Peter Guidi's Blog

Posts Tagged ‘PIN Debit’

Durbin’s Catch -22, Merchant Issued Rewards.

In credit card, debit card, interchange, merchants, payment, Payment card, Peter Guidi, Petroleum retailing, Platforms, swipe fees on June 13, 2011 at 9:13 pm

Merchants have won a battle, but the question is: can they leverage the advantage and win the war for the consumer’s method of payment?

The phrase “Catch-22” means “a no-win situation” or “a double bind” of any type. In the book, “Catch-22”, Joseph Heller describes the circular logic that confronts an airman trying to avoid combat missions by saying that his claim of insanity is the proof of his sanity. With the passage of Durbin, retailers are faced with the same circular logic. The Catch 22 of Durbin is that consumers must choose debit if retailers are to save on interchange fees, and consumers will only choose debit if offered rewards or to avoid bank fees. Today consumers choose debit in large degree to earn signature based debit reward or because PIN debit does not have bank fees as opposed to credit cards where there are annual fees and interest.  Durbin will change that paradigm as banks make up lost revenue by eliminating signature debit and adding fees to, or eliminating, pin debit cards. If those changes occur then retailers will need to fund consumer debit rewards to promote debit payment. Because merchant issued debit rewards erode Durbin’s potential cost savings, the potential is that total debit transactional fee may be higher than those during the pre-Durbin era…Catch-22.

Durbin’s challenge to Retailer’s is how to influence the consumer’s method of payment. Just because consumers are choosing Debit today, does not mean they will be choosing Debit tomorrow. The reasons why consumers choose one form of payment over another (Debit, either signature or PIN, cash, credit, check, prepaid etc.) are complex, but “Rewards” plays a large role in the process. In fact, nearly 50% of all interchange dollars are used to fund reward programs. A quick review of Bank advertising for Debit will show that Debit Rewards is tied to Signature Debit, not PIN Debit; “rewards are ” Pen, not PIN”.  Rewards for Signature Debit, plus “No Fee” PIN debit has created significant consumer demand for debit products. The banks loss of signature debit interchange fees means that these reward programs will disappear and consumers will begin paying fees for PIN debit. The result is that Durbin will change both the Debit and Payment Card market, not just the fees.

Look for these results:

1. Look for more pressure on retailers to install Pin Pads. Signature debit will go away as Financial Institutions will not longer offer signature debit. The whole point of signature debit was capture credit card like interchange fees. Debit rewards programs are funded by credit card like interchange fees and at Durbins mandated +/- 12 cents there is no “rabbit in that hole”. The reason retailer’s implemented PIN pads (3dez) were to move consumers from Pen to PIN. If Merchants are to win from Durbin, PIN Pads will play a large role in that success; otherwise there will be no debit at retail. Durbins “$10 Billion” exemption is a wild card. If smaller institutions introduce aggressive signature debit programs at the expense of larger institutions then Durbin will prove to have cost retailers more than they will save.

2. Financial Institutions will seek ways to replace lost revenue. The most immediate impact is likely to be fees on both dda accounts and perhaps the use of debit cards either as a transaction fee or monthly fee. Banks will discriminate against Debit making it less attractive. One of my associates added “Issuer’s already have plans to discontinue issuing debit cards and returning to ATM only cards.” He adds “other issuer’s are going to place a transactional cap on debit cards instead of taking them away.  They will only allow a transaction for $50.  If the transaction is $51 – then, another $1 transaction will have to run.”  Say good-bye to friendly debit transactions.

3. Watch for growth in closed loop debit card, particularly ACH Decouple Debit.

In the short term, Merchants will realize a windfall as consumers who use Debit maintain that method or payment. Debit usage will drop off unless Merchants introduce “Merchant Issued Rewards”. Merchant Issued Rewards are another name for loyalty. I can offer more on that if requested. The question retailers need to answer is: If you must offer rewards to promote debit, why not promote your own debit card? Durbin will increase the importance of loyalty rewards as merchants compete with FI’s for the consumer’s method of payment (i.e. PIN Debit).

