The $2bn Question: Is PINless the Next Game Changer for CNP?

01st February 2018
Alistair Matthewson
Alistair Matthewson

PINless for CNP payments gives merchants the option to route transactions via domestic networks instead of being limited to a card’s main global brand. This option has previously only been available to a small number of very large merchants, but this is changing fast. CMSPI estimates $2 billion of savings areavailable for U.S. merchants, so now is the time to carefully consider the cost benefits of routing online transactions away from Visa/Mastercard, and towards alternative networks competing for business.

Merchants currently pay an average of $0.92 per transaction in interchange and network fees for Durbin exempt online debit card transactions. Through domestic debit networks, this could be over 30% less with competition on interchange fees and low-fixed-cost network fees, potentially saving the merchant community more than $2 billion annually.

Amazon and Uber already benefit from routing their transactions through EFT ‘PINless’ networks. Supply chain developments mean it has finally become possible for others to get in on the act, but the savings don’t come easily. To be optimized, a merchant must understand what networks are available to them, which of those networks are PINless capable, and therefore which processing solution will suit them best. More broadly, for all debit cards to be available for PINless routing, change is needed in the card issuing world to reverse the disparity in levels of routing choice between card not present and card present merchants.

Figure 1 : U.S. PIN Debit Network Shares


The implementation of the Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act contained one key clause ensuring that all newly issued debit cards in the U.S. must be made available to at least two unaffiliated networks, with the right to decide which network is used resting ultimately with the merchant. This has created a free-market dynamic that is not replicated in most countries.

Whereas before, domestic or global networks would compete with each other to be the exclusive affiliated network of an issuing bank, now they must compete to secure transactional volume from merchants. This results in deflationary pressures on unregulated interchange and switch-fee pricing.

For any goods or services, seeing shifts in market share is a good indicator of how competitive a market is. The less churn and movement in a market, the more likely it is that there are anti-competitive forces preventing buyers from exercising choice.

Since the Durbin amendment was enforced in 2011, we can see from Fig. 1 that network volumes have shown signs of fluctuations as they balance the completive tension of providing value to both issuers and merchants. For example, STAR has been a recent beneficiary, growing volumes by 17% since 2014, whereas PULSE has lost out, losing 19% of its transaction volume in the same period.

By innovating outside of traditional PIN Point of Sale (POS) transactions (for example with eCommerce offerings), all major networks hope to achieve competitive advantages and increase market shares.


Unfortunately, there are limits upon which transactions can currently be routed to domestic networks. Historically, they were limited to card present (CP) transactions that involved a PIN as authentication. Later, ‘PINless’ transactions below $50 became eligible for CP transactions, to the benefit of many lower average transaction value merchants. Today, the domestic networks are working to further expand the number of transactions they are eligible to process to include signature-authenticated transactions over $50 (meaning that all CP transactions can now benefit from Durbin amendment rulings) and as wide a scope of eCommerce transactions as possible.

The business case is also complex: what is suitable for one merchant may not be suitable for another. One example is that fees on low-value, card not present (CNP) transactions from regulated issuers tend to be lower on global brands Visa and Mastercard than they are on their domestic counterparts. CMSPI regularly analyzes over 20 other factors including – but not limited to – fraud exposure, downgrade frequency, authorization/settlement ratio, Merchant Category Codes, and variable routing fees, all of which determine the business case for PINless CNP.

Current Market and Availability

To benefit from online PINless transactions, three parties must be capable of processing these transactions:

1. Card Processors and Gateways

Unsurprisingly, the processors that are closely affiliated with networks enabling PINless online have largely been forerunners of these arrangements. Only a small number have the capability to support both single- and dual-message PINless transaction types from all networks and, therefore, it may be necessary to consider whether a separate processing connection to an incumbent processor is required to make the most of the opportunity. However, CMSPI understands that most major processors that are yet to process PINless online are very close to completing the testing and accreditation necessary.

In addition to being able to process transactions, processors have varied capability in terms of their ability to route transactions to the maximum benefit of the merchant. Cards may have a network prioritized by default, or processors may route to particular networks by default. Both scenarios would be suboptimal when compared to a ‘least-cost routing’ rule set.

Finally, as different processors have different costs associated with their PINless online capabilities, this also needs to be considered when assessing any potential benefit.

