Debit Network Distinctions Blur
The debit industry has been in a state of upheaval over the last five years, particularly with regard to the historical distinctions between dual-message (Signature debit) and single-message (PIN debit) systems. Looking to the full implementation of EMV and STAR’s announcement that it will enable dual message “Signature” transactions on its network, the distinction between PIN debit and Signature debit will continue to erode.
The erosion began with Reg. II, the Federal Reserve Board’s implementation of the Durbin Amendment. In its final rules, the Fed determined that debit is debit, and set aside single-message/dual-message distinctions in interchange levels. The Fed also chose to discount the differences between the two in its network non-exclusivity provisions, in which it defined exclusivity at the card-level and not the transaction-level.
Undifferentiated interchange rates eliminated much of the bias large issuers had for dual-message transactions by removing the higher interchange revenue on these transactions [a differential remains for small issuers]. From the merchants’ perspective, Reg II limited the interchange cost advantage of single-message transactions that had previously dictated routing. Additionally, the network non-exclusivity rules made it easier for merchants to choose dynamically the network over which an individual transaction would be routed. This phenomenon resulted in aggressive pricing agreements between networks and the largest merchants to secure routing.
The re-emergence of “PINless” PIN debit after the implementation of Durbin further blurred the lines between single-messsage and dual-message networks. Single-message networks positioned the service as a response to the “No Signature Required” programs of dual-message networks, increasing the routing options available to merchants on transactions with no cardholder authentication. It also increased routing options available to e-commerce merchants and card-present merchant without PIN pads.
The flip-side of PINless debit was Visa’s introduction of PIN Authenticated Visa Debit (“PAVD”) which enabled merchants to route PIN-authenticated transactions on its dual-message network. In conjunction with the Durbin changes and PINless debit, PAVD caused many issuers to experience volatile network volumes, as a result of increased merchant flexibility. While the fluctuations have generally stabilized, some merchants continue to route debit transactions dynamically, resulting in significant merchant-specific swings in network volume.
Further erosion of dual-message/single-message distinctions will come in the form of First Data’s STAR Access, which enables dual-message capabilities on the STAR network, historically a single-message-only network. STAR Access will support signature, no-signature, and no cardholder verification methods using both single-message and dual-message network infrastructure; it will position STAR as a routing option at merchant locations without a PIN pad (e.g., restaurants, phone order, and ecommerce websites) and may open up dynamic routing options on signature transactions.
We anticipate EMV migration will continue the erosion of network distinctions. To comply with Reg. II, debit cards will enable a Common AID, which supports single-message debit networks and a Global AID for dual-message and cross-border transactions. In order to exercise routing choice, a merchant must choose the Common AID during the initial stage of the transaction. Once EMV implementation is fully underway, the default selection for most merchants will be the Common AID, thus limiting the Global AID (and dual-message network routing) to cross-border transactions. We believe that this will result in a continued shift of volume to single-message networks.
These changes will perpetuate issuers’ and merchants’ increasing indifference to traditional network routing structures. As such, the differential in network and processing fees for dual- and single-message transactions will be difficult for networks to sustain. Over time, we expect to see this differential erode as well, leading to true parity in single-message and dual-message economics: debit will, in fact, be debit.
For more information, please contact Casey Merolla, Senior Manager, firstname.lastname@example.org, specializing in Debit and Prepaid.
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