What You Need To Know Before Choosing an Alternative Network

 

Kevin Barry

 

Finding another, unaffiliated PIN-debit network is now mandated by law, but it also makes sense strategically and tactically. Issuers must act quickly, though, to realize the full advantage of the move.

 

In the past, card issuers have largely partnered with debit networks and promoted authentication methods that allowed them to generate the most interchange income. Now, because of new regulation, financial institutions need to look for long-term network value that goes beyond mere signature or PIN-debit interchange revenue.

 

The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 will dramatically impact the business of every debit card issuer. Frankly, it will impact the entire U.S. payments landscape.

 

One provision of the law prohibits exclusive arrangements between a card issuer and a single debit network, requiring issuers to participate in at least two unaffiliated debit-access networks. In addition, the new law gives merchants control over the routing of debit card transactions.

 

New Value Propositions

 

Financial institutions need to understand how non-exclusivity will impact them and how they should choose an alternative PIN-debit network, if necessary. Because the government may soon be setting debit-interchange rates, the criteria behind selecting a PIN-debit network will be based less on the highest interchange revenue that a network can deliver for the lowest cost, and more on the best overall value that can be realized over the life of the partnership.

 

Network value will be redefined in terms of how well the network can position the issuer with merchants, reduce costs, deliver operational reliability and a robust customer experience, help the financial institution reduce fraud, and prepare for future form factors and new value-added services.

 

Financial institutions should also be aware that there are important strategic benefits to picking an additional network, regardless of the imminent regulations. Now is the time for issuers of all sizes to form strategic partnerships with organizations that provide a greater breadth of options and deeper value propositions. This is especially true with the future regulatory environment highly uncertain. Partnering with a network that can deliver value and strategic options can position issuers to win in this fast-changing, competitive market.

 

Here is a look at the new value propositions for selecting a PIN-debit network:

 

Acceptance  More than ever, issuers need to consider a network’s value to merchants. Surely, every issuer wants to ensure its cardholders have a good experience at the point of sale and the ATM, and that includes broad acceptance of its card. Thus, a financial institution should partner with a PIN-debit network that can demonstrate superior merchant and ATM acceptance throughout the country.

 

Due to lower processing and fraud costs associated with the PIN, another factor to consider is how well a network partner is able to expand PIN-debit acceptance of an issuer’s card, especially in areas where, historically, PIN acceptance has not been prevalent. The ability to use a debit card safely instead of cash or a check is important to the consumer and can help build stickier relationships with your cardholders.

 

Operational Capacity With growth likely to shift toward PIN-debit payments, it’s important that financial institutions consider the system integrity of any new debit-network partner. In addition, once the prohibition of network exclusivity becomes effective, there will be considerable movement of payments from affiliated to unaffiliated PIN-debit networks.

 

Network operational reliability is important not only to issuers, but also to cardholders as part of the total customer experience with your brand. Accordingly, the new network partner must be able to handle the influx of transactions from a processing and settlement perspective, as well as from a support perspective.

 

Fraud Mitigation And Risk Reduction The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the Federal Reserve Board (FRB) the ability to make adjustments to debit-interchange rates for fraud-mitigation costs incurred by an issuer. However, it is not clear what approach the FRB will take to enable such adjustments, or when.

 

Nevertheless, financial institutions should look for a network partner that has innovative yet cost-effective fraud mitigation, risk-reduction, and data-security solutions that can help drive fraud and risk out of the payments value chain: within the card, the merchant process, the issuing process, and the transaction. Such solutions can reduce a financial institution’s costs and liabilities and provide a boost to the bottom line.

 

Future Proofing The payments landscape is fast-changing in other ways that are not a direct effect of the Durbin Amendment. For example: the migration from magnetic stripe to contactless and potentially to chip and PIN; the broader acceptance of mobile payments and mobile applications; the increase of card-not-present payments for e-commerce; the emergence of peer-to-peer (P2P) payment services; and various other value-added, technology-driven innovations regarding card payments.

 

There is significant innovation under way in the financial-services industry, and banks and credit unions need to develop strategies and make plans for how to deploy these emerging technologies and solutions as they become available.

 

A component of any such “future-proofing” strategy should include choosing a debit network partner that is positioned to build and deploy new solutions in the future that can deliver new value and position issuers for competitive advantage.

 

Relationships One often-overlooked element of the Durbin Amendment is that merchants will now be able to choose the network routing for debit card transaction processing—a choice they have never had before.

 

Accordingly, financial institutions may find that this makes it advantageous to consider selecting a network partner that already has deep relationships on both the issuing and acquiring sides of the payments value chain.

 

Why Act Now?

 

There is a strong case for financial institutions to be aggressive in their decision-making to keep ahead of the regulatory curve and the competition. The benefits of acting now include the ability to:

 

– Become knowledgeable and gain confidence about key network benefits;

 

– Realize first-mover advantages and position to capture new opportunities;

 

– Plan and develop a cardholder-communication strategy;

 

– Stage network-implementation processes to avoid queues;

 

– Schedule and implement any necessary branding changes;

 

– Receive advance training on customer-portal and other key systems

 

While the proposed regulations provide an incentive for financial institutions to consider expanding their network partnerships, there are other compelling reasons to take prompt action.

 

Adding another network adds diversity to network-routing choices, enables the financial institution to develop partnerships with vendors they think will deliver the features and functionality future markets will demand, and allows them to address the market forces driving the proposed regulations.

 

The traditional approach of choosing a debit-network solution based solely on interchange-revenue potential will soon no longer be valid. Instead, financial institutions must choose their network partners based on long-term value, opportunities for growth, and a strategic business advantage.

 

The proposed regulations are an important reason for financial institutions to consider expanding their network partnerships. However, savvy financial institutions understand the strategic benefits of taking quick action, regardless of regulatory mandates, to maximize the diversity of their networks, prepare for the future, and better address the needs of the market and their cardholders.

 

Not only should financial institutions carefully consider all of the strategic implications of selecting additional debit network partners, they should act quickly to mitigate risks and capitalize on potential first-mover advantages in the altered payments landscape.

 

Kevin Barry is general manager of First Data Corp.’s Star network.

 

 

 

Durbin on Network Arrangements

 

Here is the actual language of the Durbin Amendment on the question of debit networks:

 

 

 

‘‘(1) PROHIBITIONS AGAINST EXCLUSIVITY ARRANGEMENTS.—

 

‘‘(A) NO EXCLUSIVE NETWORK.—The Board shall, before the end of the 1-year period beginning on the date of the enactment of the Consumer Financial Protection Act of 2010, prescribe regulations providing that an issuer or payment card network shall not directly or through any agent, processor, or licensed member of a payment card network, by contract, requirement, condition, penalty, or otherwise, restrict the number of payment card networks on which an electronic debit transaction may be processed to—

 

(i) 1 such network; or

 

(ii) 2 or more such networks which are owned, controlled, or otherwise operated by—

 

(I) affiliated persons; or

 

(II) networks affiliated with such issuer.