Attack on Debit – Interview with Liz Garner

What do you see as the biggest attack on debit?

“I would say that the fact that industry has failed to fully adopt competitive network routing choice for every debit transaction to-date is the biggest attack on debit. For over a decade, U.S. law has required routing competition on all debit transactions. Prior to policymaker involvement over a decade ago, some networks were entering exclusive deals with major issuers, resulting in increased network and interchange fees for merchants. Policymakers opted for a competition-driven approach to help industry manage rising costs by ensuring merchants have a choice of which network to use when a customer presents a debit card for payment in their store or online. The Federal Reserve’s recent mandate to enforce this law in all payment environments – ensuring routing competition for digital debit acceptance environments is a huge step towards fulfilling policymakers’ intentions from a dozen years ago.”

– Liz Garner, Head of Strategic Partnerships at CMSPI

You mention the Fed’s mandated application of debit competition law to digital environments. Will that resolve the challenges?

The Fed’s clarification is an opportunity to broaden the competition and innovation that PIN debit in-store has seen for years. But it also makes building an effective debit routing strategy more complex than ever for merchants. Even today, we estimate that the networks available on each BIN change by 10% per year – affecting each merchant’s unique debit profile completely differently. That’s why leveraging both data-driven insights and macro industry trends is essential for any merchant looking to identify negotiation opportunities and develop a customized debit routing strategy that works in the long-run.

How can merchants take advantage of the opportunity?

Any good debit routing strategy starts in-house. It’s vital that merchants ramp up their expertise – and utilize data-driven insights through partners such as CMSPI – to understand opportunities and risks as they build a new or revised debit acceptance strategy. There are typically three key steps for success:

• Understand your unique network profile on a transaction-level basis – and that’s not just the networks you use today, but which are available on every card you see.
• Use those insights to determine the volume that is truly available to each network, and determine how that fits in with your optimization strategy.
• Keep monitoring and optimizing over time – as new BINs grow in popularity, or network badging shifts, new opportunities emerge to build deeper network partner relationships.

By developing a robust strategy with prioritized performance goals and regularly monitoring network availability shifts, merchants ensure they have balanced the benefits of a one-time incentive and a multi-layered strategy.

What does the Fed’s clarification that debit routing competition must exist across all transactions mean for the payments industry?

The US domestic debit networks and acquirers – alongside their merchant partners – stand to gain significantly from the PINless opportunity. Large merchants have been competitively routing debit transactions both in-store and online for years, and with issuer enablement of dual networks in every debit environment, even more volume will be available for competitive routing.

We expect that merchant demand for competitive debit routing will rise, increasing demand for acquirer support. Domestic debit networks can take this opportunity to grow their volume as more issuers, merchants, and acquirers enable competitive routing options for debit in all payment environments. In turn, incumbent networks with the largest debit volumes may be attempting to solidify those volumes through renewed card acceptance negotiations.

How have you seen the debit market affect merchant-supplier partnerships in recent years?

Merchant-supplier partnerships are more focused now than ever on providing a seamless customer experience. The pandemic caused exponential growth of digital commerce, driving more attention towards ensuring good sales go through without any friction at the checkout – and PINless debit is a great opportunity for merchants to improve the checkout flow without compromising on savings.

The one area of contention has been fraud. Industry stakeholders have raised questions about the anticipated prevalence of transaction level fraud with online debit as biennial data released by the Federal Reserve, highlights that card-not-present fraud is notably higher than in-person card-present fraud. US domestic debit networks have a stellar record of maintaining low levels of fraud for in-person transactions, and this may carry over to the digital realm, as well. Available data suggests domestic networks will be equally adept at fraud mitigation in online transactions. The Federal Reserve notes that having more network competition for digital debit transactions should result in broader industry efficiency with lower fraud online overall and I think that observation is spot on.

Do you have any predictions for how the Federal Reserve clarification may change the current debit landscape and existing partnerships?

The Federal Reserve’s recent mandate is expected to improve competition in the debit landscape, reversing an observed trend whereby the number of competitive networks available on some debit cards over the last two years has declined.¹ If the industry sticks to the Federal Reserve’s mandate rather than trying to circumvent it, I anticipate debit acceptance will become even more efficient in the U.S., especially as we estimate potential savings of $11 billion to be generated through competitive routing dynamics. Furthermore, stakeholders will look to enhance their service offering in the face of greater competition, and stronger innovation will ultimately have a positive impact on customer payment experiences everywhere. It’s up to each merchant and industry stakeholder to ensure they develop a robust strategy around maximizing the opportunity driven by competition and choice available for U.S. debit.