June 06th 2019

Contactless and SRC: Will Debit Routing Become Lost in a World of Quicker Payments?

Secure Remote Commerce (SRC) and contactless payments are both on the horizon in the U.S. – promising a number of enticing new features that will benefit both merchants and consumers alike. However, as we’ve previously seen with the card networks’ industry initiatives, these changes are unlikely to come without their drawbacks. In this instance, it looks like merchants will have to sacrifice their ability to route debit card transactions.

If this were to happen, CMSPI estimates it could cost merchants an additional $1.3 billion each year, so it is essential that merchants begin preparing for these changes by deciding whether or not to accept contactless and considering implementing PINless debit. Taking a look at the differences between single and dual message transactions, we evaluate the financial impacts that routing restrictions are likely to have on merchants and anticipate how the domestic debit networks may respond.

Secure Remote Commerce

As a one-click eCommerce solution, SRC will allow consumers to complete a card not present (CNP) payment online through a single button. As we discussed in the Winter 2018/2019 edition of Payments Intelligence, SRC potentially offers several benefits to online merchants: including lower fraud rates and higher acceptance and conversion rates. That being said, SRC is likely to carry the requirement for network tokens, which could compromise debit routing opportunities.

"Although currently PIN debit is not widely used for online transactions, there are significant growth plans through PINless – and some domestic networks have particularly ambitious plans in this space, which could be severely impacted by this requirement."

CJ Brown - Technical Consultant

Contactless

Contactless will affect in-store transactions at the Point of Sale (POS), with an expectation that it will improve the speed of POS transactions, and therefore enhance the customer experience.

In the U.S., just 5% of all cards are currently contactless-enabled. However, both Chase and Wells Fargo have confirmed their intent to accelerate the issuance of contactless cards in 20192, and a recent Federal Reserve Bank of Boston report suggests the conditions are in place for contactless. The New York Transit has announced plans to introduce contactless cards, and a similar move from Transport for London in the UK proved a huge catalyst for contactless adoption. It increasingly looks like the U.S. could soon be facing a contactless revolution akin to those seen overseas.

Transaction routing for co-badged cards is likely to be far more challenging for contactless than other payment methods. Indeed, in Australia we have observed local network EFTPOS lose significant market share due to routing restrictions associated with contactless acceptance.