4. Watch for more aggressive Credit Card and Pre-Paid card offerings with lower credit card fees, easier credit and more aggressive rewards. Pre-Paid is apt to be the next place the FI’s push for consumer adoption and fees. As the economy strengthens, and consumer debt drops the structural issues negatively impacting credit will lesson. Financial institutions can impact the consumer’s attitude towards credit by being more consumer friendly. The loss of signature debit will hasten this activity.

5. One “Wild Card” is the DOJ lawsuit on credit card interchange fees. There has not been a lot of press on this, but there will be soon.

 

 

Who gets to choose? Durbin’s provision on “multi-homing” and the prohibition on network routing exclusivity.

In credit card, debit card, interchange, merchants, payment, Peter Guidi, Platforms, retailers, swipe fees on January 29, 2011 at 2:18 pm

Here is the question:  When considering Durbin’s requirement prohibiting exclusive debit transaction routing arrangements, does the merchant or issuer choose which second unaffiliated network is available to route transactions? The answer is unclear and its implications impact both the intent of the regulation and the technology required to implement the rule.

Thus far, the majority of interest in Durbin is focused on the impact of interchange fee regulation with little attention on the second aspect of the provision; network exclusivity and transaction routing. Durbin has two provisions, the second of which says “that neither the issuers nor network may restrict the ability of merchants to direct the routing of the transaction”.  The rule is intended to foster competition between networks. The concept being that when at least two unaffiliated networks compete for transaction routing, the price merchants pay will optimize.

The Board is requesting comment on two alternative rules prohibiting network exclusivity: one alternative would require at least two unaffiliated networks per debit card, and the other would require at least two unaffiliated networks for each type of transaction authorization method. Under both alternatives, “the issuers and networks would be prohibited from inhibiting a merchant’s ability to direct the routing of an electronic debit transaction over any network that may process such transactions.” Some have suggested that the answer to this question lies in the currently available least-cost routing selections available to consumers between PIN and Signature debit. In this scenario debit cross-routing is the solution to network exclusivity. One expert suggests that “one such solution would be Visa for signature debit and Maestro for PIN debit. They are not affiliated, and thus fulfill the requirements of the first alternative.” The existence of the second alternative makes it clear that the Fed has not yet decided whether signature and PIN debit are one market.”

The contradiction is between the intent of the regulation and the Boards’ rule making process.  The differentiation between routing based on a transaction or a card may delineate the type of routing available, but it does little to foster routing competiveness. The intent of the regulation is to foster competition between networks.  Allowing the Issuer to choose the second network by pitting the PIN and Signature networks against each other is a weak proposal. On the other hand, if merchants choose the second network from a multitude of routing options competition will emerge, but how does that work? In order for the merchant to have a choice between a variety of networks, Issuers would have to support routing on all networks. In this scenario merchants might choose different networks on a location or regional basis? Implementing this type of network routing matrix will mean substantial changes in the infrastructure and business rules. The time and effort to create such a system is currently unknown. If competition between networks is the congressional goal this seems to be the correct interpretation.

The alternative interpretation is for the Issuer to offer the merchant a choice of two networks. In this case every Issuer would be forced to offer two networks for processing a transaction.  As an example, Visa and MC may have to route each other’s transactions. The merchant would be able to choose which of the two available networks to route the transaction.  Presumably, creating competition. As a result the merchant would choose the cheaper of the two. However, this scenario does not assure the merchant choice and adds the possibility that the Issuer could offer a second network with higher fees. In this case the second network would be the more costly option resulting in no opportunity for merchant savings.

How a two-network solution is allowed under the final version of the regulations remains unknown. It does seem that merchant choice fits congressional intent more clearly than Issuer choice, even if the technical challenges and costs to develop such a system are currently not contemplated or that the rule making process appears to miss the point.

