How PIN-less Debit Conversions Prompted a New Visa Rule

When Visa U.S.A. last month set out a new, stricter transaction-routing policy aimed at making sure all Visa payments flow through VisaNet, its backbone network, the rule's underlying purpose?to curb so-called on-us networking of transactions initiated with Visa cards?made headlines. But another, and less noted, part of the new policy aimed at Internet transactions shows the bank card association is also worried about losing control of a potentially significant chunk of online volume. And it casts the spotlight on a practice that could cause the tensions brewing between merchants and banks over interchange to spill over into the world of Internet bill payment. The new Web-related rule, which like the on-us rule takes effect May 15, requires online merchants to run Visa transactions through VisaNet. It stems from complaints Visa member banks received from cardholders who paid bills online with a Visa check card but noticed they did not receive Visa Extra rewards points on the transactions, according to Tolan D. Steele, senior vice president of financial operations at Visa U.S.A. When Visa investigated, Steele says, it found these transactions had been converted to a form of electronic funds transfer called PIN-less debit and routed through one or more of the EFT networks, several of which offer a service in which consumers can pay billers in certain merchant categories online with their PIN debit card without entering a PIN. Billers and other merchants can usually lower transaction costs with PIN debit because such transactions carry lower interchange rates than credit cards and signature-based debit cards. Steele says he can't quantify the number of Visa transactions that have been converted in this way, nor will he identify either the billers or the banks that have received consumer complaints, but says there were enough complaints to warrant action by Visa. “It was an extremely small number of transactions but we certainly heard from more than one member bank,” he says. “It came up in discussions with more than one bank as a customer-service issue over the past year. We thought it best to get pro-active while things were still small.” He won't specify the manner in which billers or their processors have been able to convert the signature-based debit transactions to EFT payments. The association's new rule, which it calls a “clarification” of its acceptance policy, requires online and other card-not-present merchants that accept Visa to “give consumers the clear opportunity to choose to use their Visa cards,” and, if consumers do so, to route those payments through Visa's network. It accompanies another new policy promulgated at the same time that requires Visa-branded transactions at the point of sale be routed through Visa. This rule is aimed at so-called on-us or private-loop arrangements in which processors that serve both issuers and acquirers can route bank card transactions through their networks without sending them to the associations' data centers. The most notable instance of this is a service offered by First Data Corp., which is embroiled in litigation with Visa after the bank card network sued to stop the practice. Both rules, Visa says, are intended to ensure transaction quality. Also, the company says, it must route transactions on its cards if the payments are to carry certain Visa benefits, including rewards points, zero liability on fraudulent activity, and chargeback protection. Major EFT networks like Star, NYCE, and Pulse have begun to offer PIN-less debit but restrict it to so-called safe-biller categories where consumers pay recurring bills and are well-known to the merchants, lessening the need for a PIN or other form of authentication. These categories include utilities, insurers, educational institutions, and government agencies. The practice is becoming an increasingly significant form of bill payment. “We're seeing very strong interest in PIN-less debit, in the last 12 months literally,” says Ronald W. Averett, president and chief operating officer of Princeton eCom Corp., a Princeton, N.J.-based processor that has links to Star and Pulse. He adds he's not aware of the instances of payment conversion cited by Steele. Averett says PIN-less debit has become necessary to processors and billers that want to be “serious” about offering a rapidly growing product known as convenience-pay, in which consumers make last-minute online bill payments with same-day posting, usually for a fee, to avoid even higher late charges. By converting signature-debit transactions to such payments on PIN-less debit, billers could create a new revenue stream on top of slicing their transaction costs. Lately though, Averett says, banks have been expressing an interest tending in the opposite direction: they want to channel bill payments to credit and debit cards they issue so as to earn the higher interchange income the cards offer. It will become increasingly difficult, he warns, to reconcile these conflicting tendencies. “One of my concerns is we're going to see an interchange war,” he says.