Debit Diversification

The EFT networks are broadening their product lineups, but are EMV and the global networks getting in their way?

Eyeing high-growth payment markets such as e-commerce, the surviving electronic funds transfer networks are in a rush to expand their product menus beyond bread-and-butter PIN-debit transaction switching.

At the same time, they’re fighting a rear-guard action to prevent what they see as an effort by the global payment networks to detour chip card transactions that otherwise would come to them.

Visa Inc. and MasterCard Inc. insist they’re not undercutting the EFT networks as the U.S. converts to EMV chip card payments, and how the controversy ultimately will play out is unknown.

What is clear is that the debit market is seeing more network competition, which means more payment choices for merchants.

“Our market’s really been morphing,” says Carol Specogna, vice president of Brookfield, Wis.-based bank processor Fiserv Inc.’s Accel debit network.

‘Everything Changed Overnight’

Once numbering more than 150, regional EFT networks first appeared in the late 1970s and early 1980s to connect banks’ and credit unions’ ATMs. As the ‘80s progressed, the networks moved beyond ATMs to bring PIN-debit card acceptance services to grocery stores and other low-margin merchants. PIN-debit cards gave those retailers a plastic alternative to cash and checks, and cost them less to accept than credit cards and Visa- or MasterCard-branded signature debit cards, which carried higher interchange rates.

But over the past couple of decades, the ranks of EFT networks have consolidated into about 20 survivors. The largest are now owned by processors and have moved far beyond their original state or regional footprints to become national networks.

As the consolidation process played out, the EFT networks found that, despite its lower acceptance costs and fraud rates than signature debit, PIN-debit service alone would not guarantee long-term survival. Estimates vary, but no more than 50% of the card-accepting U.S. merchant base had taken PIN-debit cards before the recent arrival of EMV chip cards spurred a massive upgrade of point-of-sale terminals.

And the EFT networks were largely shut out of the booming e-commerce market, where payments are dominated by credit cards and signature debit, despite efforts by the networks themselves and tech companies such as Acculynk Inc. to bring PIN debit to the Web.

Also spurring more product development was the Durbin Amendment in 2010’s Dodd-Frank Act, which imposed price controls on large banks’ debit interchange and required debit cards to offer merchants at least two network routing choices with each payment. The typical issuer solution to meet the requirements in the Federal Reserve’s Regulation II, which implements the Durbin Amendment, was to offer Visa or MasterCard for signature debit and an unaffiliated EFT network for PIN debit.

The EFT networks enjoyed a windfall after Reg II took effect and clawed back some of the volume that had gone to Visa’s Interlink, the leading PIN-debit network.

The Durbin Amendment also injected a new mindset into the EFT industry.

“What I would tell you is after the Durbin Amendment came out … every network started looking at themselves and saying, “‘Why don’t I want access to every transaction?’” says Todd Clark, former head of the Star EFT network and debit processing at Atlanta-based processor First Data Corp. Clark left Star late in May to become president and chief executive of credit-union service organization and payment network Co-Op Financial Services.

“Really, it’s Durbin,” says Accel’s Specogna. “Everything changed overnight.”

‘Deep-Seated Interest’

The operative term now is PINless debit, which can include a host of transaction types. Mirroring the bigger networks that removed the signature requirement for low-value, low-risk transactions, the EFT networks a few years ago began removing the requirement to enter a PIN in similar transactions, typically under $25.

Now they’re branching into other cardholder verification methods (CVMs), including signature debit, both of the single-message and dual-message variety, various iterations of PIN, and no CVM. Some also are looking at biometrics.

“The bigger way is really going to be trying to turn on any CVM,” says Clark.

The EFT networks “have been working on the fundamentals for some time now,” says Sarah Grotta, director of the Debit Advisory Service at Maynard, Mass.-based Mercator Advisory Group Inc. and author of a recent report about the new signature services. “There is a very deep-seated interest.”

Forgoing PIN entry in certain physical merchant locations, especially high-throughput locations such as quick-service restaurants and public transit, opens new transaction opportunities for the EFT networks.