(http://www.linkedin.com/in/peterguidi)

“Reasonable and proportional”, is issuance and the cost of reward programs a part of the “incurred payment processing costs”?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, merchants, payment, Payment card on June 17, 2010 at 9:34 pm

Lost in the debate over interchange fees and the Durbin amendment is a focus on how payment card products reach the consumer. One of the key points of the amendment is to mandate that the interchange fees on selected debit transactions be “reasonable and proportional to the cost incurred in processing the transaction” Merchants have taken the position that as the volume of transactions have increased, the economies of scale and overall effectiveness and efficiencies of the payment processing network have improved, and therefore the cost of transaction processing have gone down. The fact that interchange has gone up during this period is used as evidence that system is corrupt and anti-competitive. This point is heard when Senator Durbin says that government needs to “reasonably regulate this system”.

Missing from the debate on interchange and what constitutes the costs incurred in processing a transaction is consumer acquisition. Consumer acquisition costs are incurred in at least two areas; enrollment (consumer application) and rewards (loyalty programs & retention), to say nothing about overhead, like customer service. This week both Citigroup and TD Bank launched new “Debit Rewards” programs. Citigroup launched a 5% debit card cash back promotion, while the TD Bank program offers 1 point for every $1 dollar spent. In both cases, these reward programs are only available to consumers who use signature rather than PIN debit. As a consumer, which program should I choose? These are two highly competitive businesses, each offering me a product and a service. Each has put their best foot forward and is universally accepted. Both have used a different approach; one uses point’s, one utilizes cash back, and the choice is mine. If the Durbin amendment is successful and retailer acceptance is selective, and interchange fees regulated, would the consumer have these same choices?

Merchants involved with loyalty programs understand the costs associated with advertising and marketing to drive enrollment and fund reward programs. Industry sources report that up to 40% of all interchange dollars paid by merchants are used to support payment card loyalty programs. That means, in 2008, consumers may have earned up to 19 billon dollars in consumer rewards; a cost borne by the merchant, but also a cost to the issuer (bank).

The suggestion is that high fees are a result of no competition in the payment card market. In reality, the high fees are a result of intense competition. It just happens, that the competition is between banks (issuers) fighting for the consumers’ business.

(http://www.linkedin.com/in/peterguidi)

Does regulated debit “Swipe Fees” mean the end of cobranded debit card programs?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, merchants, payment, Payment card, retailers on June 4, 2010 at 8:16 pm

Retailers choosing “open-loop” or “closed-loop” alternative payment system might want to consider the long term viability of the open-loop business model, particularly in light of their campaign to regulate and lower the associated “swipe fees”. 

Affinity, cobranded credit card programs have opportunities for both the bank and the merchant. While the “no or low fee” in-store use of the cobranded card is a big attraction, Retailers also profit from cobranded credit cards when consumers use the card to make purchases. When a consumer uses a co-branded credit card, the accepting merchant pays the “swipe fee”.  The cobranded merchant earning “swipe fees” is an example of network effects in a two-sided market. In this example, the merchant is leveraging their customers to market a bank product. Organizations that have the marketing to reach their customers will get the response needed to make the program successful. Ironically, much of the success will be a result of the high fees paid by the merchants who pay the “Swipe Fees”. 

Retailers evaluating merchant issued ACH decoupled debit card programs consider the same model while evaluating their choice of “Open”, or “Closed” loop payment systems. The question is can the decoupled debit card generate revenue for the issuing merchant in the same way cobranded credit card products do. Ironically, the answer all depends on the “swipe fee” the 3rd party merchant pays when the consumer uses the card. The higher the fee, the more successful the program. 