Figure 2 : PINless vs Visa/Mastercard Debit Fees – Unregulated Issuance

Figure 3 : PINless vs Visa/Mastercard Debit Fees – Regulated Issuance, CNP Small Ticket

2. Debit Networks

The major domestic debit networks – NYCE, PULSE, STAR, Accel and recently SHAZAM – all now have the capability to handle both single and dual-message transactions. The distinction between single-message and dual-message transactions is an important one. Single-message transactions should only apply to CNP orders that are ready for immediate fulfilment. This would apply to products in stock and ready to ship or virtual orders such as e-tickets or downloadable software. Dual-message transactions send separate authorization and settlement files: an authorization file putting a temporary hold on customer funds, and the settlement file pulling those funds once goods have been dispatched.

3. Card Issuers

The Durbin amendment intended to create a fair market for debit interchange, while not penalizing smaller banks and credit unions that rely most heavily on interchange income. Although CNP merchants have benefited from the capped interchange fees,they haven’t benefited as they should from the increased competition that derives from the ‘no-network exclusivity’ clause. In many instances, merchants are still effectively forced to use Visa or Mastercard. Now that availability amongst networks and processors to handle these transactions is increasing, we believe the time has come to discuss PINless debit in the context of the Durbin text opposite (page 7).

Building a business case

One of the most important steps in building a business case for PINless is understanding that it is founded on your customer base: that is, which networks and issuing banks are represented and what are their mutual capabilities. Looking at national averages will often lead to inaccurate analysis for specific merchants. CMSPI has seen merchants’ exempt issuance proportions range from 20% to 67% of debit cards, and for one specific network we have seen availabilities range from 15% to 35% between merchants. This variance is important as we have seen a sharp divide in the regulated and unregulated issuing banking community. Some of the country’s largest banks – with strong affiliations to global card brands – have been the most resistant to enabling PINless, whereas smaller banks that are exempt from interchange caps have been more accommodating. This may seem surprising when you consider that it is smaller banks that stand to lose most from lower unregulated interchange fees, but other factors including refund rules, issuer-to-network fee structures and wider relationships cause this regulated-exempt split. For example, the STAR network – which issues approximately 50% of its cards through regulated banks – has a lower proportional availability of PINless eCommerce than Accel, which issues approximately 95% of its cards to unregulated banks.

BIN data analyzed by CMSPI shows that four out of six PINless networks are unable to complete PINless on the majority of their regulated bank cards, but five out of six networks can complete more than half of their unregulated bank cards via PINless (Fig. 4). The biggest area of opportunity is on interchange savings of unregulated debit transactions. As Fig. 3 illustrates, most PINless networks are cheaper across all transaction values compared to Visa and Mastercard debit.

Figure 4 : Regulated vs Exempt PINless Bank Issuance

Additionally, by enabling PINless and therefore competition, merchants often find that not only are the PINless network fees negotiable, but that the global brands may respond in kind in order to retain significant volumes. However, merchants should be aware of any deals that lock them in long-term for short-term gain. A dynamic business case means an offer that represents value now, may not be so appealing after further PINless issuance increases. Additionally, there is a danger that industry-wide benefits of PINless are stifled by deep-pocketed global networks before they really get going. Through a fully optimized process and supply chain that maximizes the capabilities of networks and processors, merchants can expect to save up to 30% of total interchange and network fee costs on convertible volume from the signature networks to PINless debit networks. For many merchants, this already represents a six/seven figure opportunity and, as PINless issuance continues to grow, so will the savings.

Fraud and Security Considerations

PINless debit authenticates the customer using Address Verification Service (AVS) and Card Verification Value (CVV) in the same way as a Visa or Mastercard debit transaction would. Each of the networks has sophisticated real-time fraud monitoring tools to protect both themselves and the merchant from fraudulent activity. However, no equivalent to 3D-Secure exists for PINless debit, and, as such, merchants can bear a larger burden. While many merchants rely on this process, others have also considered the negative net effect of shopping-cart abandonment with 3D-Secure, and implemented alternative internal and external anti-fraud measures to reduce chargebacks and increase acceptance rates.

In Summary

With PINless issuance approaching critical mass and early adopter benefits still available, now is the perfect time to assess the business case and ROI. Merchants need to understand the capabilities of their customer bases’ networks and issuers and then understand which processors and gateways offer the best solution for that profile. PINless won’t be right for all, but through collective merchant pressure and collaboration between U.S. debit networks, the market can mature to the benefit to all CNP merchants.

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