Alert CUES members note that Walmart, others now exercising their processing choice for small transactions.
By Karen Bankston
You may be noticing the latest impact of the Durbin Amendment to the Dodd-Frank Act on your credit union’s interchange fees. It appears Walmart and some other large retailers have begun processing signature debit transactions as “PINless PIN” transactions, thus reducing interchange fees—and credit union revenue—even when members opt to sign on the signature pad. The giant chain may be at the head of the pack of merchants aiming to reduce card processing expenses by adjusting the routing logic on their point-of-sale terminals to submit debit charges of $50 or less as PIN transactions whether consumers key in a code or sign for their purchases. “Merchants are beginning to exercise their new transaction routing freedoms, made possible through the Durbin Amendment, which gives retailers the option to do network routing as they see fit,” says Ryan Rackley, director with CUES Supplier member and strategic provider Cornerstone Advisors, Scottsdale, Ariz. The PIN networks, such as STAR and Pulse, introduced a PINless debit option for low-risk transactions in certain categories, including retail purchases, a few years back, Rackley notes. With their small-ticket sales, fast-food chains were the first to embrace this option on a large scale, and utility companies and cell phone providers also use this routing pathway when their customers sign up for online bill payment. Big retailers may have been waiting for the outcome of a court challenge filed by the National Retail Federation, which counts among its members Walmart, JCPenney, and the National Restaurant Association, challenging that the 21-cent ceiling set by the Federal Reserve for transaction fees on debit cards issued by big banks is too high. The U.S. Supreme Court declined in January to review an appellate court decision that the ceiling is appropriate. So big retailers now may be ready to make the least of interchange fees by resetting their payment terminals to route smaller transactions through the PINless channel. “Merchants are after low cost and speed at the checkout counter,” Rackley says. The switch will save merchants an average 9 cents per transaction, the difference between the average interchange fee of 31 cents for debit transactions routed through the signature pipeline and the 22-cent average for PIN transactions on most credit union debit cards. The CEO of a credit union that first noticed on Feb. 2 that Walmart was routing its members’ debit transactions through the PIN channel initiated a CUES Net conversation that has drawn comments from colleagues across the country. One credit union sent employees to area Walmart stores to see what would happen when they tried to make a signature transaction. “Some transactions were declined at the self-check-out,” the executive noted. “At the registers … the Walmart employee would process the transaction for them.” As other major retailers follow Walmart’s lead, the changeover will have a significant impact on credit unions’ already dwindling interchange revenue, Rackley says. Over the last 18 months, PINless transactions have accounted for about 3 percent of traffic through the PIN channel, but that mix may change quickly as other large retailers switch to “least-cost routing”: The top 100 merchants account for 90 percent of the average credit union’s debit transactions. “You’ll see the transactions shift from signature to PIN. It’ll happen overnight at any individual merchant,” he adds. As they see this shift take hold in their interchange revenue, credit unions that offer rewards for signature debit transactions may want to consider adding a $50+ purchase requirement. “No matter how credit unions spin it, reward campaigns are all about interchange revenue,” Rackley notes, and there’s no reason to reward members for transactions that don’t produce higher fees. With the average retail ticket right around $50, it won’t take much of a shift in members’ shopping habits to continue to qualify for rewards. At the same time, to avoid penalizing members for PINless transactions, credit unions that impose fees after a certain number of PIN transactions per month should be able to differentiate between the two categories. Taking in the big picture, credit unions should also be on the lookout for new sources of revenue. “If you take a look over the last seven years, interchange has been under attack. We’ve seen a downward trend, and we expect that trend to continue,” Rackley says. “Merchants will continue working to shave even a penny per transaction from their cost structures, and the networks are competing with each other for transaction volume. The payments war is very volatile and changes every week.”
Karen Bankston is the proprietor of Precision Prose, Stoughton, Wis. CUES School of Payments is slated for May in Chicago. Also read "Revenue Growth Homer" by a consultant from Cornerstone Advisors, CUES' partner in strategic, technology and risk management services.
