PINless Debit Routing

In July 2023, the Federal Reserve rolled out a new rule change that requires card issuers to offer at least two unaffiliated payment networks for all debit card transactions, including those made online and in other card-not-present (CNP) environments.

While options for PINless debit routing in e-commerce are still limited for the time being, let’s examine how merchants can take advantage of the new rules and what benefits might result.

The Durbin Amendment and Clarification

Enacted in 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Durbin Amendment marked a pivotal moment in US payment regulation.

The Durbin Amendment had two primary objectives:

  1. Interchange Fee Regulation: It mandated that the Federal Reserve should regulate interchange fees on debit card transactions. This aimed to address the concerns of merchants who were burdened by high interchange fees, a cost they incurred when processing debit card payments.
  2. Network Choice: The Durbin Amendment required issuing banks to ensure that all in-person debit transactions could be processed by at least two non-affiliated networks. This provision aimed to introduce competition among card networks and provide merchants with choices on how to route debit transactions.

Since the inception of the Durbin Amendment, the payments landscape has transformed dramatically. The prevalence of online shopping and the emergence of tokenized debit cards have introduced new complexities to payment processing. In response, the Federal Reserve revisited the Durbin Amendment to ensure its relevance in the digital age.

Effective July 1, 2023, the Durbin Clarification introduced several crucial provisions:

  1. Mandatory CNP Routing: Issuing banks must ensure that all debit transactions, including card-not-present (CNP) transactions, can be processed by at least two non-affiliated networks. This extends the network choice mandate beyond in-person transactions to the digital realm.
  2. Tokenized Debit Cards Inclusion: The Clarification explicitly states that a tokenized debit card qualifies as a debit card, subjecting it to the prohibition on network exclusivity. This ensures that tokenized cards are treated similarly to traditional debit cards.

One of the most significant implications of the Durbin Clarification is that it grants merchants the right to choose how to route debit card payments for a broader range of transaction types, including online, mobile, and remote transactions.

This change represents a significant expansion of merchant control over payment processing.

As online transactions continue to surge, merchants who have embraced CNP transactions as a core aspect of their business can now benefit from lower fees and more strategic routing decisions. This newfound flexibility empowers merchants to optimize their payment processing strategies according to their unique business goals.

What is PINless Debit Routing?

PINless debit routing allows any debit card payment to be routed through a network other than the one associated with the relevant card brand, such as Mastercard or Visa. Using third-party networks can result in lower interchange fees.

In the past, merchants typically only had multiple options for debit routing when the transaction was accompanied by a PIN, and issuers were only required to support multiple networks for card-present transactions.

This meant that e-commerce merchants were still largely limited to a single option for routing a given transaction.

The Federal Reserve’s rule is intended to disrupt these monopolies and ensure that at least some competition is present in the system, thereby reducing costs for merchants.

While most third-party debit networks were once capable of processing only PIN transactions, many have begun adding support for PINless debit, creating new options for e-commerce merchants.

How does PINless Debit Routing Work?

When a PINless debit transaction is made, it uses the same dual message system as a credit card transaction, first requesting authorization and then presenting the transaction. This is in contrast to PIN debit transactions, which combine authorization and presentment into a single message.

To enable PINless debit routing, merchants need to work with a payment processor that supports the feature.

Once enabled, merchants will be able to choose which debit network to route their transactions to. This can be done on a transaction-by-transaction basis or by setting up default routing rules.

In practice, optimizing debit routing is often a Herculean task. Merchants must navigate a labyrinth of factors, including shifts in card issuance, volume commitments, sub-optimal routing tools provided by processors, and more.

However, those who manage to harness the right tools have already made significant strides in cost savings. According to an estimate by CMSPI, least-cost debit routing has already saved U.S. merchants over $1 billion annually.

Challenges and Roadblocks

While the Durbin Clarification represents a significant step forward in enabling PINless debit routing for online merchants, there are still challenges and roadblocks that businesses may encounter when implementing this strategy. Understanding these hurdles is essential for successful execution.

One of the key challenges merchants face in implementing a flexible PINless debit routing strategy is their dependency on Payment Service Providers (PSPs) for transaction processing. Many businesses use multiple PSPs for processing payments, and each PSP may have its own rules and limitations when it comes to routing decisions.

It's crucial for merchants to understand how each PSP routes debit transactions and the level of flexibility they offer in terms of setting network priorities or providing specific routing instructions at the transaction level.

This dependency on PSPs can sometimes limit merchants' ability to fully optimize their routing strategies.

To build an effective PINless debit routing strategy, businesses also need access to critical payment data. This includes metrics such as interchange costs, authorization rates, chargeback rates, and transaction volume broken down by variables like card type or payment method.

Without access to these essential data points, it becomes challenging to make informed routing decisions and, equally important, to measure the success of the routing strategy. Having transaction-level insights empowers businesses to make dynamic routing decisions that optimize cost and maximize approval rates in real time.

Strategies for Successful PINless Debit Routing

As the landscape of debit card processing continues to evolve, merchants must adopt strategies that allow them to leverage the benefits of PINless debit routing while addressing the challenges and roadblocks previously discussed. Here are a few strategies that can help businesses navigate this dynamic landscape successfully.

Partner with the Right Payment Service Providers (PSPs)

Selecting the right PSPs is crucial. Merchants should seek partners that offer robust routing options and the flexibility to customize routing decisions based on business needs. Conducting thorough due diligence when choosing PSPs can pay off in the form of more efficient routing and cost savings.

Invest in Data Analytics

Data is the lifeblood of effective routing. Merchants should invest in data analytics tools that provide access to essential metrics, including interchange costs, authorization rates, and chargeback rates. These tools should offer real-time insights and transaction-level data to inform routing decisions.

Implement Real-time Routing Decisions

To fully harness the advantages of PINless debit routing, businesses should consider implementing real-time routing decisions. This involves dynamically selecting the optimal debit network for each transaction based on factors like cost, network performance, fraud risk, and approval rates. Automated systems can make these decisions swiftly and accurately.

Monitor and Measure Success

Continuous monitoring and measurement are critical for success. Merchants should establish key performance indicators (KPIs) related to routing efficiency, cost savings, and approval rates. Regularly reviewing these KPIs allows businesses to make adjustments and refine their routing strategies as needed.

Looking Ahead

As we look ahead, it's clear that online merchants in the United States have the opportunity to harness the benefits of PINless debit routing in ways previously unexplored. In fact, an estimate by CMSPI indicates that US merchants could save up to $3 billion in total by taking advantage of these rule changes.

By understanding the intricacies of debit routing, addressing challenges, and adopting strategic approaches, businesses can position themselves for success in the ever-evolving world of payment processing.

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