A Merchant's Guide to Debit Networks
One of the biggest paradigm shifts in the payments industry was when Visa and Mastercard logos started showing up on debit cards. Combining the convenience of credit cards with the ability to pay with cash in your bank account instead of taking on debt is the ideal payment solution for many consumers.
But while credit and debit cards may function almost indistinguishably at the point of sale, it’s a very different story on the back end. How do debit card networks operate, and what do merchants need to know in order to keep their rates as low as possible?
On average, more than a third of all US consumer transactions are made with debit cards, outranking both credit cards and cash. For consumers, the payment process is more or less identical no matter what type of card they’re using—debit cards have the option of being authenticated with a PIN instead of a signature in card-present transactions, but for card-not-present transactions, there’s no difference at all.
However, the similarities stop there. Debit cards transactions are sent over their own networks, and there are many of them. This is of little consequence to the consumer, but it should matter a lot to merchants. Legally, merchants are entitled to choose the debit network they prefer from multiple options, and choosing the right debit network can be a big money saver as processing fees can vary greatly between them.
Merchants who understand how debit networks function and what their rights are under the law can lower their costs and increase revenue simply by researching their options and making the optimal choice.
What Are Debit Networks?
Debit card transactions require electronic communication between banks for authentication and processing purposes. Because of the wide range of banks and banking systems, many different debit card networks have come into being over the years.
Some of the most widely-used networks are Interlink, Maestro, and Pulse, owned by Visa, Mastercard, and Discover respectively. There are also debit card networks that are independent of the major card brands, like Star and Accel.
Debit card networks can be set up to authorize debit card transactions in one of several different ways: with PIN entry, which of course can only be done in card-present environments; with the cardholder’s signature; or with the so-called PINless method, necessary for online payments and other card-not-present transactions, which uses the card’s three-digit verification code.
How Did the Laws Change for Debit Card Processing?
In 2010, the push for better banking regulations culminated in the passage of the Dodd-Frank Act, which included the Durbin Amendment, a provision of the law that puts a limit on the interchange fees that merchants can be charged for debit card processing. It also requires issuers and card networks to offer merchants a choice of at least two different, unaffiliated debit card networks for processing.
Merchants lobbied for this change because there was significant consumer demand for debit payment options, but the banks were charging high rates for them. Merchants were going to be stuck either raising their prices or refusing their customers’ preferred payment method.
What’s the Difference Between PIN, PINless, and Signature Debit Transactions?
When customers check out with a debit card at a retail store, they may get to choose whether to enter their PIN at the payment terminal or provide a signature instead. This choice will determine which debit network processes the transaction and how much the merchant will pay in interchange fees.
The way the Durbin Amendment is currently interpreted, only PIN entry transactions are subject to the strictest fee caps, and processors can charge higher rates for PINless transactions, which are riskier and costlier for them to handle.
Signature debit transactions are always processed through the applicable card brand’s debit network. These are also called “offline” debit transactions.
In card-present environments, it makes the most sense to offer the PIN and signature options. In card-not-present environments like e-commerce, merchants can utilize internet PIN entry systems like 3-D Secure. These solutions are very effective at preventing unauthorized transactions, but they can introduce some checkout friction.
The only other option for card-not-present merchants is PINless debit. Because it’s the least secure method, many processors only offer it to merchants in low-risk industries, or for recurring payments from trusted customers.
One very good reason for merchants to utilize PINless debit when they can is that under current regulations, PINless debit transactions cannot be subject to chargebacks.
What Do Merchants Need to Know About Debit Network Choice?
Many merchants spend little time thinking about which networks to route their debit card transactions through. Often, their payment processor has promised to route transactions through the most cost-effective network, but their priorities may not always align with the merchant’s. They may default to routing through a network they have a partnership with, or avoid PINless transactions, which may be riskier for them but cheaper and safer for the merchant due to their immunity to chargebacks.
Many issuers offer more than the two debit network options required by law. It pays to take the time to research your options and choose the authentication and network routing options that are the safest for you and the easiest on your bottom line.
If your processor has guaranteed you that they’re automatically routing transactions to provide you with the lowest rates, audit your data and make sure you agree with the choices they’re making. Per the law, you have the right to tell them which networks to use.
Debit network choice may seem like a fine-grained thing to be concerned about, but it really can have a big impact on the rates you’re paying. It also provides you with a way to reduce your exposure to chargebacks, if you have the option of PINless transactions.
It’s important for merchants to consider the high rates of debit card usage as a factor in their strategic planning around payments and chargeback management. Credit cards and debit cards took different paths on their way to ending up in every consumer’s wallet, and there can be crucial variances in the laws, policies, and procedures that govern them.