Responding to Merchant Demand, Shazam Prepares Dual-Message PIN Debit

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The Shazam debit network is testing a so-called dual-message PIN debit format and expects to make it available network-wide early next year, a Shazam official tells Digital Transactions News. The move, which represents the first known instance of PIN-debit transaction processing departing from the single-message format that has characterized it since its emergence in the 1970s, is expected to appeal to merchants and their processors as new Federal Reserve debit rules take hold. “This initiative was driven solely by the merchant community,” says Dan Kramer, senior vice president for marketing and merchant services at Johnston, Iowa-based Shazam.

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In a related move, Shazam is also testing applications written for both the iPhone and Android mobile operating systems that will let store staffers move away from checkout counters and use mobile devices to complete PIN-debit transactions anywhere on the sales floor. These apps will also become available next year, Kramer says.

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With the traditional single-message format, which Shazam will continue to offer, PIN debit transactions are routed from merchant to acquirer to issuer with both authorization and settlement messages bundled together. Dual-message processing, by contrast, splits authorization and settlement into separate messages. This is the format followed by signature-based debit and credit card processing.

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But while signature debit is more prevalent among merchants, experts expect merchants and issuers to start preferring PIN debit because of its lower fraud losses. That’s because, under the new Fed rules, transactions on cards issued by banks with more than $10 billion in assets will carry the same interchange pricing effective Oct. 1. Less fraud is likely to make PIN debit more profitable for these banks and will appeal to merchants as well, since they will have to handle fewer chargebacks. The Fed rules, which the agency issued June 29, implement the Durbin Amendment to last year’s Dodd-Frank Act.

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Kramer says dual-message PIN debit will allow merchants whose systems are already geared to signature-debit acceptance to add PIN debit with less integration costs. “We’re taking a process that already exists and adding a PIN to it,” he notes. This could be especially valuable for e-commerce merchants, which have historically accepted only signature-debit and credit cards. Shazam is working with two vendors, Acculynk Inc. and Adaptive Payments, to introduce PIN debit online. E-commerce, he says, was a primary “driver” behind the decision to introduce dual-message PIN debit.

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Merchants are also looking to introduce mobility into their stores, which led to Shazam’s development of the PIN-debit app for mobile devices, Kramer says. “Retailers want to move the clerk out from behind the counter,” he says. He will not disclose what companies are participating in either the dual-message or PIN-debit app test, though he says the requests for dual-message PIN capability came from “fairly significant” merchants.

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Some observers expect other debit networks to add dual-message PIN debit. Under the Durbin rules, merchants will have more control over transaction routing and issuers must feature at least two unaffiliated debit networks on their cards, all of which could make dual-message PIN debit capability an appealing network option. “As merchants have more control over routing, they will say, ‘What can that network do for me?’” says Patty Hewitt, director of the debit advisory service at Maynard, Mass.-based Mercator Advisory Group.

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Hewitt calls Shazam’s dual-message capability for PIN debit an “interesting innovation.” Regarding why, until now, no network had offered it, she says, “Probably because it’s not an easy thing to do.”