The Durbin Routing Mess

By Gloria Colgan, Managing Director, Market Platform Dynamics

The ruling by Judge Leon that told the Federal Reserve Board it had erred too far in favor of the banks has gotten a lot of attention over the past two weeks. The implications for any institution that is involved in handling or accepting debit cards are far-reaching and put two issues back on the table from Durbin – pricing and routing.  While pricing is the most direct (and quantifiable) impact, I’d like to talk about the routing and “debit choice” issue that is also on the table. 

Choosing a debit option is very tricky. Sounds easy. Sounds like something that should be reasonable and practical to achieve – like having multiple options for cereal in the morning.  If it were only that simple.

This is not a simple product on the shelf.  It is a complicated ecosystem.  Let’s illustrate the issues by making comparisons to other industry “choices.” What if someone decided it would be a good thing if every mobile telephony network needed to provide both mobile standards for a consumer (or business) to decide their preference (GSM and CDMA)? What if they decided the Top 5 U.S. airlines needed to support every U.S. airport to give consumers adequate choice (Southwest, United, Delta, American, U.S. Air)?  I mean every airport, like those in Peoria, Illinois and Sioux Falls, Iowa. Would you think that’s easy to do? Who would likely have the capacity and capital to make this happen?

If your initial reaction is that it’s extremely difficult, requires significant capital investment (which may be more for some players than others), and takes years to achieve, then you are paying attention.  Back to our topic – debit routing. 

The short answer is that the “desired state” of allowing multiple decisions at the transaction level is very difficult under the current industry architecture.  Can it be done? Probably.  Are there unintended consequences? Certainly.  Will it take a long time? Most likely.  Will it achieve the desired result? Uncertain. It’s my belief that given the upheaval in the industry required to try and make this work, and not even knowing if it would have the desired outcome, the Fed originally took all of the substantive feedback (and it was a lot of detailed, documented feedback), absorbed it, and concluded that one signature and one PIN network would provide sufficient results, as least given what was feasible. 

There are multiple reasons the Fed likely came to this conclusion.  First, at their core, signature and PIN networks are technically different.  Signature runs on a dual-message architecture.  PIN networks, which started as ATM networks, are single-message – they don’t carry separate transactions for authorization and settlement. The ability to easily “switch” and provide choice between multiple PIN and signature networks generally requires offering two separate signature and two separate PIN options on every card.  However, one network claims to have integrated both transactions, but that’s likely not the case with everyone else (so guess who might be favored if you have to enforce Judge Leon’s interpretation).  Unintended consequence number one.

Second, assuming you need to offer two signature and two PIN options for every transaction, then those options need to be present on every card (in some way).  While signature networks are very similar (all dual-message and similar construct), none of the global networks are identical in their structure and format.  So, one example of how a “requirement” might play out would be to have two mag stripes on every debit card – each having to carry the specific information of the two networks chosen by the financial institution for the merchant’s ultimate “choice.”  Or, both sets of information reside on an EMV chip which the merchant reads and then selects.  But, everyone needs to agree on the common AID (application identifier).  No network wants to relinquish all control over their application to another (including governance) so the debate for universal implementation rages on. Assuming someone needs to help financial institutions fund plastic reissuance (or EMV development or any other technical investment), any guesses on who that would favor? Hint: need for deep pockets.  Unintended consequence number two.

Finally, there might be some long-term discussions over optimal architecture that does combine the best of both worlds, single-message and dual-message.  The only networks in a position to take advantage of this can do both signature and PIN today, have substantial capital available for investment and see sufficient return for that investment.  Only a few large players come to mind, which leaves the PIN-only networks looking for partners…

The part I find most disturbing is the assumption that the Fed didn’t do their job in the first place.  This is not easy and there are no simple answers.  You can’t wave a magic wand and offer choices that will ultimately affect consumers without significant cost and consequences.  This is a technical decision, affecting many parties in the ecosystem.  If competition is to be preserved to lower merchant and consumer costs, then impacts to everyone need to be considered.  If the proposed option requires capital investments and a major “redo,” then small players will die, large will survive and ultimately become stronger.  Generally speaking, that is not conducive to competition and lower costs for consumers, which I thought was the point of the legislation.  I guess we will see what happens during Round 2 of the Judge’s hearing on August 21. 


Gloria Colgan, Managing Director, Market Platform Dynamics

Gloria K. Colgan is a Managing Director at Market Platform Dynamics and a leader in emerging payments and financial services.  Prior to her affiliation with MPD, Gloria served as Senior Vice President for Discover Network, and as a member of the Discover Financial Services Management Committee.