Networks: Crossing the Line in Debit

Lauri Giesen

As EFT networks hunt for new business in the era of the Durbin Amendment, MoneyPass is expanding beyond its comfortable ATM space to link banks to point-of-sale PIN-debit services.

Most of the headlines in the general press about the Durbin Amendment in the 2010 Dodd-Frank financial-reform law focused on the amendment’s cap on debit interchange for financial institutions with more than $10 billion in assets, a cap that is now shaving 40% or more off of their pre-Durbin debit revenues.

But there was another provision in that amendment that created little buzz among the public but still has serious consequences for financial institutions, particularly small and mid-size ones, and electronic funds transfer networks that offer point-of-sale debit card acceptance services to merchants.

That’s the provision banning network exclusivity and requiring merchants to have at least two unaffiliated network choices when deciding how to route a debit transaction.

The practical effect of that part of the law was for banks and credit unions to keep their incumbent Visa or MasterCard brand for signature debit and add at least one more option for PIN debit by linking to an EFT network unaffiliated with the signature network.

While it’s still too early to assess the ultimate impact of the anti-exclusivity provision, many observers believe debit-market leader Visa Inc., which owns the big Interlink EFT network, has the most to lose from it, while rivals stand to gain. That’s because many banks’ debit cards exclusively offer Visa for signature debit and Interlink for PIN debit.

For most large institutions, complying with the exclusivity regulation is not difficult since many already belong to multiple EFT networks. But many small institutions belong to only one PIN-debit network, and thus had to find at least one more to join in order to be in compliance by the April 1 effective date.

This Durbin-induced network-shopping spree has put some new zing into the once-staid PIN-debit market, and the networks themselves are becoming more aggressive in seeking new members.

‘Looking Around’

But another development is a decision by the MoneyPass surcharge-free ATM network, a unit of Minneapolis-based U.S. Bancorp, to offer POS PIN-debit service to its members as well as financial institutions that use U.S. Bank’s Elan Financial Services as their debit processor.

MoneyPass formed primarily to help small financial institutions with few ATMs compete with the vast reach of the big banks that have hundreds or even thousands of machines.

Surcharge-free networks allow their members’ customers to use machines owned by all network members without paying a fee. Surcharging, in which the ATM owner charges a fee to users whose accounts are at other banks, is now an entrenched industry practice.

MoneyPass found that many of its members, as well as Elan customers, were perplexed by the Durbin Amendment’s ramifications because they belonged to only one EFT network and could not offer merchants an alternative way to route POS debit transactions.

A June 2011 membership survey showed a large number of institutions needed an additional PIN-debit network.

In response, MoneyPass offered them a program that gave them immediate access to the Pulse or Maestro POS networks without having to pay any upfront network-membership fees or rebrand their cards.

“In talking to our members, we realized we had a lot of members that were looking around for a simple solution for compliance with the Durbin Amendment,” says Douglas P. Miraglia, MoneyPass president.

MoneyPass has 1,427 financial-institution members with 60 million customers. About half the members use Elan for debit processing.

In looking at its members, MoneyPass found many either belonged to Visa’s Interlink or MasterCard Inc.’s Maestro network, but not both, with Interlink the most common POS-debit mark. What MoneyPass offered them was a link to Maestro for members that already belonged to Interlink or a link to the Houston-based Pulse network for members that already belonged to Maestro. Discover Financial Services owns Pulse.

Miraglia says his network offered a “competitive rate” as well as no sign-up fees, card royalty fees, or the need to reissue cards. MoneyPass members need only the MoneyPass logo, which is already on their cards, to participate in POS debit once they sign up. Membership or card fees as well as card-reissuance expenses are often expensive barriers to institutions joining multiple POS networks.

“We tried to create a solution for our members that allowed them to comply with Durbin in a way that was not confusing or complicated. We tried to make this as straightforward and as least expensive as possible,” Miraglia says.

‘Cultural Match’

To promote the service, MoneyPass has held several Webinars for its members as well as sent out question-and-answer documents and bulletins explaining what the Durbin Amendment requires and how members can meet those requirements through MoneyPass.

“Most institutions were aware they needed to do something, but many were not sure what they needed to do,” Miraglia says. “We tried to communicate effectively about what choices they had. We needed to educate our clients about Durbin as well as propose a solution that met their needs.”

Although Miraglia declines to reveal specific numbers, he says the number of institutions signing up for the POS program is in the “hundreds” and has exceeded initial expectations. The network launched the service in March with eight institutions. He says signups include both MoneyPass members as well as Elan customers.

MoneyPass members choose whether they want to use Maestro or Pulse for purchase transactions by their cardholders. (At the time of the transaction, however, the final choice is up to the merchant, depending on the total number of options available.)

The transaction will go from the point of sale to Elan’s switch, which in turn will route the transaction to the appropriate network. MoneyPass has wholesale revenue arrangements with Maestro and Pulse and collects a switch fee with each transaction.

Because most of the institutions participating in this new program have assets below $10 billion, the debit interchange cap does not affect them. As a result, offering a competitive interchange rate also was a key consideration in attracting institutions to join.

Miraglia says MoneyPass chose Maestro as one of its options because it has an international presence. Also, because many MoneyPass members already belonged to Visa’s Interlink, the competing Maestro network from MasterCard was an obvious alternative.

MoneyPass chose Pulse as the second network because it “had a good cultural match with us in that we found it was conscious to its clients needs,” Miraglia says. Like MoneyPass, Pulse has a large number of small and mid-size institutions as members.

