Checking Faces Growing Threat From PIN-Less Debit

03/26/2015 08:27 pm

By Ray Birch

LOMBARD, Ill—Get ready for CU debit interchange income, certainly on a per-transaction basis, to slide even further, thanks to a new routing strategy employed by many of the big-box retailers.

Behind the change: a Supreme Court decision that has led to an ironic result.

Bill Handel, SVP-Research of Raddon Financial Group, pointed out that merchants such as Costco, Walmart and others recently decided to route all transactions below $50, including signature debit, through PIN-less debit. Under that routing merchants process the transaction as PIN, but don’t require the customer to enter their personal identification number.

The purchase is routed to the issuing bank through a debit network instead of a Visa or MasterCard network. That results in lower interchange fees that retailers pay to banks and credit unions.

Retailers React To Court Ruling

Handel said the Supreme Court’s decision last year to uphold the Federal Reserve’s debit interchange guidelines—ruling against the merchants—has retailers taking action into their own hands.

Bill Handel

“The net impact here is merchants are reducing their interchange costs, which is taking money out of the pockets of the issuers below $10 billion in assets,” said Handel, who added the move saves merchants about nine cents per transaction compared with higher-priced signature debit outlined for those under the Durbin carve-out. “Merchants are taking a little more (fraud) risk here by pushing these transactions though as PIN-less debit, but they are saving money at the expense of issuers.”

While several analysts have already noted that CU debit interchange revenue has already slipped by around 10% post-Durbin on a per-transaction basis, many reports have indicated CUs are more than making up the decline with programs to increase transaction volume, a strategy backed by all of the CU card processing companies.

Debit Interchange To Fall Faster

Handle is not so sure credit unions’ overall debit interchange revenue will withstand this latest merchant move.

“We anticipate credit unions will continue to see the interchange rate on debit cards drop,” said Handel. “And we believe this will happen at a faster pace with all of these smaller debit transactions processed at the lower interchange rate.”

What is interesting to note, observed Handel, is the Supreme Court’s decision to uphold the Fed’s interpretation of the Durbin rules has, essentially, broadened the impact of the debit interchange guidelines.

“The impact of the Durbin Amendment has been certainly felt by issuers over $10 billion in assets,” said Handel. “Now the rules will dramatically impact financial institutions of all sizes.”

Checking on Checking

New rules affecting overdrafts may deeply impact the product that remains the core of most member relationships, the checking account. To examine this potential threat, and to offer credit unions a patch forward, CUToday.info has launched a series titled “Checking on Checking: Threats & Strategies.”

Stories in the series are below:

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URL: https://cuto.flux5.ccplatform.net/THE-feature/Checking-Faces-Growing-Threat-From-PIN-Less-Debit

Analysis: Retailers’ Move Will Hurt Consumers, Too

BIRMINGHAM, Ala.—The recent move by big box retailers to PIN-less debit, may not only take money out of issuers’ pockets, it may do the same to consumers.

Moreover, the cost-cutting move by retailers like Costco, Walmart, Kroger and others could lower the rates of high-yield rewards checking programs, and even lead to banks and credit unions charging consumers fees for PIN-less transactions, according to analysis by DepositAccounts.com.

Some large merchants recently moved to route all transactions below $50, including signature debit, through PIN-less debit. Under that routing merchants process the transaction as PIN, but don’t require the customer to enter their personal identification number. The purchase is routed to the issuing bank through a debit network instead of a Visa or MasterCard network. That results in lower interchange fees that retailers pay to banks and credit unions, compared with higher-priced signature debit transactions.

Sources have indicated that the move by retailers resulted from last year’s Supreme Court decision to uphold the Federal Reserve’s interpretation of the Durbin rules. Not winning in court, retailers have now taken action into their own hands.

DepositAccounts.com pointed out that the move will make it difficult for FIs to keep checking accounts free, cover costs of ATM fees, and pay high yields on reward checking accounts.

“This long zero interest rate environment has been very difficult on reward checking accounts. Rates and balance caps have gone down over the last several years. I’m afraid this is yet another headwind for reward checking,” the website reported. “When I asked my credit union contact if they are planning to make any changes to their reward checking account due to this loss of interchange revenue, he said that if most retailers adopt this, he was sure it would lead to a drop in the interest rate.”

Fewer signature transactions could also mean consumers won’t qualify for their monthly signature transaction minimum to receive the higher interest rate—and consumers may not even be aware they are short since the retailer, at the point of sale, does not inform the consumer that the transaction is PIN.

Another possible ramification is that banks and CUs may hit consumers with a fee when they make a debit card purchase that goes through as a PIN-less transaction, DepositAccounts.com reported.

The move to PIN-less debit may bode well for Internet savings and checking accounts, whose greater efficiencies allow for higher rates—and those higher rates will be noticed more by consumers as high-yield checking rates fall, sources have stated.