In order for an ACH decoupled debit card to work in an open loop system the card must affiliate with a bank, and a network. Today’s interchange rates for PIN debit are already comparatively low. The challenge for cobranded cards is to offer a level of consumer rewards that will motivate the consumer to use the card. This is the reason that debit rewards programs are offered for signature debit and not pin debit transactions. As Merchants anxiously await the passage of the much ballyhooed Durbin amendment, they might consider its impact on the cobranded card. If “swipe fees” for debit are regulated, (decoupled debit card programs included) there will be no dollars in the program for either the consumer, or the cobranding retailer. If the consumer does not receive rewards to use the card, and the retailer is not earning money from the program, the network effects driving the value of the platform will be eliminated, making the cobranded credit/debit card program obsolete.    (http://www.linkedin.com/in/peterguidi)

What decision factors should retailers use when choosing between an open-loop vs. closed-loop alternative payment solutions?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, merchants, payment, Payment card, retailers on April 22, 2010 at 3:31 pm

Prevailing wisdom is often wrong.  Mark Twain said: “Every generalization is dangerous, especially this one”.

The prevailing wisdom on payment is that open-loop systems are superior to closed-loop systems. Open-loop payment systems have four stakeholders; consumer, merchant, issuer, and network. It is generally accepted that successful payment systems offer the consumer at least three attributes; simplicity, safety and desirability. This has lead to the mantra that only ubiquitous payment products can achieve “top of wallet” status. The reason being that the consumer wants one method of payment rather than multiple options as a matter of convenience; consequently, it’s simple and desirable.

Yesterday, Target announced they are dropping its Visa cobranded program. The Target program was one of Visa’s largest cobranded programs. This decision is the strongest sign yet that merchants are reevaluating the benefits of offering general-purpose credit cards. Target said they tested a Target credit card and that research indicated that the Target credit card drove more sales. The test made a clear case for its private-label cards over general-purpose cards. So much for “prevailing wisdom”.

Closed-loop payments systems have two stakeholders, the consumer and the merchant. When a payment system creates disintermediation between issuer and the network (acquirer) the result is increased engagement between the retailer and the consumer. Engagement is good for business. If consumers are interested in single purpose cards, as Target’s test indicated, why share the relationship with two other parties?

Prudent retailers will consider the results of Target’s decisions and other trends in payment before making a final payment system decision. Recent research indicates that 38% of consumers will reduce the use of their credit cards. Visa has reports that debit usage has surpassed the use of credit. Last week VISA announced an increase in Debit rates. Retailers looking to leverage these emerging payment preference trends should consider closed-loop ACH decoupled debit. (http://www.linkedin.com/in/peterguidi)

“War on Cash” or “War of Words over Card Fees”; the battle between two industries with very different points of view.

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on March 5, 2010 at 1:43 pm

The epic battle between the Merchant Payments Coalition and the Electronic Payments Coalition heated up again this week when NACS spokesman Jeff Lenard was quoted in the America Public Media online journal “Marketplace” saying “Welcome to the war on cash,” in response to increasing debit card transaction fees. Adding; “that the credit card companies have to find new revenue sources” as a result of The Credit Card Reform Act, and that “one of those is going to be interchange”.

 Meanwhile the “War of Words over Card Fees” continued as the Electronic Payments Coalition (EPC) reported that Senator Arlen Specter (D-PA) has indicated to Pennsylvania banks that he will introduce legislation which will mirror H.R. 3282. The EPC says that the “legislation will potentially shift the cost of accepting credit and debit cards onto consumers”. Frank Pinto, CEO/President of the Pennsylvania Association of Community Bankers goes on to say “When retailers accept cards in their stores, they receive profits, customers, guaranteed payment, and the golden key to e-commerce–and they shouldn’t have their customers pay for this cost of doing business.”

 Rising Signature Debit Transaction Fees are the latest cause for merchant concern. Consumer behavior is changing as debit becomes the preferred “method of payment”. Card Issuers are competing with each other for the consumers business. One result is that the Issuers and Card Associations are promoting the use of Signature Debit over PIN Debit because the signature debit interchange fee is higher than that of PIN debit which funds the reward program. The justification for the different fees is that the financial risks associated with the two types of transactions are different; Signature being more risky than PIN and therefore meriting higher fees. The paradox is that the industry is promoting the use of the riskier transaction assumedly because it is more profitable. The reality is that debit fees are approaching credit card fees, and that the two tiered debit fee is probably going to be phased out in favor of the one higher interchange fee.