Surprisingly, not all MoneyPass members signing up for the POS program are just looking for a second EFT network. Hanscom Federal Credit Union, based at Hanscom Air Force Base in Massachusetts, already belonged to the NYCE, CU24, and Armed Forces Financial Network POS programs, but decided to add MoneyPass as a POS network as well. Its signature-debit network is Visa.

After an analysis of interchange rates, Hanscom FCU found it could get a more favorable interchange rate through Maestro and it liked not having to pay upfront joining fees, according to Scott Post, senior vice president of strategy and delivery.

Because Hanscom is below $10 billion in assets, its interchange revenue is not capped. Hanscom has $976 million in assets with 46,000 members and 14 branches.

Post also liked the fact that his institution did not have to add any more logos to customers’ debit cards. The cards, he says, already “look like a Winnebago” with so many logos on them.

Hanscom will not inform customers about the added option, except to tell them that they can now use their debit cards internationally if they see the Maestro logo at the point of sale. Scott says most customers don’t care what network their transactions travel over, only that their cards are accepted.

The credit union will continue to encourage customers to use its debit cards generally, but will put slightly more effort into promoting signature authentication, which generates higher interchange than PIN debit for institutions that are exempt from the Durbin cap.

While Hanscom offers rewards for both signature and PIN-debit use, the rewards are higher on signature debit, Post says. As a result, about 60% of cardholders’ transactions are secured with a signature.

‘Strictly Focused’

With MoneyPass now getting into POS debit, payments experts believe other ATM networks or processors now will begin offering PIN debit.

“Durbin has created an opportunity for other networks to get in PIN POS, and we expect more will. Any new competition is always good for the market,” says Dan Kramer, senior vice president of marketing and merchant services for the Des Moines, Iowa-based Shazam network, one of the pioneers of PIN debit.

Another surcharge-free ATM network that some outside observers speculate could join the POS-debit ranks is Allpoint. Based in Bethesda, Md., Allpoint is owned by Houston-based Cardtronics Inc., operator of the nation’s largest non-bank ATM network.

“The next ATM network that could offer POS would be Allpoint and I would not be surprised to see it enter the PIN-debit market as well,” says Madeline K. Aufseeser, senior analyst for Boston-based Aite Group LLC.

An Allpoint spokesperson, however, says there are no immediate plans to expand beyond ATMs.

“We continue to be strictly focused on the ATM market,” says the spokesperson. “We have not historically been involved in POS and are not aware of any shifts that would cause us to go beyond our ATM focus.”

Some outside observers downplay the significance of new POS players. Consultant and former Visa executive Eric Grover, principal at Minden, Nev.-based Intrepid Ventures, notes that most large banks already have access to multiple POS networks.

And he adds that both Pulse and Maestro already have a strong presence with small financial institutions, noting that Pulse has about 5,000 small banks as members and more than half of Maestro’s client base is made up of small institutions.

‘Aggregator’

While the lack of upfront fees might entice some members to join through networks such as MoneyPass, Grover says most banks that want to join Maestro or Pulse will simply do so directly.

He also downplays the significance of not having to rebrand cards, since most networks do not require their logo be placed on cards for the card to work on that network.

“You can join Pulse without putting the Pulse logo on every card. Most consumers are not checking to see if they have the right logo on their cards. They just assume it will work,” he says.

Miraglia, however, says while networks do not demand immediate rebranding with the new logo upon membership, they often require institutions to add their logo when cards expire and then are reissued.

Adding more logos still requires effort and expense, he explains.

And in terms of what the network can offer financial institutions, Aite’s Aufseeser describes MoneyPass’s role in POS debit as “an aggregator. They can bring a number of small institutions together so that they can negotiate better terms for its members with these networks than what these smaller institutions would be able to get on their own.”

How Durbin Is Waking up EFT

In addition to seeing at least one new point-of-sale network, the debit market is witnessing EFT networks engaging in more aggressive recruitment campaigns as banks and credit unions look for unaffiliated options.

“A lot of networks are trying to acquire a greater share of the market right now and be more competitive with Star and NYCE, two of the larger POS options,” says Madeline K. Aufseeser, senior analyst for Boston-based Aite Group LLC.

(Two big payment processors, First Data Corp. and Fiserv Inc., own Star and NYCE, respectively.)

One network that has been successful in signing up new members in recent months is the Des Moines, Iowa-based Shazam network .

“We have benefited in terms of the number of clients we have signed in the last 90 days,” Dan Kramer, senior vice president of marketing and merchant services at Shazam, said in late March. In the final days before the April 1 deadline, Shazam signed more than 10 new institutions, some of which are not even in or immediately adjacent to Shazam’s core Iowa market, he adds. He says the new clients range in size from very small to over $1 billion in assets.

With Durbin forcing many institutions to look for new networks, some networks have been competing aggressively on interchange, the transaction fee set by the network, charged to the merchant acquirer—and ultimately to the merchant—and paid to the card issuer. “For institutions that are exempt from the cap on interchange rates, networks can compete on price,” Kramer says.

Other networks are also gaining new members. Pulse reported it added 129 direct financial-institution members in 2011, including both large and small ones. Pulse executives have attributed much of the membership gain to the need for financial institutions to comply with the Durbin Amendment.

So whether it has been long-time PIN-debit networks becoming more aggressive or new players coming onto the scene, the formerly sleepy EFT market seems to be attracting more attention than it has seen in decades.