Blog May 27th 2021

What Does Online Debit Routing Look Like?

As a result of the Durbin amendment's "no-network exclusivity" clause, merchants can route PIN debit transactions to the least cost network. In the online market, PINless technologies allow for merchants accepting online transactions to route to the least cost network, resulting in lower costs and increased competition between card networks in the online environment.

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Callum Godwin

Chief Economist

As a result of the Durbin amendment’s “no-network exclusivity” clause, merchants can route PIN debit transactions to the least cost network.

In the online market, PINless technologies allow for merchants accepting online transactions to route to the least cost network, resulting in lower costs and increased competition between card networks in the online environment.

There’s concern in the merchant and regulatory communities over long-standing limitations in PINless growth. In November 2019, the Federal Trade Commission (FTC) launched an ongoing inquiry in PIN routing limitations. In addition, in May of 2021, the Federal Reserve released a position on Regulation II which reinforced the NNE clause’s extension to CNP transactions. In this article, we explain what PINless debit is, the current issues with PINless growth, the regulatory response, and considerations for merchants.

Durbin No Network Exclusivity Clause

Since October 2011, the Durbin amendment’s “no-network exclusivity” clause has mandated that all debit cards in the U.S. must be badged with at least two unaffiliated networks. Card-accepting merchants in the U.S. are given the right to choose which network on the card is used for an individual transaction. The process of choosing a network for a transaction is known as debit routing.

Prior to the Durbin Amendment’s “no-network exclusivity” (NNE) clause, we understand it was commonplace for card networks to sign into exclusive partnerships with an issuing bank. As a result of the Durbin amendment, card networks are now forced to compete amongst themselves for merchant transaction volume in the form of routing preference. This competition creates deflationary pressures on unregulated interchange fee and switch fee pricing.

What is PINless?

The practical application of the NNE clause by the card industry has meant that merchants only tend to have routing choice when a debit card transaction is authenticated via a PIN. In response, many domestic debit networks have developed PINless functionality, which allows merchants to route transactions down these networks without the need for a PIN entry. While PIN is prevalent in-store, PINless-authentication provides merchants the ability to route contactless and online transactions to domestic debit networks. As a result, PINless authentication allows for the same competition between debit networks that we see in the PIN-authenticated in-store environment to take place in the online environment.

What is the issue?

In order for PINless to reach ubiquity in the online space, all stakeholders in the payment supply chain are required to participate. Among many barriers to PINless growth, Bank Identification Number (BIN) enablement could represent a challenge at the issuer level, wherein individual issuers may not be enabling PINless functionality when issuing debit cards. With many debit cards lacking PINless enablement, merchants accepting online transactions may be limited in their ability to route debit transactions and could be forced to process the transaction down the sole global network available on the card, blocking domestic debit networks and resulting in higher per transaction costs for merchants.

What’s changed recently?

Merchant advocates including CMSPI strongly believe that limitations in the ability to route a debit transaction, either in-store on online, represent a violation of the Durbin amendment’s NNE clause. In November 2019, the Federal Trade Commission (FTC) launched an inquiry into Visa and Mastercard’s debit transaction routing processes. John Drechny, CEO of the Merchant Advisory Group, has recently highlighted the issue and importance of the FTC inquiry for merchants:

“As merchants spent time and money to implement these new transaction types, it became clear they were not enabled by all issuers who have those domestic networks on their cards…Merchants believe this is against the routing provision of Reg II and would be happy to see the FTC and Federal Reserve clarify this point and enforce regulation.” (Source)

(Note: Durbin amendment is also known as Reg II)

In May 2021, the Federal Reserve released a statement echoing the calls of merchants and merchant advocates to ensure PINless capabilities are not limited in the card not present (CNP) environment. The Federal Reserve notes:

“The absence of at least two unaffiliated networks for card-not-present transactions forecloses the ability of merchants to choose between competing networks when routing such transactions, an issue that has become increasingly pronounced because of continued growth in online transactions, particularly in the COVID-19 environment.” (Source)

This is an important position which could ultimately lead to the proper implementation of Durbin, enabling all debit transactions to be routed by the merchant.

What does the data say?

In the Federal Reserve’s recent Regulation II 2019 update, data on single-message, CNP transactions shows a clear lack of growth in PINless. (Card present (in-store) PIN-authenticated transactions are classified as single-message. Card not present PINless transactions are also classified as single-message debit transactions. All other debit transactions are considered dual-message.) While local debit networks have developed the technology, analysis of the Federal Reserve data indicates PINless growth is being throttled in comparison to the growth of dual-message networks. In 2017, single-message networks accounted for just 8% of CNP debit transactions. In 2019, that figure shrunk further to just 6%. While PINless’s routing options seem attractive to merchants, PINless’s market share in the CNP environment is consistently dwarfed by the more expensive and fraud-prone solutions offered by dual-message networks. This result is evidence that the supply chain is not providing PINless capabilities to merchants.

Figure 1. PINless (single-message CNP) vs. Non-PINless (dual-message CNP)

According to CMSPI estimates, as of 2020, the limitations in online routing due to low PINless enablement, further exacerbated by the shift to online that occurred as a result of the COVID-19 pandemic, is costing merchants $2-3 billion annually.

What should merchants do?

Given the challenges in PINless enablement, many merchants are not fully considering the benefits of PINless debit. While PINless issuance and enablement continue to pose challenges and opportunities for merchants accepting online payments, it’s important for merchants to assess the business case and ROI for PINless routing. Merchants should be aware of the trends in issuer and network enablement rates and understand how those trends may be affected by regulatory intervention. These trends also change over time, making monitoring and surveillance of PINless growth an important consideration. Depending on the debit card profile of each merchant, the benefits and challenges of PINless enablement will vary.

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