US PIN Debit Consolidation

18 April

Fed Pin Debit

Two years ago, top 5 bank CEOs met every week during Durbin to discuss response. I believe they probably had a good plan as Debit is a very very popular payment product. Unfortunately BAC’s Moynihan jumped the gun and announced a “fee” for debit.  Consumers and press went ballistic.. I wish that BAC had just waited another few months to roll out it’s card linked offers product to show the new “value”  and tie the pricing to this new “value”. As the Chinese say


There have been quite a few excellent Fed studies out on Debit since my last blog on the topic (Real Time Transfers – Feb 2011):

From the Reference 2 aboveDebit bank loss - EPC

The network exclusivity provision and the merchant routing provision of Regulation II both give merchants more control in routing transactions to preferred networks. However, most banks’ way of complying with the prohibition of network exclusivity arrangements is to enable more than one PIN network on their debit cards, but not more  than one signature network. As a result, those merchants that accept  only signature transactions generally have not gained any increased  scope to choose from among different networks.

Among merchants that accept PIN debit transactions, many have taken advantage of their new control. The routing kc fed before and after reg 2provision of Regulation II allows them to pick the PIN network they prefer from among  those enabled on a given card. Their exercise of this control has altered  PIN debit networks’ market shares. Many merchants now avoid Visa’s Interlink network, the largest PIN network prior to the regulations, and  instead choose other PIN networks whenever possible. As a result, in  terms of transaction volume, Interlink has lost significant market share  to other PIN networks such as Maestro, Pulse, and STAR (Finkle; Daly). Through their new control over routing, merchants’ emerging influence over the market shares held by different PIN networks is likely  to increase competition among PIN networks for merchants….

Consumers appear to have shifted to some extent from signature debit to PIN debit as a result of the regulations. Regulated banks now have an incentive to promote PIN debit over signature debit, though that same incentive does not apply to exempt banks…Many regulated banks stopped offering rewards to debit card users, especially to signature debit users, and they may also have eliminated the PIN fees that were assessed in the past to some consumers for each PIN debit transaction. Merchants have also taken steps to steer customers toward the use of PIN debit.

From Reference 1 – with respect to PricingKC Fed small large merchant debit fee

Merchants’ new freedom to offer discounts based on payment method, brand, and product allows them to steer customers toward the payment methods that the merchants prefer—and thus to affect the market shares held by networks. For example, if signature networks set their interchange fees for exempt banks higher than those set by PIN networks, merchants may offer greater discounts to customers who use PIN debit. To retain transaction volume, signature networks may avoid setting their interchange fees significantly higher than those of PIN networks. In this way, merchants’ new flexibility in offering discounts causes networks to compete for merchants. Most merchants, however, have not yet taken advantage of this new power. Given the many different payment methods, brands, and products that merchants accept and the complexity of the fee structures, it will take time for merchants to determine whether and how to offer discounts based on payment method. For example, Kroger,
one of the nation’s largest grocery store chains, considers payment based discounts a very powerful tool for influencing customers’ payment choices (Clifford and Strom), but has not decided how to offer the discounts.

Thus we see a world where big merchants push PIN debit, small merchants are getting taken by ISOs who don’t even know to ask for PIN capability, with competition in pricing…. With signature debit going down, PIN debit use going up.. Visa’s Interlink hemorrhaging volume. For perspective, my estimates are that somewhat Approximately 15% of Visa’s Revenue comes from US debit (just 2% from PIN Debit Interlink). Does anyone now wonder why Visa wants “Chip and Signature”?kc fed before and after reg

Banks have lost over $7.7B annually because of this change. Remember that PIN debit is just an extension of the Bank’s ATM network..  why on earth would they want to continue to use 8 different independent networks to continue here? What if there were new products they could deliver on the PIN debit networks…. ?

PIN Debit seems to be ripe for consolidation and bank control. I have a strong bet that the US banks will consolidate around a single PIN provider within the next 18 months. Why? Probably more for defensive purposes.. Its also nice to be able to control the rules on your own network..

