Increasingly blurred territorial lines in the debit card business are bumping up competition among payment networks — and experts fear this could soon slash interchange income for credit union debit card issuers.
At issue is a crossover occurring among debit payment networks no longer content to stay in their lanes. Typically, most debit purchases occur either as PIN transactions, in which members enter a PIN number into a terminal, or as signature transactions, where users authorize the transaction with their signatures instead. Though many debit payment networks largely used to process either PIN or signature transactions — not both — these days, some networks such as First Data's Star, for example, which is traditionally known for processing PIN debit transactions, have swerved into signature transactions. Likewise, networks traditionally known for processing signature debit transactions are targeting PIN transactions.
The result is a marketplace in which some PIN-transaction networks are processing more signature transactions, and some signature-transaction networks are processing more PIN transactions. Often touted as "expanded network capabilities," the result is growing competition for transactions — a situation that tends to drive down prices and in turn has some people worrying about shriveling interchange income.
"There's no question that these other — what once were regional [PIN] networks, which really aren't regional anymore, they're national — they want their share of the pie," ServU Credit Union EVP Keith Orfanides told CU Times. "My concern for credit unions, starting with my own credit union, is I don't want to suddenly see our interchange decline and not understand what's going on." Painted Post, N.Y.-based ServU has $278 million in assets and 36,000 members.
The shift
The Durbin Amendment, which took effect in 2011, was perhaps one of the biggest sparks in the current turf war. By requiring card issuers to give merchants at least two unaffiliated network options for routing debit transactions, PIN processors scored a huge win, said Mercator Advisory Group Debit Advisory Service Director Sarah Grotta.
Eager to gain (or avoid losing) market share in the PIN processing business, some signature processors upped the ante. Facing a post-Durbin drop-off at its PIN processor, Interlink, Visa for example began the controversial enforcement of its PIN Authorized Visa Debit (PAVD) policy, requiring certain PIN-authorized transactions to be routed over VisaNet. Visa issuers use VisaNet for signature-based transactions and Interlink for PIN-based transactions. The move allowed Visa — largely known as a signature debit processor — to get more involved in PIN transactions.
Likewise, PIN processors have taken aim at signature transactions. First Data Corp.'s Star network launched Star Access, which offers signature authentication in addition to its existing PIN options. Discover's Pulse network, Fiserv's Accel network and others introduced similar services. That's helping them crack the massive but largely PINless card-not-present market, among other things, Grotta noted.
"That really opens up e-commerce and m[obile]-commerce to these networks and also gets them in-store with big merchants that aren't interested in having PIN hardware," she said. "My best guess is that it is simply because the EFT debit networks want to compete really on absolutely every possible venue with the global brands if they can."
Raising the dollar limit on PINless transactions, which are typically small, low-risk and don't require a signature, is another effort to take a bite out of the signature side of the business, First Annapolis Consulting Partner Lee Manfred said.
"This is all action and reaction," he said.
The advent of EMV — which prompted a massive upgrade of payment terminals — is still a sobering obstacle for some networks, because EMV is largely influenced by Mastercard and Visa, Grotta added. Apple Pay and other payment tokenization mechanisms haven't helped, she said, suggesting there may be another chapter to come in the turf war.
"Once again, EFT debit networks are shut out because Mastercard and Visa and Amex are working directly with Apple to devise their tokenization capabilities. Because of that, those are some strong incentives to come up with a competing solution that looks like it's going to be financially favorable for both issuers and merchants," she noted.
Unintended side effects
Adding to the pool of debit players is certain to affect the bottom line for credit union card issuers — even the ones below the Durbin Amendment's $10 billion asset threshold that don't face a federal cap on interchange fees, Manfred explained. Plus, merchants are actively scrutinizing fees now more than ever in an effort to optimize their network transaction costs.
The result, he anticipated, is that small issuer interchange rates will soon begin to approach the regulated rate.
"It's a big deal," he said.
Grotta felt the same way, though she thought rates could drop even more.
"It's a merchants' world right now," she said. "They are much more in the driver's seat than they ever have been, and they will continue to negotiate prices. Some of those prices for them may fall even below Durbin interchange levels."
Though the hit won't come overnight, she said, credit unions should keep a close eye on interchange and prepare now for less predictable noninterest income.
"Monthly is not too frequent to watch and trend the transactions," she warned.
Dragging debit
There is another wrinkle, of course: how credit unions will cope. Though basic principles of economics generally dictate that unprofitable products eventually get the ax, most credit unions likely don't want to or can't afford to nix debit — even if it becomes a cost center instead of a revenue generator. That's because debit is still an access device for share accounts, Manfred warned, and processing a debit card transaction is still a better deal for credit unions than processing a check.
Debit's also more lucrative than person-to-person payments right now, not to mention that it is probably the most important, visible connection members have with a credit union brand, Grotta added.
"Despite all the negative things that may be eating away at the income statement for debit, we probably need to not just maintain it but invest in it," she said.
Efforts to repeal the Durbin Amendment are wending their way through Congress, which could change the game altogether. But in the meantime, people like Keith Orfanides are wondering if anybody else is noticing that the water seems to be getting hotter.
"I don't think there's a big understanding of this," he said. "I'm sure there's others that are out there ahead of it — they've gotten notifications from their network, things like that. I also think there's going to be some surprise out there, and that's what I'm worried about."
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