Networks: No PIN, No Problem

Karen Epper Hoffman

PINless debit card transactions are gaining favor as online merchants latch onto this speedy payment alternative. But will PINless debit’s rise give debit networks much of a boost in the short term?

Call it PINless debit version 2.0.

The ability to make a payment with a debit card without entering a PIN, which has been offered in a limited fashion for online bill payments for years, is finding a new following among e-commerce merchants.

Indeed, while it’s still early days, industry observers say more retailers—physical as well as online—are beginning to offer PINless debit as a purchase option for low-ticket, low-risk transactions.

Experts say merchants are exercising their new transaction-routing freedoms under the Durbin Amendment and that PINless debit not only allows for faster transactions but also less expensive ones, since the transaction is riding over low-cost electronic funds transfer networks.

E-commerce giant Amazon.com Inc., for example, now reserves the right to run transactions as PINless debit if the customer sets up their debit card as a payment option and does not opt out of PINless debit transactions.

‘Timely and Hot’

In some ways, PINless debit is the EFT networks’ competitive response to the growth of no-signature options for Visa- and MasterCard-branded debit cards.

PINless purchases are “being offered as due to the expansion of the ‘No Signature Required’ programs initiated by major credit card companies,” says Neil Marcous, executive vice president at Jacksonville, Fla.-based processor Fidelity National Information Services Inc. (FIS) and president of its NYCE Payments Network. “Debit-payment companies such as NYCE are entering the PINless-purchase arena as a way to offer a similar no-signature experience.”

While Marcous won’t comment on the exact number or percentage of such PINless purchase transactions that ride the NYCE network, he does “expect the percentage of PINless purchase transactions to increase throughout the remainder of 2013 and more significantly in 2014.”

PINless debit, as a technology, has existed for at least a decade. But until recently it’s had a “limited presence at the point of sale,” according to Casey Merolla, senior manager for the deposit access practice at First Annapolis Consulting Inc., Linthicum, Md.

Indeed, PINless-debit services initially gained traction enabling consumers to make bill payments in real time to utility companies, telecommunications providers, or insurance companies through the billers’ Web sites. In this way, bill payments were credited quickly and easily, and the risk was relatively low since the payments typically were recurring. After all, fraudsters rarely use fake cards to pay a water bill.

“Historically, PINless debit was a way to make low-cost bill payments,” says Patricia Hewitt, director of the debit advisory service at Mercator Advisory Group Inc., Maynard, Mass. “That’s where PINless debit started and it stayed there for a long time.”

But new opportunity is here, and the EFT networks are jumping on it.

Dave Keenan, general manager for network solutions at Brookfield, Wis.-based bank processor Fiserv Inc., owner of the Accel (formerly Accel-Exchange) network, says that, like many EFT networks, Accel has supported PINless debit transactions for bill payment for several years.

“With Durbin, it’s becoming more interesting to merchants now that they have more routing power and there’s more competition,” Keenan says. “I think this area is timely and hot.”

‘Right on Course’

The Durbin Amendment in 2010’s Dodd-Frank Act not only capped the debit card interchange revenues of large banks, it also required that each debit card provide access to at least two unaffiliated networks for transaction routing.

Plus, the law transferred the routing choice from card issuer to merchant or merchant acquirer on the theory that such choice would restrain interchange rates and force networks to compete harder for merchant traffic (“The Great Debit Network Reshuffle,” October, 2012).

Aside from e-commerce merchants, quick-serve restaurants, grocery stores, and even large multilane retailers are starting to embrace PINless debit for transactions of less than $50 as a means for moving their checkout lanes faster and incurring lower transaction costs, Keenan adds.

Dan Kramer, senior vice president of marketing and merchant services for the Johnston, Iowa-based Shazam EFT network, which announced support for PINless debit about 18 months ago, says, “What you have to understand is everyone is competing for transactions now. Debit networks large and small are trying to get transactions to them. What you’re seeing is that competition for transactions.”

But it’s not just Durbin and the impetus to move transactions faster that has made this appealing. It’s also the new risk-mitigation technologies that have made PINless debit possible, according to Paul Tomasofsky, president of Two Sparrows Consulting LLC, Montvale, N.J.

He points out that the emergence of more fraud-prevention tools being applied to transactions online—like those that track geolocation, Internet Protocol addresses, purchasing habits, and other ready online identifiers—give e-commerce merchants more security to accept PINless debit.

“Although PIN is still the number-one authentication method, for the speed of the transactions, PINless is also coming into play to start counteracting signature-not-present transactions,” Tomasofsky says.

