US Merchants Still Overpaying by Millions on PIN Debit
Back in 2010, when the world was still reeling from a global recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in the US, a law which affected almost every part of the nation’s financial services industry.
This legislation included a last-minute addition, the so-called Durbin amendment, which capped interchange fees on debit cards and also mandated that every debit card must carry at least two non-competing networks, with the merchant being able to select the network of their choice.
This presented a huge opportunity for merchants as there was now a certain amount of guaranteed competition for Visa and Mastercard, the card networks which for so long have dominated the US market.
Fast forward nearly ten years and Bankhawk estimates that merchants are still missing out on millions of dollars in possible savings and, worse, often they are doing so due to deliberate efforts by issuing banks and processors to route according to their own preferences at the expense of merchants’ bottom line.
What’s the Problem?
There are twelve main PIN debit, or EFT, networks in the US, and each of them carries their own set of interchange and switch fees, each has preferential deals with issuers and processors, and each are open to incentive agreements with merchants.
The simple economics of card payments dictate that interchange goes to the card issuer, switch or network fees go to the network/card brand and merchants pay both, as well as an additional amount to their processor. Collectively, these make up the merchant service charge.
Since October 2011, when the Durbin amendment came into force, the networks have been competing for issuers to get their network on as many cards as possible, thereby increasing their own switch fee revenue.
Most cards have, on average, three networks, and can have more than ten, with almost all including Visa’s Interlink or Mastercard’s Maestro. Naturally, issuers will prioritize the network which gives them the highest interchange revenue, subject to any other incentives the networks offer. This means that, where a merchant is not routing the transactions directly, the issuer will likely default to the highest cost option.
But Durbin also prompted the processors to develop their own routing solutions, which ostensibly gives control back to merchants. However, those merchants who lack the knowledge or sophistication to develop a proper routing strategy often find themselves indirectly lining the pockets of their processors, as they too have incentive agreements with the networks and will optimize the routing accordingly without the merchant knowing. In fact, some processors even own networks themselves, representing a clear conflict of interest.
What Can Merchants Do?
- Decide whether to accept PIN debit in the first place. There are many benefits of accepting PIN debit including lower costs, faster settlement and lower fraud rates due to the PIN authentication.
- Determine what your processor is currently doing with your transactions. Are they processing according to the issuer’s default or prioritizing in some way. If they are prioritizing, is this for their benefit or yours?
- Determine the capability of your processor to “smart-route” transactions in an optimal way and establish quick wins. Some processors simply have a priority order whereas others have routing algorithms designed to assess each individual transaction, calculating the cost of each option and selecting the cheapest one. However, be aware that I have worked with a number of merchants where such a routing algorithm was not actually delivering the best results and was costing the merchant millions. Whatever your processor can handle, make sure it is optimized using independent analysis if possible.
- Engage the debit networks to negotiate incentive deals. Whilst these are usually reserved for larger merchants, they can be a game changer for costs and even Visa and Mastercard will come to the table rather than lose transactions to a rival network. It’s best practice to negotiate with those networks which have the potential to carry the most transactions, but establishing this can be difficult, as can making sense of the complex matrix of routing options, volume tiers and transaction types which will follow. Merchants need to do their homework up front in order to get the best from such negotiations, or use a third party with specialist knowledge.
- Consider whether a different processor can better support you to implement the outcome of the above steps through superior technology and routing capabilities. Maybe changing processor isn’t worth the additional debit routing saving available elsewhere, but in my experience it often is.
- Don’t stand still. The landscape is constantly changing. The networks available on the card change over time as issuers do new deals with the networks, interchange and switch fees vary, rules can change etc. Regular analysis and updates to the routing algorithm and incentive agreements should be undertaken to ensure costs continue to be optimized.
Our team has supported a number of high profile merchants to get the best out of their debit routing, saving millions of dollars in the process. To see how much you could save, contact Bankhawk today.
