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June 05th 2020

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

The COVID-19 pandemic has undeniably, fundamentally changed the world of retail – and with many of these changes likely to continue into the long-term, the retail payments landscape may never be the same again.


Perhaps most notable is the accelerated shift from in-store to online spending. This was particularly prevalent during lockdown: however, as stores begin to reopen their doors, many consumers are continuing to shop predominantly online.

This comes at a cost for merchants. Not only are fees for Card Not Present transactions generally higher than for face-to-face transactions, merchants are less able to route their transactions down the most cost-effective route – resulting in higher costs. In this blog, we take a look at the barriers preventing online routing and the overall impact to merchants in the current climate.

Why Can’t You Route Transactions Online?

Since 2011, the Durbin amendment’s No Network Exclusivity (NNE) clause has mandated U.S. debit cards need to be co-badged with at least two unaffiliated networks. This allows merchants to route debit card transactions to the lowest cost network: a process that engages competitive forces and puts downwards pressure on pricing.

However, Card Not Present transactions are a lot more difficult to route to local debit card networks, which tend to have lower costs than the global Visa and Mastercard networks.

Historically, domestic debit networks – such as STAR, Pulse and NYCE – have been characterized by PIN authentication. However, this has proven restrictive to their growth: PIN authentication is problematic in a number of retail situations, such online transactions and in-store small ticket purchases where speed at the Point of Sale (POS) is vital. In response to this, the local debit networks, except for Visa’s Interlink network, have developed the technical ability to process transactions without a PIN – this is known as PINless debit.

However, there is a fundamental issue with Bank Identification Number (BIN) enablement, preventing the growth of PINless. In a nutshell, many issuers are not switching on PINless functionality when they issue bank cards, which means merchants are unable to use it for a large proportion of transactions. In our experience, a merchant is unlikely to be able to use PINless more than 50% of the time.

Merchants and merchant advocates have long argued this is a violation of the terms of the Durbin amendment. At no point did the Durbin text state online transactions are exempt from the NNE, and it is unlikely legislators ever intended for it to be. Put simply, we believe by preventing the growth of PINless, some members of the payments supply chain are breaking the law.

‘‘(B) NO ROUTING RESTRICTIONS.—The Board shall, before the end of the 1-year period beginning on the date of the enactment of the Consumer Financial Protection Act of 2010, prescribe regulations providing that an issuer or payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person who accepts debit cards for payments to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions.”

In response to merchant concerns, the Federal Trade Commission (FTC) has launched an inquiry into restrictions to the growth of PINless. Although very little is publicly known about how the inquiry is progressing, merchant advocates are rightly concerned that the pandemic may cause delays, further exacerbating the issues and increasing the costs to merchants.

How Much is This Worth to Merchants?

If 2020 had been a normal trading year and followed expected growth trends, and if PINless was widely available, the U.S. merchant community would have saved an estimated $2.1 billion in the calendar year (Fig 1).

However, online debit card volumes have skyrocketed due to the pandemic. As a result, merchants stand to miss out on a staggering $3.1 billion this year from being unable to access PINless on a large portion of transactions (Fig 1). These figures are based on the assumption domestic networks could reach a market share of 41% of CNP transactions, the same as their market share in the Card Present (CP) space. We believe this estimate could be conservative, and if this market share reached 90% – which could be theoretically possible – the annual savings would be $5.6 billion in a normal trading year and $7.9 billion during this pandemic.

We should note we haven’t included CP PINless debit in these numbers, which is also subject to the same restrictions. PINless is also useful for small ticket merchants such as QSRs – where PIN authentication is not desirable – because it gives merchants another routing option for these transactions.

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

Figure 1
Sources: CMSPI Estimates & Federal Reserve Reporting


The increase in online commerce will also inevitably increase merchant card fees. In the debit space, it makes Durbin-mandated routing more difficult and this is set to cost U.S. merchants an eye-watering $3.1 billion in 2020 alone. With the FTC inquiry ongoing, a fair outcome would solve this issue – however, merchants and merchant advocates need to join together to ensure this happens.

As more transactions move online, merchants must now look to rigorously audit and review their existing CNP payments set up. While routing remains obstructed by inherent issues in the payments supply chain, retailers can still identify significant areas for cost savings by optimizing their holistic arrangements. With the shift to ecommerce looking likely to last well into the future, now is the time to ensure you’re not paying over the odds for CNP transactions.

*Please note, unless otherwise stated all figures are CMSPI estimates.

To find out how you can optimize your payments set up to win customers and boost revenue in a more online world, get in touch with our ecommerce experts today.

This blog is one of three in a series looking at how the rise in online spending is impacting the merchant community: