A Critical Look At Debit Routing

Debit has never been more popular with U.S. consumers, who made almost 73 billion non-prepaid debit card transactions in 2018 – and the final 2019 number is bound to be bigger. How those debit payments are routed is the invisible part of the process – and a huge moneymaker.

Card networks attract merchants with promises of faster, more accurate debit routing, and merchants pay handsomely to transact across these networks. The Durbin Amendment is a 2010 law that gives merchants some choice in which networks route their debit payments, so networks want to entice retailers with speed and convenience.

The March 2020 PYMNTS Next-Gen Debit Tracker®, a PULSE collaboration, provides an in-depth examination of debit’s changing role in both banking and retail, with a deep dive especially for merchants who want to control their routing spend.

The Finer Points of Routing

Debit networks have long been a lucrative business, and they’ve been at the center of controversy before, with merchants filing suits alleging monopolistic practices and exorbitant fees. Now, with disintermediation as the prevailing trend in finance, debit rails are on the radar again to look at what else they can do, and for whom.

“Retailers selecting a card authorization method and network are often concerned with the impact on consumer convenience, their own bottom lines and security,” the report states. “Signature debit is often more prone to fraud because signatures are relatively easy to fake and rarely subjected to scrutiny. Cashiers do not often compare those customers present for comparison in store to the ones on the back of the cards, for example, meaning it can be easy for bad actors to make unauthorized purchases. PIN debit users need the correct four-digit number code associated with the card to make payments, however, which is not information that can be faked, so fraudsters can less easily steal and use PIN cards.”

Digging deep into fee and security offerings that vary based on the backend sophistication merchants want, the March Next-Gen Debit Tracker® gets into the nitty gritty about fee structures on debit network rails, and the variations around service levels.

“Card networks sometimes charge less to handle PIN debit because of the lower fraud risk or use different pricing models for PIN versus offline debit,” the report states, adding that, “Fixed, per-transaction fees are levied on both payment types, and merchants are assessed additional fees based on transactions’ dollar values. PIN debit network operators tend to charge higher fixed fees but lower percentages: Merchants might pay a 21-cent fixed fee when accepting a PIN debit purchase, plus around 0.1 percent of the transaction value, for example. Those accepting signature debit payments for the same items might instead be charged a 4-cent flat fee plus approximately 1.6 percent of the transaction value for purchases below $15, or a fixed 15-cent fee plus 0.8 percent of the value for signature debit purchases of $15 or more.”

Merchants Making Decisions

Even given the choice, merchants sometimes pick the more expensive option if it means a better customer experience, which supports loyalty programs and strengthens merchant footing in other ways. PINs are safer but slower; signatures are faster, but can still be faked. Depending on which is chosen, it’s a different routing, a different fee structure … and no feeling of control.

“Merchants are calling the shots in debit routing, and appear focused on turning profits and pleasing customers with fast, secure transactions,” the report concludes. “The networks seeking to attain and maintain strong footholds in the market must thus address these issues to win merchants over.”