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Innovate Now: Merchants and PIN Debit Networks Share a Common Interest (MAG Quarterly- Volume Three, Issue Two)


By Christopher Poole, Vice President Operations, CU24

June 4, 2015

Nevertheless, the high degree of merchant control over this difficult balancing act has had its effects.  This has been exacerbated by newer pricing structures to address these issues put in place by, for example, Visa, in the form of its PAVD and FANF policies.  These pricing initiatives enable more volume to be routed to Visa – the transformation of signature debit to PIN authorizations; and the incentives to particularly large merchants to fill up the Visa pipeline to reduce unit costs in line with FANF access pricing.

That loud sucking sound you hear is the sound of debit transactions re-routed from the regionals to the national branded networks.

Add to this mix the emerging trend toward merchants routing transactions to the regional networks as PINless debit, and the resulting “conversion” of higher priced signature transactions to PINless, and there are even greater reductions to financial institution income.  The confluence of all these factors, including the growing volume of PINless transactions being converted from signature, are placing extraordinary pricing pressure on the PIN debit networks as they try to maintain sufficient interchange income to retain their issuer members. Merchants benefit from both the lower cost of PINless and the increased efficiency at the cash register. At the same time, merchants, seeking additional near term cost reductions, route more of their transactions to the nationals, further depleting the regionals of their life’s blood and keeping them struggling to maintain their issuers in the face of decreasing income. The networks may be the recipients of the low cost converted PINless volume; however, their issuer participants suffer even greater losses in interchange income.  The delicate balance suffers.  How long can it be before we see the regional debit networks diminish further, or even disappear, strangled by the competitive imperative to reduce interchange below sustainable levels?  What happens when the regional network option disappears?  Our bet is that national brand pricing rises for merchants, as the options diminish.

Is there not an argument for PINless debit pricing that enables merchants to realize cost benefits from converted high cost signature transactions, while maintaining a level that can work for issuers?  In this way, all parties to the transaction can reap some of the benefit of this emerging routing approach, and contribute to the overall health of the system.

Merchants have an interest in maintaining competitive but healthy PIN debit network options.  Merchants have an interest in maintaining a lower cost transaction routing option for both traditional PIN debit, as well as the growing volume of PINless debit transactions captured from previously high priced signature volume.

Merchants have an interest in maintaining their lower cost options by not strangling the PIN networks, and offering a “living wage” when it comes to interchange.

A healthy and competitive network environment is best for all, and suffers when individual players choke the system.

Merchants, financial institutions, the networks and, ultimately, consumers – our common customer – all have a vested interest in a healthy and productive competitive environment.