April 14, 2015
As the payments industry continues to expand and grow, the introduction of new payment methods will alter the status quo. Some of these, like Bitcoin, will offer a completely new payment ecosystem. Others, like mobile payments, will focus on improving the existing ecosystem by providing new and improved customer experiences. And then there will be others, like PINless Debit, that focus on creating winners and losers in the current model.
While this latter approach is unhealthy for the payments industry and consumers alike (PINless Debit Payments—Here we go again…), it is happening, and it is something that industry players need to manage. By nature, as a zero sum game, PINless Debit creates both winners and losers. There seem to be two winners in this game—merchants who receive reduced interchange rates, and EFT networks that gain a new competitive weapon in their long-standing battle with Visa and MasterCard. On the losing side are consumers and debit card issuing financial institutions (especially community banks and credit unions). Consumers will experience confusion and benefit reductions, while financial institutions will see a decreased ROI for debit payments brought upon by increased costs as they modify programs to address consumer impacts.
Unlike other emerging payments that offer innovative new value propositions and improved consumer experiences, PINless Debit is being deployed as a back office routing change—without consumers’ knowledge or explicit consent. Consequently, many debit consumers will see their payment experiences change—sometimes significantly—despite doing exactly the same thing at the POS that they have been doing for years.
Those most affected will be consumers making swipe and go or tap and go purchases. Historically, these purchases have been processed exclusively as Signature Debit, which made them eligible for traditional Visa and MasterCard consumer protections like zero liability, extended warranties and purchase protection. With the introduction of PINless Debit, these purchases will be processed by EFT Networks. This will likely result in the transactions being handled like traditional PIN Debit payments, which are not eligible for the Signature Debit consumer protections. In addition, these purchases may be subject to the PIN Debit fees still in place at many smaller financial institutions, and they may no longer qualify for card reward and marketing programs or checking account incentive programs.
This places financial institutions in a challenging position—they did not introduce PINless Debit into the market, yet they will be the ones consumers look to for an explanation of what is happening. With this in mind, debit issuing financial institutions may want to modify some of their programs in the near term to get ahead of the impending customer support wave.
> Debit Card Reward and Marketing Programs – The impact of PINless Debit will be felt mainly at community banks and credit unions that typically reward customers for Signature Debit purchases only. Moving forward, these institutions may want to start rewarding all debit purchases, as do many Reg II regulated issuers.
> Checking Account Incentives – Similar to debit card rewards, many checking account incentive programs focus solely on Signature Debit purchases. Financial institutions may need to change these programs to reward all debit purchases, if they want to avoid consumer confusion.
> Debit Card Fees – Some community banks and credit unions charge a fee for PIN Debit transactions to offset the negative economics of these transactions. This approach has been debated for a while, and these institutions may find that PINless Debit provides a good opportunity to eliminate these fees in the name of a better customer experience.
The above-mentioned changes can all be implemented to offset the negative consumer experience PINless Debit will produce. However, they all require an investment by the debit issuing financial institutions that will be difficult to justify because PINless Debit will also reduce their debit interchange revenue (Pinless PIN Reducing Interchange). To create a ROI that supports these changes, financial institutions may need to change their reward, marketing and incentive programs to payout at a level that can be sustained by the lower interchange revenue.
> Debit Card Reward and Marketing Programs – As with the customer experience challenges, the economic impact of PINless Debit will be felt mainly at community banks and credit unions, which typically only recognize Signature Debit purchases with these programs. Institutions that move to the reward all debit model will likely need to reduce the consumer benefits associated with these programs to accommodate the lower interchange revenues from PINless Debit.
> Checking Account Incentives – The economic impact of PINless Debit will also affect the viability of existing checking account incentive programs. Financial institutions may need to alter the structure of these programs to account for the lower revenue contribution of debit purchases. Options to consider might include requiring more debit transactions or increasing the minimum balance requirements for program qualification.
The other area of financial impact that PINless debit will introduce is related to fraud. In some instances, issuers are finding that PINless Debit is leading to a migration from PIN Debit—not Signature Debit. This creates a new set of challenges for issuers becausethe sophisticated models used by issuers to mitigate fraud may not be setup to handle these transactions. As a result, issuers will need to invest time and effort developing new expert rules and retraining their neural network models to recognize and handle PINless Debit at the POS.
While, in general, competition is good, the introduction of PINless Debit—which forces incremental new costs and reduced revenues on debit card issuers—is not helping to move the debit payments industry forward. In an era driven by innovative new consumer experiences and regulation that is hyper-sensitive to protecting consumer rights, deploying PINless Debit in a zero sum model, without providing consumers an opt-out option, seems extremely short-sighted. The traditional payment industry players may want to start thinking about taking the high road and working together to modify the PINless Debit model in a way that creates a winning situation for everyone involved.