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June 17th 2020

101: An Introduction to Online Routing + PINless Transactions

As the world continues to digitize, retailers are increasingly focusing on their ecommerce offer as the growth in online transactions accelerates.


Despite having access to more consumers and potential revenue, the shift to online purchases has wider cost implications and risks for merchants. In the U.S., not only do merchants see much higher card fees for online than face-to-face channels, it’s also harder for them to process online transactions down cheaper routes.

Merchants pay a fee when a customer makes a purchase in-store or online to networks (such as Visa and Mastercard, or other local networks) to process the transaction. These fees vary depending on which network the purchase is routed through, what type of card the customer is paying on (debit or credit), whether it’s a Card Not Present transaction (online purchase) or Card Present transaction (in-store purchase), and much more.

The Durbin Amendment: No Network Exclusivity (NNE)

In 2011, the U.S. Government brought in the Durbin amendment, as part of the Dodd-Frank Wall Street Reform Act, to offer merchants some relief on processing fees for debit transactions. However, cards issued from banks, with under $10bn assets, are exempt from the regulation. The amendment contained a No Network Exclusivity clause to ensure all debit cards issued in the U.S. have at least two unaffiliated networks.

Prior to 2011, Visa dominated the debit network market, which we understand they achieved by agreeing exclusivity deals with a large proportion of issuers (banks), leaving merchants no choice but to route their transactions down them and having to pay the cost. Durbin’s NNE clause enabled merchants to route more debit transactions to local networks, using transaction volume and value in return for preferential deals, to benefit from increased competition in the market.

PIN vs PINless

Routing a single message debit transaction can be typically achieved through two types of transaction authentication, PIN and PINless. PIN is prevalent in-store, with customer verification easily achieved, however as transactions shift to online and the use of contactless payment methods increases, using PIN to authenticate a transaction becomes increasingly more difficult.

What is a single message debit transaction? A transaction which is authorized and settled within a single message from the processor to the consumer’s bank – most commonly used for transactions with PIN confirmation, such as Card Present and ATM transactions.

The alternative is PINless, which provides merchants with the ability to route those contactless or online transactions to domestic debit networks and drive more savings – but exactly what is it and what are the barriers?

What is PINless?

PINless is a debit transaction processed through a debit network without the need for a PIN entry. Historically, domestic debit networks, such as Star, Pulse and NYCE, have been characterized by PIN verification. This has naturally limited their growth as PIN verification is not desirable in situations including online transactions and small ticket transactions, such as fast-food restaurants, where speed at the point of sale is vital. In response to this, the local debit networks (apart from Visa’s own local network Interlink) have developed the technical ability to process transactions without a PIN.

The main issue for merchants is PINless requires participation from all the key players in the payments ecosystem, however, this doesn’t appear to be happening. In addition to some suppliers lacking the capabilities to allow PINless transactions, many issuers are not enabling the PINless functionality when issuing bankcards – it’s reported a merchant is unlikely to be able to use PINless more than 50% of the time, despite having the technology to enable a PINless transaction. This means the great majority of Card Not Present transactions have been routed to Visa or Mastercard networks, which are typically more expensive.

In fact, we estimate, if PINless was widely available online for Card Not Present transactions, U.S. merchants could drive an astounding estimate of $2.1 billion of savings during the trading year of 2020 (Fig 1). However, with the dramatic shift to online accelerated by the COVID-19 pandemic, we estimate that number could rise to an estimate of $3.1 billion dollars – if not more – furthering highlighting the impact on merchants of not being able to route online debit transactions via PINless.

Online Routing: The Barriers Costing Retailers $3.1bn a Year

Fig 1. | Sources: CMSPI Estimates & Federal Reserve Reports

Issuing banks not enabling PINless technology for many debit cards is widely seen as a violation of the Durbin Amendment by the merchant community. It is believed the strong relationships between issuers and the large networks are preventing the growth of PINless. Merchants and merchant advocates would like to see the Federal Trade Commission issue a clarification to the Durbin Amendment stating, ‘all single message debit cards, no matter the channel, should be routable by law’.

The Federal Trade Commission launched an ongoing inquiry back in November 2019 to explore why PINless debit still isn’t widely available to merchants and the benefits could be available to merchants if PINless debit really did take off.