E-Commerce: A Tangled Web for PIN Debit

Lauri Giesen

Will PIN debit for online transactions ever take off? Some backers are hopeful for this year, but others argue the Durbin Amendment and alternative technologies—like mobile payments—could make PIN debit irrelevant for e-commerce.

Time was, the case for online retailers to accept debit card transactions secured with a PIN rested on cost reduction. Now, that case seems to have shifted to fraud prevention. But is the new argument strong enough to kickstart PIN-debit use and acceptance in e-commerce in 2013?

Although one technology provider is predicting a boom year for online PIN debit, some others think it will take time for it to catch on. Yet others wonder whether alternative technologies now under development could make irrelevant the whole idea of using PINs on the Internet.

PIN debit on the Web is an idea that, though it has a long pedigree, can’t quite get off the ground. For more than a decade, PIN-debit networks and technology companies have been trying to figure out a secure method to allow consumers to enter their PINs on laptops or PCs to make a purchase.

In more recent years, technology companies have come out with systems that appear to improve the security of typing PINs on PC keyboards. The goal then shifted to getting a sufficient number of online retailers to make changes in their systems so they could accept PINs.

Until about a year ago, the argument to get retailers onboard had been purely economic, as proponents of PIN debit showed that the interchange cost of a PIN transaction to merchants was significantly less than that of a signature-debit transaction. And retailers had just started to come around to buying into that argument.

‘Then Durbin Came Along’

But then came the Durbin Amendment to the 2010 Dodd-Frank Act, which in late 2011 capped the cost of debit transactions—both PIN and signature—on cards issued by banks with more than $10 billion in assets. One effect of that legislation was that the cost of PIN and signature transactions was made nearly equal on cards issued by financial institutions subject to the regulation—signature debit averaged 24 cents a transaction vs. 23 cents on PIN, according to the Fed.

That dramatically weakened the purely economic argument for PIN debit. “We were all set to roll out programs with several of the top PIN-debit networks, and then Durbin came along. A lot of the merchants that had been interested in PIN debit to lower their transaction costs started to take a second look and they put their programs on hold,” says Ralph Bianco, chief operating officer for Plantation, Fla.-based Adaptive Payments Inc., a company with a unique system that combines online purchases with PIN entry on mobile phones.

So backers of PIN debit for e-commerce have shifted their argument. No longer stressing interchange cost, they point out to merchants that PIN transactions have considerably less fraud and lower chargeback levels than signature transactions, the type of debit that has commonly been used for online debit. There is also a secondary argument that PIN allows retailers to accept foreign sales from debit cards that are only PIN-based.

But experts are split on whether this argument is strong enough—at least this year—to get PIN moving online.

One technology company, however, is confident that 2013 will be the breakthrough year. “We finally have enough merchant acceptance and cards available to see strong growth for 2013,” says Ashish Bahl, chief executive and chairman of Acculynk, an Atlanta-based technology firm that enables PIN debit on the Web.

Acculynk is projecting a 300% increase in its revenue coming from PIN e-commerce transactions, with the majority of that growth coming from U.S. retailers.

Bahl says a lot of the growth will be coming from the travel-and-leisure industry, but he adds that several large brick-and-mortar retail chains have announced plans to begin accepting PIN debit on their e-commerce sites in 2013.

Shift to Mobile

One large corporation that announced plans to accept PIN debit through Acculynk is American Airlines. But Bahl says several other large travel companies will be announcing plans in early 2013 as well as several unnamed large retail chains.

And Bahl says his company is also getting support from several large merchant acquirers and processors, including First Data Corp. and Bank of America Merchant Services. Also, 11 major PIN networks now allow their cards to be used in the Acculynk program. The only network holdout is Interlink, owned by Visa Inc.

The company’s big selling point for retailers is the ability to lower chargebacks and fraud. “PIN can reduce fraud for retailers by 20 to 30 basis points [compared to signature debit],” Bahl says.

Additionally, Bahl touts the ability for U.S. retailers to increase their sales in foreign markets. Not only is debit more secure—a bigger factor in foreign sales where the fraud potential is even greater than in the U.S.—but also there are some foreign debit cards that can only be used with a PIN.

Acculynk recently announced some deals that will allow large banks in India and Puerto Rico to make their cards available to the U.S. retail market if retailers can accept PIN.

Using the Acculynk system, customers at checkout enter their debit card number just as they enter their signature debit card or credit card number today. But if they push the PIN debit option, a PIN pad shows up on their computer screen. Rather than type their PIN on their PC keyboard, they enter their PIN by moving their mouse and clicking on the screen’s PIN pad.

But not everyone believes that the factors Bahl alludes to are enough to get a significant lift in PIN debit for e-commerce yet this year. As a result, some technology companies and networks are putting their PIN emphasis on mobile-payment transactions, where they see an immediate demand.

One such company is Adaptive Payments.

“We have not gotten the commitment from the merchants that we thought we would. Our merchant advisory group tells us there is a strong demand, but we are not seeing it,” says Bianco, referring to e-commerce.

While Adaptive Payment is still committed to e-commerce transactions, Bianco doesn’t think the big push there will come in 2013. As a result, it is applying the same technology to accommodate PIN debit cards for mobile payments—such as paying for taxicabs or home-service providers. Adaptive Payments is also active with programs that involve PIN-debit mobile payments to purchase chips and get cash back at casinos.

