As retailers move to capitalize on PINless debit, CUs need to re-evaluate their fee and reward programs.
By Joe Woods
Sponsored by CU24
Credit unions have seen a recent spike in PINless debit transactions as Walmart, Target, McDonalds and other large, national merchants have begun implementing PINless as part of their business strategies, reducing interchange that flows to issuing credit unions. (Also read, "Retailers Reduce CU Debit Income" on this blog.) What are “PINless” transactions? When a consumer uses her debit card for a purchase that is less than $50, a merchant may decide to route that transaction over one of the PIN debit networks, without capturing the PIN. Merchants may not even offer the consumer the choice of PIN, but routinely capture the transaction and forward it as “PINless.” PINless transactions aren’t new; however, they have been used infrequently, generally for transactions where both parties are known to each other with an established relationship, such as utility bill payments, rent payments, tuition and the like. The original intent was to provide a quick, low-risk transaction for cardholder and merchant. PINless was rarely used for routine POS debit activity. With this shift in merchant transaction routing behavior and the accompanying decreases in interchange income, credit unions face some important challenges to their more traditional debit strategies. Two areas in particular may require some re-thinking. First, it is not uncommon for credit unions to offer pricing incentives for members to choose signature over PIN debit, or even what amounts to penalties, or disincentives, for using PIN over signature. These practices are meant to encourage signature debit use, and generate higher income for the credit union. The regulatory and market forces, however, have combined to create convergence in debit interchange rates. That is, the gap between signature and PIN has closed significantly, and continues to narrow. Nevertheless, a number of credit unions are still assessing fees for members that choose PIN debit over signature. These fees can range from $0.25 to $1 per PIN-debit transaction. A $0.25 fee may not seem high, but we need to recognize that the difference between PIN and signature interchange is substantially less than $0.25–and continues to narrow. Despite the relatively limited income differential, credit union members may be being penalized for transaction activity over which they have limited control, in the interest of protecting income streams that aren’t what they once were. Secondly, most credit union reward programs are based on signature debit and credit transactions. As merchants divert signature transactions to PINless debit, it will reduce members’ card rewards and expectations, possibly leading to frustration and dissatisfaction. Coupled with the overall reductions in interchange income, credit unions may have to re-think their approaches to card rewards programs to avoid confusion and member disaffection.
Joe Woods is VP/sales of CU24. 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.
