By Jim Ghiglieri
In final rules enacting the Durbin amendment, the Fed has given debit card issuers some new options. Most credit union debit card transactions today can be finalized with either a PIN or a signature at the point of purchase–cardholders' choice. However, the Fed now allows issuers to create a signature-only or a PIN-only debit card.
It was generous for the Fed to give issuers choices–particularly as they handed over to merchants the decision on which network will take priority in processing a particular transaction. Yet most issuers will not exercise the PIN-only or signature-only option because doing so would limit how consumers can use their cards.
While PIN-only, signature-only, or PIN-and-signature cards are all options for issuers, the Fed is requiring that every debit card be backed by at least two "unaffiliated" (independent) networks by April 1, 2012. That can be (at minimum) two separate PIN networks, two separate signature networks, or one of each. (Those credit unions that currently have one company serve both their PIN and signature debit transactions will need to make a change by the April 1 deadline.)
For most debit card issuers, including credit unions, a debit card carrying the brands of two signature networks on the front of the card is difficult to imagine. Several challenges–not the least of which is cardholder confusion–would arise, given a card branded both American Express and Visa, for example.
Albeit less confusing than our example "American Express/Visa" card, a dual-branded PIN card (those logos are typically on the back of the card) would come with its own set of challenges. Most notably, cardholders would not be able to use debit cards in their customary way–that is, in signature transaction situations. For example, while more online retailers are accepting PIN transactions today, the practice is far from ubiquitous.
Industry observers have suggested that some issuers may take advantage of a PIN-only card to limit their fraud loss exposure, which is higher for signature-based transactions. But for credit unions currently partnered with secure signature networks, fraud losses from signature-based transactions have not historically been high enough to sacrifice cardholder convenience. Credit unions could also choose to have a PIN-only or signature-only card if the business case supported pushing transactions to one or the other--for better interchange income, for example. Member convenience issues would still be at play.
In all, rather than contemplate a move to a signature- or PIN-only debit product, credit union card managers may find it more worthwhile to devote energy to evaluating their existing networks and, if necessary, new network partner candidates.
Two key questions must be asked of these partners:
- What are the per-transaction costs we can expect as our transactions are routed through your network? and
- What is the average interchange rate we can expect for a typical transaction?
As of Oct. 1, 2011, merchants--rather than card issuers--will have the power to choose which of a CU's selected networks a PIN or signature transaction will go down. Because acquirers (banks that receive card transactions on behalf of merchant customers) are right now beginning to negotiate the price of debit transactions, credit unions must be in close communication with their existing and prospective networks to understand how fees and interchange rates will change in the newly regulated environment.
While issuers under $10 billion in assets are technically exempt, predicted market pressure may already be influencing network costs.
When asking the second question of networks, credit unions must request a comprehensive response, encompassing the average interchange rate for each of the top merchant categories–that is, the categories of merchants their members shop most. If member debit cardholders’ behavior is atypical, meaning they shop at a different type of retailer more often than average, it will be critical to share this with the network providing the estimate to get the most complete picture possible.
Ultimately, credit unions must read between the lines when collecting responses to these two key questions. The most important factor to discern is whether the network partner understands (and advocates for) credit unions. Do they have a history of working alongside community-based financial institutions, and are they prepared to continue doing so even as the market morphs into something entirely new?
Jim Ghiglieri is VP corporate communications for SHAZAM.
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