‘Slowly, But Surely’

Bianco agrees that the higher fraud and chargeback rates on signature debit compared to PIN debit ultimately will sell online retailers on PIN debit. But he doesn’t think the total volume of e-commerce transactions, and therefore the total volume of chargebacks and fraud, has quite hit the point where retailers feel they have to take action.

“There is a need for merchants to deal with their fraud levels, but I will have to see more major merchants make a strong commitment to fighting this fraud with PIN debit before I will put a major sales effort behind it,” Bianco says.

With Adaptive Payments’ technology, when a customer gets to checkout and says she wants to pay via a PIN debit card, she is instructed to provide her mobile number. An Adaptive Payments representative then calls her immediately and tells her to enter her PIN on her mobile phone. The transaction is then approved or denied.

Some outsiders believe that, in addition to offering another layer of security, the idea of introducing the mobile phone to input PINs may appeal to consumers.

“Card issuers have done a really good job educating consumers to be careful where they input their PINs. As a result, a lot of people aren’t going to want to enter their PIN on their computer screen. Mobile changes that because consumers are used to entering PINs on their phone. They use PINs on their phone all the time, whereas with online, they use passwords,” says Patricia Hewitt, director of debit advisory services for Maynard, Mass.-based Mercator Advisory Group.

Regardless of what technology is used, other payment experts also aren’t too optimistic that 2013 will be “the year” for PIN debit online.

Dan Kramer, marketing director for the Iowa-based Shazam ATM and PIN-debit network, is predicting a modest 5% to 8% rate of growth in his network’s e-commerce PIN transactions for 2013. “We’re still pushing adoption with retailers, but acceptance is not coming as rapidly as we had hoped. It is moving slowly, but surely,” Kramer says.

Like Bianco, Kramer believes the technology developed for e-commerce PIN debit may move faster in other applications, such as mobile bill pay. “From an acquirer’s point of view, we have a product that competes with companies like Square to facilitate mobile payments. We see more growth in that [in 2013],” Kramer says.

For e-commerce, the outlook is less certain. “PIN acceptance for e-commerce is still in its infancy and we don’t know what to expect. Our focus-group reports show that customers would use it, but we just haven’t seen acceptance by a lot of retailers yet,” he says.

Still, Kramer believes there may be a few markets that might make some strides in 2013. Airline-ticket purchases seem to have accounted for more interest than have general-merchandise sales, he adds.

Shazam has worked closely with Adaptive Payments on online PIN debit. Early in 2011, the network announced had invested in the company, though it wouldn’t specify the amount. Still, while Kramer and Bianco think it will just take more time, some people don’t think PIN debit over the Internet will ever have a “big year.”

“These programs work and there will be some financial institutions that will want them and will use them. But I don’t see there being any time when we see PINs over the Internet being energized to the point where there is widespread application,” says Neil Marcous, president of the NYCE Payment Network, one of the largest debit networks in the country.

Potential for E-Commerce

Although NYCE has certified Acculynk for its members’ cards to be used in the Acculynk program, Marcous says fewer than 10 out of about 3,000 NYCE member institutions have chosen to participate.

As if to drive a nail into online PIN debit’s coffin, NYCE decommissioned its Safe Debit program, an internal effort to allow PIN-debit transactions over the Internet, after years of experimentation.

Marcous believes new alternatives have simply passed up e-commerce PIN-debit technology. Already, NYCE has arrangements with PayPal Inc. and Amazon.com Inc. to allow PINless NYCE transactions for Internet purchases, and Marcous says fraud and chargeback levels have not been a problem.

Additionally, Marcous specifically points to a development deal his parent company, Fidelity National Information Services Inc., has with Boston-based Paydiant Inc. to develop mobile-wallet technology. Although much of that technology is applied to developing mobile-based payments at the point of sale, Marcous says it has a lot of potential for e-commerce as well.

In such a system, consumers would use barcodes resident on their mobile phones to notify the technology company they want to make a purchase from an e-commerce site. In the meantime, the online retailer sends the company a notice that a transaction is pending. The company can authorize the transaction without the consumer ever entering a PIN or the merchant receiving sensitive card or PIN information, Marcous says

Indeed, some experts believe that with so much other development going on in payments, PIN systems will struggle to compete. If for no other reason, PIN systems could wither as other technologies rival it for the attention and financial resources of both financial institutions and retailers.

“Merchants are trying to sort out the changing dynamics and they only have so much investment capital to spend on payments acceptance,” says Mercator’s Hewitt. “Right now they have to figure out how to handle EMV [chip cards], mobile payments, and other programs,” she says.

And moving toward PIN debit is not easy. “This is not about just accepting another mark like PayPal or Discover. This requires new technical requirements and requires the retailers to modify their entire checkout experience,” Hewitt adds.

Ultimately, the stronger popularity of payments made over mobile phones could cross over and help PIN-debit programs, especially ones like that of Adaptive Payments that use the mobile phone. But that won’t happen overnight, Hewitt argues.

“At some point there is likely to be a convergence of the mobile technologies that will help PIN debit, but that is a long way away,” Hewitt says.