Pete Korpady, general manager of big payment processor First Data Corp.’s Star EFT network, which last summer launched PINless debit payment through its Star Secure program, says PINless debit is a better model for online merchants in terms of “having a streamlined and efficient procedure.”

While he would not disclose what percentage of Star’s transactions are PINless, Korpady says, “It’s right on course with our expectations. We continue to promote it with e-tailers and expect to see it gain more traction with them.”

Star also is seeing more interest in PINless debit in the card-present environment, where earlier this year it introduced its RapidFlash PINless debit-payment service for low-ticket transactions.

Improving Checkout

“We see Star RapidFlash and other PINless initiatives as being a potential game changer,” says Jim Hanisch, executive vice president for network operation and corporate development at Co-Op Financial Services, a Rancho Cucamonga, Calif.-based processor and network provider for credit unions that uses Star services. “The opportunity is to move some signature debit and credit transactions to PINless [but], given the focus on low-dollar transactions, it may also attract conversion of some cash transactions as well.”

In late May, Discover Financial Services’ Pulse EFT network announced that, come July 1, the Houston-based network would be enabling debit transactions as a payment option on Amazon.com, the leading e-commerce site.

“This new arrangement between Pulse and Amazon offers [card] issuers the potential to earn incremental interchange income on transactions that ordinarily would utilize other payment methods,” Pulse said in a news release. “The payment option gives issuers the opportunity to align themselves with one of the nation’s top e-retailers.”

Pulse has been supporting PINless debit for bill payment for more than a decade, but such transactions still represent less than 5% of the network’s volume, according to Judith McGuire, executive vice president for product management.

Now, says McGuire, the market is ready to embrace PINless debit for purchases online, especially at Amazon.com, largely because of the “fraud-mitigation tools they have developed. They [the tools] are robust and they know their customers.”

For EFT networks, PINless debit purchases present a new market. For e-commerce merchants, PINless debit offers lower interchange expenses than credit card transactions, real-time funds verification, and automatic payment.

“The market today is very interested in real-time money movement and the EFT networks can deliver that,” says Mercator’s Hewitt. “And it’s an opportunity to shift the consumer from the more expensive credit [payment].”

Adds Star’s Korpady: “We can be cost-effective and competitive, otherwise we wouldn’t be doing this.”

Co-Op’s Hanisch says he suspects “the merchants will immediately look at the cost of PINless relative to alternatives. Given recent pricing changes in low-dollar transactions, it is easy to see why there is opportunity in this market.” (Hanisch refers to the increase in Visa and MasterCard small-ticket debit card interchange rates for banks subject to the Durbin Amendment’s caps.)

Speed is also critical to merchants. Not only in getting paid, but in making the transaction process as fast and seamless as possible for shoppers.

“This helps my capability to make the checkout experience good and avoid high abandonment rates … to get people to click ‘buy,’” says Shazam’s Kramer.

Slow, Steady, Focused

While PINless debit for purchases is beginning to catch fire, even proponents admit that it could be a long time before this transaction type ignites most of the market.

For starters, some say, it’s only the savvy e-commerce merchants like Amazon—with strong and varied risk-mitigation tools and oodles of customer data—that can institute this without expecting higher fraud.

“E-commerce PINless purchase applications are offered only via Internet retailers that have very strong consumer-authentication programs, thus limiting risk, and our experience has been very positive over the past two years,” says NYCE’s Marcous.

With newer PINless purchase options in the card-present environment, he points out, “customary magnetic-stripe authentication technologies are being required that have been tested in the marketplace, again demonstrating no new risks.”

Another potential issue swirls around the question of liability: namely, is the e-commerce merchant willing to shoulder the liability for fraud in these transactions?

“We’ll have to see if the merchant will change the way they’re thinking about [liability],” says Merolla of First Annapolis. “If those e-commerce merchants are willing to accept that … that’s going to depend a lot on acquirer pricing.”

But industry insiders like Keenan claim “the merchant demand is intense … I believe this holiday season you will see some top-tier merchants doing more PINless debit, and possibly for higher dollar amounts.”

But the fact remains that the transaction technology is still fairly nascent. Hanisch reports that Co-Op Financial’s PINless volume is “low,” approximately 2% of the network’s total PIN activity. 

“We don’t have large numbers of retailers using it yet,” adds Shazam’s Kramer. “It’s still in its infancy.”

But Korpady of Star anticipates a growth ramp-up for PINless debit purchases.

“This will happen over time,” he says. “You can’t just flip a switch on this.”