But the real prize is e-commerce, which is growing far faster than in-store retail sales. PIN-debit payments lag well behind credit and signature debit cards and automated clearing house payments in online retail sales, which totaled $341.8 billion in 2015, up 15% from $297.6 billion in 2014, according to the U.S. Census Bureau.

“Traditionally, you’ve seen the PIN-debit networks focusing on more secure transactions, and e-commerce has traditionally been the least secure,” says Terry Dooley, executive vice president and chief information officer at Johnston, Iowa-based Shazam Inc., one of the few remaining EFT networks still owned by financial institutions. “As competition has become more robust, you need to be able to compete across all transaction sets.”

‘Invisible to the Cardholder’

Into this increasingly competitive environment Star in March unveiled a new service called Star Access, which the network sees as giving it an entrée into e-commerce and other categories difficult to crack with just PIN debit. The service includes signature-transaction capability, both of the single-message and dual-message variety.

In single-message transactions, typical of PIN debit, the authorization and clearing/settlement data are in one message, whereas in dual-message transactions, common in signature debit, the clearing/settlement message comes after the authorization. Dual-message formatting is frequently used when the exact amount of the sale isn’t known until after the authorization, such as an online booking for a hotel stay.

“E-commerce is the fastest-growing segment in both debit and credit, so it is obviously a place we want to play,” says Clark. “Traditionally, PIN debit has not been accepted online, but our new Access solution allows us to effectively compete for those transactions, too.”

Some merchants already are using Star Access, though Clark wouldn’t identify them. He says Star will leverage First Data’s huge merchant base (the company serves 6 million merchants globally, the majority in the U.S.) to find takers. Implementing the system required coding changes but otherwise was not a massive undertaking, according to Clark.

“I think it’s fair to say we’re out attacking and going after the biggest merchants first,” he says. “The largest part of the market that is interesting to us is the traditionally signature market.”

The choice to offer signature debit is up to the merchant or merchant acquirer. The consumer who’s signing has no clue about which network is routing the transaction.

“We made it invisible to the cardholder, just like Visa did with PAVD,” Clark says in reference to Visa’s PIN-Authenticated Visa Debit service, which Visa rolled out as part of its post-Durbin debit recovery program. PAVD exploits the backbone VisaNet network’s previously underutilized ability to handle PIN as well as signature transactions.

Star has rolled out interchange rates for the signature service that Clark would not detail, but says are “competitive in the market.” Some 116.5 million debit cards bore the Star brand in 2015, up 28% from 91 million in 2013, according to First Data.

‘A Large Opportunity’

Star isn’t the only EFT network trying to broaden its reach with new CVMs, especially signature. Accel is in the process of deploying a signature service, in both single- and dual-message formats, with a full ramp-up set for next year, according to Specogna.

Merchants also can choose single-transaction processing rather than batch processing. The service has two different interchange rate schedules, depending on which global network logo is on the front of the card, Specogna says.

“We’re actually rolling it out first for e-commerce transactions,” she says. “We see a large opportunity for e-commerce.”

In addition, Accel, which has 3,200 financial-institution members, went live in April with a service called Cardfree Cash that taps Fiserv’s Popmoney person-to-person payments technology to enable debit card holders to use their smart phones to withdraw cash from ATMs, forgoing the need for the card.

Shazam, too, is working on single- and dual-message signature and other services intended to attract more volume, according to Dooley.

“Our brand will be available for any transaction set in which the other brands are available,” he says.

Houston-based Pulse, the EFT network owned by Discover Financial Services, launched its Pulse Pay Express in late 2014 for PINless single-message transactions of $50 or less without cash back, according to Anne Uwabor, vice president of content marketing.

Pulse Pay “was expanded in October 2015 and now encompasses single- and dual-message transactions of all values,” Uwabor says by email. “This expansion enabled an additional signature-debit routing option, but without the need to reissue the card.” Such re-issuance would have been necessary under the Discover Debit signature-debit program Discover and Pulse launched in 2006.

A spokesperson for processor Fidelity National Information Services Inc. (FIS), owner of another leading EFT network, NYCE, did not respond to a Digital Transactions request for comment.

