PYMNTS.com got a number of great questions during the “Deep Dive into Durbin” webinar on Sept. 22. I asked the panelists to take a stab at answering them.
Steve Cole is off traveling so we spared him but below you’ll see how Tim Attinger, Tom Durkin, and Ron Mann answered the questions posed by our audience. – David S. Evans
“Why would it be any more difficult for a merchant to manage multiple signature options than it is to manage multiple PIN options?”
Tim Attinger (formerly Global Head of Product Innovation at Visa and now Managing Director of Market Platform Dynamics): While an interesting theoretical exercise, the practical reality of linking multiple signature accounts to one master account number is highly challenging. Existing PIN networks essentially ride the 16-digit PAN of current Signature cards, with account numbers and corresponding PIN network options loaded into routing tables. The Signature PAN becomes the master routing formula. In the hypothetical case of a MA card routing to Visa, the following changes would likely need to be made, among others:
Dr. Thomas Durkin (former Senior Economist, Federal Reserve Board): It probably is not more difficult to manage multiple signature networks than multiple PIN networks, after all the costs of system development, setup, and changes are borne by someone.
“Since the costs associated with signature debit and the incidence of fraud is much higher, why would signature debit be encouraged by any party?”
Attinger: I’m not sure that the data would support this observation. While it may be true that the absolute costs of fraud are greater on signature, this is most likely driven by the fact that Signature purchase volume is twice the size of PIN. Still, absolute fraud losses across bankcard systems tend to be in the range of 5-7 basis points, still a very low number.
Durkin: Signature debit likely is preferred by many merchants who do not want to undertake the costs of retrofitting all terminals and who are largely insulated from fraud costs if they follow contractual procedures.
“If it is true that a card must have a minimum of two networks, does an issuer have to offer more than two networks?”
Attinger: It would appear from the wording that the issuer must support at least one Signature and one PIN network. If both of those networks are provided by the same company (ex: MasterCard Debit + Maestro) then the issuer will need to provide an additional PIN network to support merchant routing options.
Durkin: The wording of the Durbin amendment does not appear to require more than two networks.
“This question has to do with timing of implementation. The Board has nine months from date of enactment to establish standards for assessing the whether the amount of interchange transaction is reasonable. That could be read to say they have to establish a standard, but not necessarily implement it. Do any of you interpret this to give the industry more time to implement the regulations?”
Durkin: The Federal Reserve has the authority to determine the effective date, and there are precedents for delaying effective dates as needed to reduce transitions costs. The Federal Reserve has not made any determinations in this area, but they are known to be considering the possibility of some delay in the effective date.
Professor Ron Mann of Columbia University (a specialist in payments law and regulation): I don’t think so. In context, Congress has obligated the Fed to publish regulations on this subject within nine months, and I think the industry should expect the Fed to comply. I can imagine interim regulations, that might be changed in the near future, but I think something is going to come into effect early next year.
“How do you see these regulations impacting the remaining debit product rewards programs offered by issuing banks?”
Attinger: As with much of the amendment provisions, current consumer value from debit programs and deposit access may be severely challenged. Insofar as an issuer was supporting the provision of services — such as rewards — on the basis of debit interchange, the issuer will need to work to find a new model. These rewards models may take the form of either a different back-end benefits structure (ie: not points) or a process of bringing merchants into the direct delivery of value on the front of the transaction. MPD has deep experience in debit loyalty and merchant rewards and would be happy to advise financial institutions on the best course of action for their particular portfolio.
Durkin: To the extent that the new rules lower debit interchange fees, banks will have to reconsider all aspects of their pricing structure and business models, including rewards programs, fees, deposit fees and interest rates, account minimums, etc.
“The amendment states that additional fees can be applied for additional security provided for debit transactions. What is your interpretation of this stipulation, and do you have examples of what this will lead to?”
“Will the changes increase interest in decoupled debit?”
Attinger: The primary interest in decoupled debit in the past came from two basic areas: 1) credit issuers who were looking for a way to provide deposit access services to their existing portfolio without getting into the business of deposit management, and 2) merchants who were looking for lower cost of deposit access acceptance. The challenge with decoupled is that it tries to process spontaneous consumer transactions at the point of sale, in real time, over a network (ACH) that clears and settles those transactions in offline batch mode. There is no real authorization component to decoupled debit, which greatly increases the likelihood of fraud loss and overdraft/NSF. It’s hard to see a case where decoupled would become more attractive in this environment, especially with core online-authorized debit costs coming down for merchants.
