Blog March 7th 2023

Beware The ‘Big Check’: Is Debit Routing Exclusivity the Answer?

With the Fed’s recent clarification¹, payments-savvy merchants are getting back in the ring for a fresh round of negotiations – one that will decide how much of the $3bn² Card Not Present debit opportunity their business will claim.

Author Image

Elley Frost

Chief Executive Officer

What’s the Big Check?

When the Federal Reserve clarified that routing rights must apply to all Card Not Present debit by July 2023, merchants of all types knew that a huge savings opportunity was on the table. But the global networks knew it, too. For them, the lead-up to July is a chance to guarantee that all eligible ‘PINless’ debit volumes flow their way. But with so much churn in the market, why would any merchant sacrifice their routing rights and lock themselves into near-network exclusivity?

That’s where the big check comes in.

Global networks are able to offer all-in-one incentive packages as a result of their significant market share across debit and credit spending. Exclusivity is surely a win for the chosen network, but is it as good as it looks for the merchant?

Busting the Big Check Myth

To get the answer to the big check question , CMSPI’s experts dug into a sample of the data on historical ‘Big Check’ offers – including sign-on bonuses, annual bonuses, signature debit interchange rates, and PIN and signature incentives tied to amalgamated volumes– all of which are typically associated with near-exclusive routing rights for the global network. We then compared these savings to multi-layered incentive strategies, where merchants used CMSPI’s data–driven insights to analyze their potential network mix and secure incentives, dynamically routing every subsequent transaction to the optimal network.

Figure 1. Average Cost Per Transaction Savings on Eligible Volume, Big Check vs. Optimized Routing

Source: CMSPI Estimates

While multi-layered incentives may be more complex to execute, our analysis showed that – even in the short-term – large retailers can expect to save 20% more through multi-layered incentives than under the ‘Big Check’ scenario on average (Figure 1). For those willing to engage with market fluctuations, those benefits can grow in the long-term, as regular changes to the networks badged on each card mean that what is optimal today isn’t what was optimal when you signed on the dotted line. Every one of these changes could bring with it an opportunity to develop a more productive relationship with providers who work behind the scenes to remain competitive every month that a ‘Big Check’ deal ticks over.

So, Why Do Merchants Cash That Check?

For many, it’s simplicity: the choice between a tangible, one-off boost to your bottom line and navigating a complex labyrinth of network scenarios. For others, it’s actually the right call; with differing payments partner capabilities and a unique transaction mix, the Big Check business case is bespoke for every merchant. The problem is that many merchants don’t know which camp they’re in. And there are some key mistakes they make when trying to find out:

  1. Looking at historical network availability – This method relies on a dataset biased by the routing choices the merchant made previously. Without monitoring real-time network availability (rather than actual usage), many enter negotiations with only a portion of the information they need to be competitive. The problem only compounds over time; CMSPI finds that up to 2.5% of the PIN debit transactions you see today are made on cards which had different networks available last month, quickly making merchants’ volume commitments obsolete without sufficient time to alter their strategies.
  2. AB testing to find available networks – Merchants doing this must spend a period of time giving away volumes for free, and are at risk of seasonality or issuance shifts affecting their annual estimates and ultimately increasing their costs.
  3. Using national average network shares – With network dominance differing significantly between states, a merchant’s national footprint could mean that their unique network availability mix is a far-cry from the national average.

None of these methods can achieve a truly optimal outcome, and with limited data making PINless a black box for many merchants, those one-off incentives may become more tempting than ever.

Determining Your Position… The Right Way

The goal of the Durbin Amendment’s no network exclusivity clause was to promote competition: a free market solution to the challenges of a two-sided market in which networks compete for issuers’ custom rather than merchants’. Interchange costs since its introduction are estimated to have fallen by over $1bn annually, a figure predicted to increase to $4bn as the opportunity expands to Card Not Present debit transactions.² Exclusivity deals are just one way that this competition can be limited. But, armed with the knowledge that even the short-run benefits of the Big Check can be less compelling than the long-run benefits of a robust debit routing optimization strategy, merchants without the data they need across dozens of factors – from ongoing network availability, to card mix – could be leaving millions on the table.

CMSPI works with the largest merchants across the U.S., analyzing the market’s leading dataset of debit transactions to determine anticipated results of an optimization strategy. Read our full Attack on Debit Report here.