 Sun Tzu the historical military strategist is well known to have said “Know your enemy”. Another of his lesser known quotes is “opportunities multiply as they are seized”.

 The merchant community could heed his advice when thinking about payment. The payment industry has noticed the consumer’s preference for debit. As a result the card issuers are offering richer debit rewards programs as they compete for the consumers business. Merchants can expect to see the cost for these consumer transactions to rise as these programs grow in popularity. Merchants must ask themselves, has the time for war arrived and is the “opportunity” competition?

(http://www.linkedin.com/in/peterguidi)

“It is not on our agenda this year,” is competition the only option in the battle over interchange?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on March 1, 2010 at 7:25 pm

Alexander Woollcott said “Many of us spend half our time wishing for things we could have if we didn’t spend half our time wishing.” The same might be true when considering the high cost of card acceptance and the path to lower Interchange fees.

With eight words, “It is not on our agenda this year,” Barney Frank ended the speculation over H.R. 2382, the Credit Card Interchange Fees Act legislation aimed at regulating interchange fees. Representative Peter Welch (D-Vt.) explained saying “He (Frank) doesn’t want to necessarily spend time moving things here when there’s been so little response in the Senate,” Merchants are left exhaling with the slim hope that U.S. Senator Arlen Specter (D-Pa.) may introduce a bill that seeks to limit interchange fees. It now seems fair to say that the effort to use legislation to control interchange has failed, at least for 2010.

Merchants had pinned their hope for reform on The Merchants Payments Collation’s three pronged strategy, legislation, litigation and competition, to lower card acceptance fees. The question now: is competition the only option in the battle over interchange?

(http://www.linkedin.com/in/peterguidi)

Pen or Pin: An expensive decision for the retailer. Are best things in life free, or do you get what you pay for?

In alternative payment, Bank Tax, credit card, debit card, interchange, loyalty, payment, Payment card on February 3, 2010 at 9:49 pm

Debit cards are making news as the consumers preferred method of payment. Financial industry analysts predicted that debit cards would overtake credit cards and would start a change in the loyalty offering and other types of card incentives from credit to debit cards. It was never predicted that it would happen so quickly with such a tidal-wave type of shift. One major transaction processor, revealed that membership in credit card reward programs has declined from 71% of the consumers surveyed in 2008 to 67% this year. While at the same time, the participation in the debit reward programs has increased markedly from 34% of consumers surveyed in 2008 to 45% this year. This trend is expected to continue as consumers struggling under the load of credit card debt move to debit.

PCI PED deadlines appear like a fog bank on the horizon, big, dark, impenetrable and getting closer. Retailers are faced with the decision to either upgrade from older, no-secure PIN pads to PCI PED approved pads at significant cost, or to accept all cards as “signature” at the pump paying the higher “signature transaction fee”.

Meanwhile, banks are sending a conflicting message as retailers are now faced with PIN debit transaction fees that are nearly equal to signature debit transaction fees.  Adding injury to insult, Financial Institutions are offering consumers aggressive “debit reward” programs based on consumers’ choosing ‘Signature” rather than PIN.  Rewarding the consumer for using signature debit is essentially bribing the consumer to use a more expensive form of payment. One major bank recently released its “Swipe & Sign” program offering consumers a $10.00 gift certificate from Amazon.com for one “signature debit transaction” at a grocery store. The result is retailers are paying for more expensive Signature based debit transactions. This is a “dammed if you do, dammed if you don’t” situation. 

Retailers are wondering if the upgrading to PCI PED pin pads is worth the expense. They face a situation where the lower cost PIN debit rate is going away at the very same time banks are rewarding consumers to use signature debit. It appears that the banks are saying “no” to PCI PED upgrades.

(http://www.linkedin.com/in/peterguidi)