Two years ago, top 5 bank CEOs met every week during Durbin to discuss response. I believe they probably had a good plan as Debit is a very very popular payment product. Unfortunately BAC’s Moynihan jumped the gun and announced a “fee” for debit. Consumers and press went ballistic.. I wish that BAC had just waited another few months to roll out it’s card linked offers product to show the new “value” and tie the pricing to this new “value”. As the Chinese say
If you are patient in one moment of anger, you will escape a hundred days of sorrow
There have been quite a few excellent Fed studies out on Debit since my last blog on the topic (Real Time Transfers – Feb 2011):
- KC Fed – 2012 New Debit Card Regs – MUST read
- KC Fed – 2013 Payment system efficiency impacts on consumers and merchants
- Boston Fed – Consumer Survey
- Electronic Payments Coalition Overview – Must read
From the Reference 2 above
The network exclusivity provision and the merchant routing provision of Regulation II both give merchants more control in routing transactions to preferred networks. However, most banks’ way of complying with the prohibition of network exclusivity arrangements is to enable more than one PIN network on their debit cards, but not more than one signature network. As a result, those merchants that accept only signature transactions generally have not gained any increased scope to choose from among different networks.
Among merchants that accept PIN debit transactions, many have taken advantage of their new control. The routing provision of Regulation II allows them to pick the PIN network they prefer from among those enabled on a given card. Their exercise of this control has altered PIN debit networks’ market shares. Many merchants now avoid Visa’s Interlink network, the largest PIN network prior to the regulations, and instead choose other PIN networks whenever possible. As a result, in terms of transaction volume, Interlink has lost significant market share to other PIN networks such as Maestro, Pulse, and STAR (Finkle; Daly). Through their new control over routing, merchants’ emerging influence over the market shares held by different PIN networks is likely to increase competition among PIN networks for merchants….
Consumers appear to have shifted to some extent from signature debit to PIN debit as a result of the regulations. Regulated banks now have an incentive to promote PIN debit over signature debit, though that same incentive does not apply to exempt banks…Many regulated banks stopped offering rewards to debit card users, especially to signature debit users, and they may also have eliminated the PIN fees that were assessed in the past to some consumers for each PIN debit transaction. Merchants have also taken steps to steer customers toward the use of PIN debit.
From Reference 1 – with respect to Pricing
Merchants’ new freedom to offer discounts based on payment method, brand, and product allows them to steer customers toward the payment methods that the merchants prefer—and thus to affect the market shares held by networks. For example, if signature networks set their interchange fees for exempt banks higher than those set by PIN networks, merchants may offer greater discounts to customers who use PIN debit. To retain transaction volume, signature networks may avoid setting their interchange fees significantly higher than those of PIN networks. In this way, merchants’ new flexibility in offering discounts causes networks to compete for merchants. Most merchants, however, have not yet taken advantage of this new power. Given the many different payment methods, brands, and products that merchants accept and the complexity of the fee structures, it will take time for merchants to determine whether and how to offer discounts based on payment method. For example, Kroger,
one of the nation’s largest grocery store chains, considers payment based discounts a very powerful tool for influencing customers’ payment choices (Clifford and Strom), but has not decided how to offer the discounts.
Thus we see a world where big merchants push PIN debit, small merchants are getting taken by ISOs who don’t even know to ask for PIN capability, with competition in pricing…. With signature debit going down, PIN debit use going up.. Visa’s Interlink hemorrhaging volume. For perspective, my estimates are that somewhat Approximately 15% of Visa’s Revenue comes from US debit (just 2% from PIN Debit Interlink). Does anyone now wonder why Visa wants “Chip and Signature”?
Banks have lost over $7.7B annually because of this change. Remember that PIN debit is just an extension of the Bank’s ATM network.. why on earth would they want to continue to use 8 different independent networks to continue here? What if there were new products they could deliver on the PIN debit networks…. ?
PIN Debit seems to be ripe for consolidation and bank control. I have a strong bet that the US banks will consolidate around a single PIN provider within the next 18 months. Why? Probably more for defensive purposes.. Its also nice to be able to control the rules on your own network..
Perhaps more on this subject in a future blog.