Durkin: It will be surprising if the new rules do not have some restrictions of a kind to prevent decoupled debit from becoming a loophole from the pricing aspects of the rule.
“You are saying that this will not affect financial institutions that are less than 10 billion. How will you be able to tell the difference for credit unions/community banks that have shared BINs?”
Attinger: That will indeed be a challenge. Since the vast majority of smaller issuers process through shared BINs under a processor or BIN sponsor, this will present a challenge for bankcard networks that would wish to manage differential interchange for smaller institutions. While this is not insurmountable (processing at levels of discretion below 6-digit BIN is possible in Visa, at least on all credit products), it increases the likelihood that the initial implementation of interchange changes will be “one size fits all” despite the amendment’s provisions for smaller institutions.
“What about an on-us transaction that could potentially never touch a payment network?”
Attinger: Although there are financial institutions with significant business presence on both the issuing and acquiring sides of the transaction in the US, the share of those transactions that route outside of the bankcard networks today is effectively zero. While an institution could make the systems investments to create a private label closed loop debit network, it is unlikely that the Fed would allow a single financial institution to circumvent national rate schedules through on-us routing.
Mann: I think it is pretty clearly an “electronic debit transaction” governed by the regulation, even if it is on-us, so long as the card is “approved for use through a payment card network.” {efta § 920(c)(2).}
“Do you think that the WTO charge against China and CUP will have an impact on this process?”
Attinger: It is doubtful that the Fed will look at the WTO actions against CUP as a benchmark, other than to perhaps use them as an example of regs against “anti-competitive” practices in card routing.
“Is there any chance interchange caps will be set at levels that are above current rates?”
Attinger: This doesn’t seem likely. However, it is worth noting that in the provision of small ticket interchange rates, the GPC networks did deliver an interchange structure to quick service restaurants that had a higher variable component than the restaurants had seen in previous structures. However, that variable component when combined with the lower fixed fee per transaction resulted in a net lower interchange rate per average transaction. So…it could happen, but the likely outcome would be like that just mentioned.
“What is your general estimate in interchange reductions? 30%, 50%, more? Will signature end up matching POS rates?”
Attinger: The gap between Signature and PIN may close more significantly, but there will still likely be a gap between the two given the differences in processing systems, infrastructure, costs, and support. The effective rate across all debit will likely decline for many merchants (see PYMNTS University Durbin 101: http://www.pymnts.com/pymnts-university/)
Durkin: Proposed interchange reductions will depend on the Federal Reserve’s cost analyses, based on the questionnaires it has distributed. The questionnaires are detailed enough that there likely will be differentiations among various debit products. Before completion of the cost analyses, it is difficult to predict the outcomes, but signature and PIN debit rates seem likely to converge at least somewhat.
“Do you think megabanks will try to be creative to keep community banks and credit unions compromised to compete?”
Attinger: Absolutely no idea here, and don’t wish to conjecture the competitive actions of major financial institutions in the face of smaller ones. However, we can say this: Competition for consumer deposits will only intensify, and the competition will increase for large deposit institutions from smaller deposit firms, prepaid specialty players, and the large retailer and money-transfer operator money services businesses. Financial institutions will need to innovate vigorously to win in this space.
Durkin: The new rules are unlikely to produce new opportunities for noncompetitive behavior. If anything, they likely will reduce such opportunities. It seems likely, however, that the larger banks will remain vigorous competitors with smaller banks and credit unions for deposit accounts and electronic transfer systems, including debit card access.
“Do you foresee an increase debit card fees and some new fees coming? Is this aspect on the Fed’s radar?”
Attinger: Financial institutions will need to think carefully about how and where to introduce new fees in the context of increasing pressure on revenues and increasing competition for consumer deposits. Debit card interchange revenues made it possible for financial institutions to provide many core deposit services for free, democratizing access to full service deposit accounts for a large consumer population. Those consumers are not likely to begin paying fees for previously free services without first 1) seeing incremental value or services to justify them, or 2) checking competitor offerings.
Durkin: If interchange fees are lowered significantly, it seems likely that all banks will need to consider new fees. The Federal Reserve is well aware of this likelihood.
