As the same time, large merchants are being approached and often incented by networks to route transactions in their direction.  As competition heats up and margins get squeezed, incentives mean more money to a retailer's bottom-line.  Retailers in all channels are evaluating the new playing field looking to enable consumers' payments of choice.
Internationally, PIN debit will continue to thrive. In most countries there is a single debit network that often has tremendous consumer and merchant appeal.  Just look at Canada where Interact accounts for 50% of all transactions and the only way to initiate a transaction today is via PIN.  Similarly, Puerto Rico's ATH network accounts for half of the island's retail transactions.  That said, both of these networks are controlled or heavily influenced by banks and have little or no interchange or similar pricing schemes.  In essence they are virtually free to merchants.
In the U.S., will consumers care about or need to trasact via PIN debit?  And with the price currently equivalent to signature, will merchants?  I wish I had a crystal ball and could tell you.  I do know that changes such as the ones we are dealing with do spur innovation in the way of new producs that increase value for consumers and merchants.  The networks that continue to add value and maintain relevance will thrive while others may die.  We will most likely see some consolidation as certain players may not be able to survive on their own.  We will see networks and schemes that add greater value start to steal market share.  In the end, I don't know who will win or what the future will hold for U.S. PIN debit.  But as acquirers/ISOs it is our responsibility to keep our ears to the ground, help position our organizations for the future and guide our merchants toward prudent decisions.
Transaction World Magazine, by Greg Cohen, November 2011

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