PIN-Less Debit: How CUs Can Win in a Losing Model

CUs may need to alter the structure of their debit programs to account for lower interchange income.

June 8, 2015

As the payments industry continues to expand and grow, the introduction of new payment methods will alter the status quo.

Some of these, such as Bitcoin, will offer a completely new payment ecosystem. Others, such as mobile payments, will focus on improving the existing ecosystem by providing new and improved member experiences.

And then there will be yet others, such as PIN-less debit, which will create winners and losers in the current model.

While this latter approach is unhealthy for the payments industry and consumers alike, it’s happening, and it’s something that industry players need to manage.

By nature, as a zero sum game, PIN-less debit creates both winners and losers. There seems to be two winners in this game—merchants who receive reduced interchange rates, and electronic funds transfer (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, particularly credit unions.

Consumers will experience confusion and benefit reductions, while credit unions will see a decreased return on investment (ROI) for debit payments brought upon by increased costs as they modify programs to address consumer impacts.

Reducing consumer confusion

Unlike other emerging payments that offer innovative new value propositions and improved member experiences, PIN-less debit is being deployed as a back-office routing change—without members’ knowledge or explicit consent.

Consequently, many debit consumers will see their payment experiences change—sometimes significantly—despite doing exactly the same thing at the point of sale (POS) that they’ve been doing for years.

Those most affected will be members 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 such as zero liability, extended warranties, and purchase protection.

With the introduction of PIN-less debit, these purchases will be processed by Electronic Funds Transfer Networks. This will likely result in the transactions being handled like traditional PIN debit payments, which aren’t eligible for the signature debit consumer protections.

In addition, these purchases may be subjected 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 credit unions in a challenging position: They didn’t introduce PIN-less debit into the market, yet they’ll be the ones members look to for an explanation of what is happening.

With this in mind, debit issuing credit unions may want to consider these modifications to some of their programs in the near term to get ahead of the impending member support wave:

Debit card reward and marketing programs. Credit unions that typically reward members for signature debit purchases only will feel the impact of PIN-less debit.

Moving forward, these institutions may want to start rewarding all debit purchases, as do many regulated issuers.

Checking account incentives. Similar to debit card rewards, many checking account incentive programs focus solely on signature debit purchases.

Credit unions may need to change these programs to reward all debit purchases, if they want to avoid member confusion.

Debit card fees. Some 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 PIN-less debit provides a good opportunity to eliminate these fees in the name of a better member experience.

NEXT | Managing the new economics

Managing the new economics

By implementing these changes, credit unions will be able to offset the negative member experience PIN-less debit will produce.

However, these changes require an investment by the debit-issuing credit unions that may be difficult to justify because PIN-less debit will also reduce their debit interchange revenue.

To create an ROI that supports these changes, credit unions may need to consider these changes to their reward, marketing, and incentive programs to pay out at a level that can be sustained by the lower interchange revenue:

Debit card reward and marketing programs. As with the member experience challenges, credit unions that typically only recognize signature debit purchases will feel the economic impact of PIN-less debit programs.

Institutions that move to the “reward all debit model” will likely need to reduce the member benefits associated with these programs to accommodate the lower interchange revenues from PIN-less debit.

Checking account incentives. The economic impact of PIN-less debit also will affect the viability of existing checking account incentive programs.

Credit unions may need to alter the structure of these programs to account for the lower revenue contribution of debit purchases. A couple options to consider include requiring more debit transactions or increasing the minimum balance requirements for program qualification.

The other area of financial impact that PIN-less debit will introduce is related to fraud. In some instances, credit union issuers are finding that PIN-less debit is leading to a migration from PIN debit—not signature debit.

This creates a new set of challenges for these credit unions because the sophisticated models used to mitigate fraud may not be set up to handle these transactions.

As a result, credit unions will need to invest time and effort developing new expert rules and retraining their neural network models to recognize and handle PIN-less debit at the POS.

Working as a team

While, in general, competition is good, the introduction of PIN-less debit—which forces incremental new costs and reduced revenues on debit card issuers—isn’t 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 PIN-less 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 PIN-less debit model in a way that creates a winning situation for everyone involved.

DEAN NOLAN is vice president of product management and design at Saylent, which provides financial institutions with data analytics software and services.