Since 2011, most card-not-present (CNP) merchants have had limited access to alternative debit networks due to issuers not enabling transaction routing. Now, nearly two months since the Federal Reserve codified that issuers must enable two networks for ‘all types of transactions’, US merchants are seeing their share of routable transactions grow - along with the opportunity to achieve over USD 3 billion in annual cost savings. In addition, US card-present (CP) merchants have new but varied access to alternative transaction rails that may concurrently facilitate cost-savings and customer through-put.
The passage of the Durbin amendment as an addition to the 2010 Dodd-Frank law contained several interventions into the US debit card market: interchange limits, co-badging guarantees, and protection of merchant routing rights. The co-badging mandate requires issuers to make at least two unaffiliated debit networks available for each debit transaction, enabling merchants to ‘least-cost route’, the process whereby merchants select the most cost-efficient network via which to route each transaction (Figure 1). CMSPI estimates that card-present PIN debit routing alone saves US merchants nearly USD 1.5 billion annually.
While the Durbin amendment guarantees access to unaffiliated networks and merchant routing rights on all debit cards, at the time of passage, many US networks could not process CNP transactions. In the decade since the bill’s passage, however, most US debit networks have developed the technology (typically referred to as PINless) that enables CNP debit routing. Despite the development of this technology, according to the Federal Reserve’s October 2023 clarification, some issuers were not enabling two unaffiliated networks to process CNP debit transactions.
CMSPI’s Debit Optimisation Tool (DOT) aggregates and anonymises billions of transactions each year to evaluate network availability and PINless enablement for our merchant clients. As of July 2023, we estimate that the proportion of CNP PINless enabled transactions has risen to over 90% for domestic network-badged cards. This suggests that CNP merchants will have access to alternative networks on more than 90% of domestic network-badged debit transactions, a substantial increase from the estimated sub-50% availability at the beginning of 2022.
Interestingly, the historical differences in CNP PINless enablement by issuer size have also been flattened as of 1 July 2023. Issuers with fewer than USD 10 billion in assets are not required to comply with the Durbin amendment’s interchange limits but are required to co-badge their debit cards and facilitate merchant routing rights.
Well before the Fed’s October clarification, we estimated these issuers had maintained close to 80% CNP PINless enablement. Conversely, our estimates suggested issuers with more than USD 10 billion in assets maintained close to 30% enablement as of early 2022. As of 1 July 2023, both issuer groups appear to have enabled over 90% of domestic network-badged transactions for CNP PINless routing, giving merchants the opportunity to save approximately USD 2.70 billion of the over USD 3 billion in annual anticipated savings.
When it comes to in-store transactions, PINless solutions can be used to maintain access to competing debit networks while offering faster checkout times than PIN transactions. The Fed's clarification, with an aim of enhancing merchant access to competing debit networks for all types of transactions, made clear that an issuer must enable at least two unaffiliated networks and protect routing rights for debit processing ’for a geographic area, specific merchant, particular type of merchant, or particular type of transaction.’
Specifically, the Fed states that CNP debit, which has been primarily processed via transaction messaging wherein signature authentication predominates, is a particular type of transaction for which the issuer must enable two unaffiliated networks.
Despite these guarantees, CMSPI data suggests issuer enablement of alternative debit networks in the US has grown primarily for CNP transactions, with CP enablement posting varied and diverse levels of enablement. Some issuers have enabled two or more networks for CP PINless on over 90% of their available volume, while other networks have not been enabled to the same degree and sit below 20%.
The nature of the clarification and the language guaranteeing routing rights for all types of merchants suggest that PINless enablement should be protected for CNP and CP transactions. For example, a quick-service restaurant (QSR), whose payments manager’s primary objective is to ensure a speedy customer checkout, is unlikely to implement a strategy of prompting their customers to enter a PIN as a result of the low potential fraud risk at low transaction values and the wait-times that can result from customer PIN-entry. For this ‘particular type of merchant’, the value of PIN entry is diminished, and the value of CP PINless enablement rises, demonstrating the importance issuer-enabled PINless solutions for CP and CNP, as the value of different debit network solutions can vary by merchant types and arrangements.
While enablement for CP PINless is lower than CNP PINless on average, merchants routing CP PINless debit today have opportunities to do so across a variety of card types, but doing this well requires routine monitoring of PINless enablement at the BIN-level. In addition, merchants discouraged by the levels of CP PINless enablement today should engage with their trade associations to learn more about how they can get involved in driving more competition in the market.
As there is significant variation in enablement across individual issuers’ card portfolios, the optimal strategy for analysing PINless availability is by doing so at the BIN-level, examining each card and the card’s subtypes for PINless enablement.
This approach, however, requires significant resources, as the BIN-level insights are typically built using data consensus across network and acquirer BIN-files, which often contain discrepancies. Furthermore, these BIN files must be routinely analysed, as we have seen that nearly 10% of transactions in the first six months of 2023 occur on cards where the networks available were different from the beginning of the period.
Lastly, even as PINless enablement increases, global network card fees are also increasing. As a result of shifting network fee costs, an optimal routing strategy today may look dramatically different after October or April, once new fees are introduced. So, while PINless availability and potential savings grow significantly, so does the complexity of establishing the optimal network routing strategy.
Christian manages the company's industry engagement and strategies on regulatory trends, finding innovative ways to develop data-driven narratives on the biggest issues in the payments industry. Christian works with stakeholders across the payments industry to promote competition and foster a more productive payments ecosystem, drawing on CMSPI’s market-leading data insights.
As the leading global payments consultancy, CMSPI has an unrivaled track record of saving global merchants millions by optimising their payments supply chain.
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