‘The Choice Question’

But as the networks broaden their offerings, they’re beginning to feel constricted by the new EMV chip cards in the U.S. The EMV standard far pre-dates Durbin, and chips originally were designed to access only one network. To meet Durbin’s routing requirements, Visa and MasterCard worked with the EFT networks to develop the so-called common application identifier (AID) that would facilitate merchants’ routing choices in EMV debit card transactions.

In recent months, however, the common AID has been undercut by prompts appearing on POS terminals that, in the name of consumer choice, present confusing options to customers with the result that transactions are being routed via the so-called “global AID” only to Visa or MasterCard instead of the PIN-debit networks, according to some debit-industry observers.

The Debit Network Alliance, a consortium of EFT networks, went public with such concerns in May.

“While Visa and MasterCard have had rules in place for many years that require merchants to honor ‘consumer choice’ at the POS, this ‘choice’ historically allowed the consumer to decide to enter a PIN for the debit transactions (by selecting debit) or to sign for it (by selecting credit),” a DNA news release said. “As merchants upgrade their terminals to be EMV-compliant, Visa and MasterCard have emphasized these new ‘consumer choice’ rules, which require merchants to comply with a consumer’s choice of AID, effectively forcing individual debit transactions to be routed over the Visa or MasterCard networks as opposed to other networks available to the merchant.”

The DNA’s position was seconded by the Merchant Advisory Group, a Minneapolis-based organization that represents more than 100 retail and travel companies and has asked federal bank examiners to look into the issue.

“We aren’t pleased that routing choice has been taken away from us,” says MAG vice president Liz Garner. “The PIN-debit networks have the most to lose here. This is survival for them.”

‘Customer Confusion’

The alleged customer confusion stems from various EMV terminal prompts generated by merchant acquirers or POS services vendors. Garner says she first heard reports about them around 2015’s holiday season, and they’ve been increasing since then. As a result, some merchants have seen drop-offs in PIN-debit volume of 40% or more, she says.

In one prompt, which appeared when the customer presented a Visa debit card for payment, buttons with the terms “Visa Debit” and “US Debit” came up. In another, which appeared when a Citibank debit chip MasterCard was inserted into a terminal, the customer was asked to tap one of two buttons dubbed “Citibank Card” and “MasterCard Debit.”

“MAG believes this is a violation of Regulation II and EMV routing rights that merchants have,” says Garner. “It’s creating a tremendous amount of customer confusion.”

Says Shazam’s Dooley: “‘US Debit’ is meaningless for 99.9% of all consumers.”

But Visa and MasterCard insist they’re not trying to subvert Durbin’s routing choices. The term “US Debit” stands for an EMV application linked to Visa debit-transaction routing, but Visa does not require merchants or acquirers to present that terminology on terminals, says Stephanie Ericksen, vice president of global risk products at Visa.

“The merchant can customize their terminal to display any language they want,” says Ericksen.

That said, Visa continues to support consumers’ rights to choose signature or PIN debit as the U.S. migrates from magnetic-stripe cards to chip cards. “We don’t believe retailers should take away the consumer’s rights,” Ericksen says.

At MasterCard, Chiro Aikat, senior vice president of product delivery for EMV, says “there’s nothing, nothing in our rules or recommendations that requires a merchant to display the AID labels or a U.S. debit card only. The merchants have full control.”

But the nation’s largest merchant, Wal-Mart Stores Inc., in May filed a lawsuit against Visa, accusing the network of trying to route EMV debit transactions to Visa for signature authentication instead of to Wal-Mart’s preferred PIN-debit networks. Wal-Mart says signature debit produces more revenue for Visa but has higher fraud rates than PIN debit. Visa did not comment on the suit, filed in New York State Supreme Court in Manhattan.

It’s unclear what’s next for this routing controversy. The DNA urged merchants to make sure their EMV equipment, including near-field communication systems that process contactless mobile payments, selects the common AID, which opens access to the PIN-debit networks, and that merchants scrutinize vendor-supplied screen prompts.

While the prompting dust-up plays out, the EFT networks can be expected to continue developing new services to assure they stay relevant as the scramble for transaction volume grows more intense.