“Does the ban on issuer or routing exclusivity represent a boon or bust for payments networks?”
Attinger: This is likely a mixed bag. One the one hand, networks that were otherwise challenged to present a unique value proposition to issuers for inclusion as a routing option may now find a larger marketplace for their network services simply because many issuers are forced to enlist alternatives. On the other hand, the larger networks that were able to manage a blended-rate value proposition to issuers by managing the interaction between Signature and PIN networks they managed will likely see that value proposition impaired somewhat.
“Does Durbin cover decoupled debit?”
Attinger: The primary interest in decoupled debit in the past came from two basic areas: 1) credit issuers who were looking for a way to provide deposit access services to their existing portfolio without getting into the business of deposit management, and 2) merchants who were looking for lower cost of deposit access acceptance. The challenge with decoupled is that it tries to process spontaneous consumer transactions at the point of sale, in real time, over a network (ACH) that clears and settles those transactions in offline batch mode. There is no real authorization component to decoupled debit, which greatly increases the likelihood of fraud loss and overdraft/NSF. It’s hard to see a case where decoupled would become more attractive in this environment, especially with core online-authorized debit costs coming down for merchants.
Durkin: Not specifically, but it is hard to imagine that the new rules will not cover decoupled debit, if only to prevent “loopholes” in the rules as the government sees them.
Mann: This is a hard question, and the Fed might come out differently, but I am inclined to think it does not, at least in the form in which I understand decoupled debit — a card issued by a bank, for which transactions are routed and cleared through ACH. In that case, I would say, the card is not a debit card under EFTA § 920(C)(2) because it is not approved for use on a “payment card network,” because the issuer and aquirer are not providing infrastructure for clearance and settlement.
“Can you comment on where you think the range of where interchange rates for PIN and Signature transactions will end up?”
Attinger: We estimate that if rates on average have been around 50-60bps for PIN and 120-130 bps for signature, a combined interchange rate back to major institutions would be roughly ~100 basis points at current PIN to Signature ratios. That number could move from a variety of factors, including a combination of PIN growth over Signature or Signature decline in rate with higher transaction growth as a result. It’s tough to predict at this point, but there are a lot of pieces moving beyond average transaction rates.
PYMNTS.com “Deep Dive Into Durbin” Speaker and Moderator Bios
Tim Attinger/Managing Director: Product development and innovation expert
As the former Global Head of Product Innovation and Development for Visa Inc., Tim had global responsibility for product strategy, platform development, and P&L management for Visa’s mobile, money transfer, and eCommerce business units, as well as product innovation, security solutions, healthcare and IP strategy. In this role he led a number of innovation efforts related to debit cards.
Tom Durkin/Senior Expert: Economist and former Federal Reserve Board director
Tom was a Senior Economist at the Federal Reserve Board for more than 20 years and was the Regulatory Planning and Review Director for ten. As a result of this experience, he is deeply knowledgeable about how the Federal Reserve Board approaches regulation. He has also written extensively on consumer credit and its regulation. His most recent book, Truth in Lending, Theory, History, and a Way Forward, will be published by Oxford University Press in the Fall of 2010.
Ron Mann/Senior Expert: Law professor and business advisor to the payments industry
Ron is one of the leading global authorities on the law and economics of payments. He has authored numerous authoritative books and articles on the law of payments including Payments Systems and Other Financial Transactions. He is a Professor of Law at Columbia University.
Steve Cole/Senior Expert: Debit industry pioneer
Steve was the President/CEO of Cash Station, the fifth largest ATM/debit network at its zenith, from 1986-2001. He and Bruce Burchfield, later the CEO of CIRRUS Systems, co-founded Cash Station in 1979. Prior to leading Cash Station, Steve had an extensive career in banking. He is now a business advisor to the payments industry and is a Director of the Online Resources Center (ORCC).
David S. Evans/Founder and Managing Director: Economist and business advisor to the payments industry
David is one of the leading global authorities on interchange fees and financial regulations. His recent work has focused on helping payments businesses discover and ignite profitable innovation. He is the co-author of the leading text on the payments industry, Paying with Plastic: The Digital Revolution in Buying and Borrowing, as well as leading texts on driving innovation in two-sided markets including Catalyst Code: The Strategies Behind the World’s Most Dynamic Companies and Invisible Engines: How Software Platforms Drive Innovation and Transform Industries.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More