Perhaps more on this subject in a future blog.

9 thoughts on “US PIN Debit Consolidation”

  1. Excellent points … and I agree that at some point the networks are going to face consolidation. A continued shift to prepaid products supported by virtual checking accounts (ala Bluebird) will also play into this dynamic. Perhaps the folks at MCX can leverage this need for consolidation in the network to help create/route their mobile and other transactions over those rails and provide a “floor” for the volume to build off of.

  2. A couple of contrarian thoughts: 1) The prospects of PIN network consoliation would send merchants to the DoJ claiming reduced routing and pricing options. If nothing else, merchants have demonstrated a canny knowledge of how to get Antitrust to intervene when MPC and others cry foul. 2) Consolidation has to start somewhere with someone. But which existing EFT network will become the nucleus? Star, NYCE and PULSE are owned by publicly held payments companies that compete with one another so it’s unlikely that any two of the non-winning networks whoud let their asset go cheap, particularly in light of the premiums they paid originally. Shazam is bank-owned and an association making this Iowa-centric network attractive to credit unions and east or west coast banks or Charlotte. 3) Interlink or Maestro as the core? DoJ problem again. Consolidation may ultimately occur but I doubt it will happen in my lifetime.

    1. Excellent points, and thanks for the thoughtful feedback
      1) Antitrust. Hmm.. the interchange is already regulated.. flat fee signature, PIN, CNP, CP, … think the threat of anti trust is gone.. Banks have a right to select how they clear payments.
      2) What if Interlink sale was part of JPM deal? If the banks were going to buy one.. you think all 6 prospects would run away and say “no” or would they want to be the man left standing in musical chairs?
      3) This is current “problem” in signature debit. Post Durbin margins do not support 6 players, all of them want out of this business.. look at Visa’s public comments.. What if the banks ALSO created a signature debit competitor and consolidated with PIN? this implies a new Debit brand (think interact)..

      This idea has been 4 years in the sausage factory.. it may not happen.. but this is not exactly a business that can exist in current state.

      1. 1) The antitrust thrust from MPC would likely parallel that used when First Data was attempting to acquire Concord resulting in FD owning Star and 64 percent of NYCE. Merchants complained diminished routing choice and won. FD was forced to sell NYCE.

        2a) Ditto Interlink. If banks bought it, Interlink would like it did before Visa purchased it from the CA banks. Moreover, retailers would argue that the backroom antics of Interlink management would poison the well. 2b) FD paid $800 million for Star and it’s probably worth half that today. So a “short” sale, one bankers might be able to justify would result in a haircut for First Data. Same scenario may be pretty much true for Discover/PULSE and FIS/NYCE.


        1. I agree completely on Signature… Merchants and top banks want it gone. Interests are aligned. I don’t see disposition leading to a new 4 party network.. but rather a “quasi” 3 party network(s) (Chase/CPT, Citi/FDR, …). Giving these institutions renewed “control” and pricing ability for products that could “ride the rails” of bank owned debit.

          In mobile wallets this is the tokenization project I discussed. There is NO VISA in this project.. mobile wallets hold a token that can only be resolved by the consortium. Token could be a debit, token could be credit… Token is routed via the debit network… authorization is sent via bank owned “consortium” debit network. JPM seems to have another option… of also routing through their own version of Visanet. This seems to protect their interchange and is a backstop to any regulatory issues surrounding a new token pricing scheme which is dependent on debit.

  3. (wordpress text editor and my browser hate each other).
    3)Banks I work for want no part of signature anything (except interchange) and would like to see it dry up. Since Durbin created equivalence in Sig/PIN pricing, why would banks want to form an alternative four-party, Durbin subjected, signaure network? Interact pricing is quite attractive to merchants but US banks will throw up all over it. The six large EFT networks will either solve their earnings and liquidity p;roblems or die, the prper course of things.

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