With pending debit interchange rules tipping the power scale in favor of merchants over issuers, payments networks are expected to use their issuer playbook on retailers.
"Merchants will now be assuming more control in the debit transaction routing process," said Jason Kupferberg, an equities analyst with UBS Securities LLC in New York. "We've suggested what you might end up seeing going forward is contracts [with retailers] that actually incorporate some of the same types of rebates and incentive structures that we see between networks and the issuers."
The driver is a provision in the Dodd-Frank Act related to debit interchange fees that requires issuers to provide multiple network routing options on their cards.
In recent years, deals in which an issuer agrees to exclusively use a single payment network for all its transactions have become more common. For example, a bank may agree to use Visa Inc.'s network for signature transactions and Visa's Interlink network for PIN transactions, at the expense of, say, First Data Corp.'s Star PIN debit network and Fiserv Inc.'s ACCEL/Exchange Network.
The so-called Durbin amendment in the Dodd-Frank Act prohibits such deals, so the bank would have to offer an alternative network routing option not owned or operated by Visa.
Visa and MasterCard Inc., along with competing PIN debit networks including NYCE Payments Network LLC, Discover Financial Services' Pulse, Star and ACCEL/Exchange, offer better pricing to issuers based on their transaction volumes.
"In today's world the issuers' choice around debit in almost all cases … is what matters," said Eric Grover, the principal of the Menlo Park, Calif., consulting firm Intrepid Ventures. "Your bank is picking whether [the card] is a Visa signature product or MasterCard signature product [and] with a few exceptions, the issuer is determining the PIN debit hierarchy."
Grover and other analysts have said networks could start using such tactics with merchants.
For example, a retailer that chooses Visa's Interlink PIN debit network as its preferred choice could receive preferential pricing for achieving certain volume thresholds.
"Post-Durbin, bundled pricing, incentives, and value-added services such as the analytics … and advisory services previously employed only in issuer contracts may begin to be employed to gain market share at the retail end of the payments food chain," Kupferberg wrote in a research note last week.
Spokesmen for Visa and MasterCard declined to comment on the topic, citing the fact that the Federal Reserve Board, which is charged with the task of implementing the debit interchange regulation, has not released its rules yet. The Fed is expected to release them this month.
Operators of competing PIN debit networks said they expect Visa and MasterCard to compete more at the merchant level to sustain existing volume — and that they could do the same.
"We try to keep our lines open and our relationships going no matter what, but certainly I would be less than candid to say that [retailers] aren't feeling good about their chances in this environment," said Mike Kelly, the general manager of the ACCEL/Exchange Network.
Kelly said it was too soon to say what types of incentives it might offer to win merchants' business or if it would even do so.
NYCE has seen more interest from issuers about adding its brand to its card to comply with the provision banning exclusive agreements, said Neil Marcous, the senior vice president of network solutions at Fidelity National Information Services Inc., the vendor that owns the PIN debit network. The company has had discussions with merchants as well, he said.
Others are skeptical to what extent Visa and MasterCard would offer incentives to merchants because of the impact to their agreements with issuers, which already face the certainty of lower interchange revenue under the regulation.
For the payments networks to sweeten the pot for merchants, they most likely would have to reduce incentives for issuers, analysts said.
"These are two-sided markets, which have complex economics," said Lee Manfred, a partner with First Annapolis Consulting in Linthicum, Md. "To the extent that a network's incentives become out of balance towards one side or another, they're going to lose participation on the other side. I think that it would be inaccurate to presume that all incentives and rebates flow away from issuers and to merchants."
"Those networks need … to have banks issue their cards to generate the transactions," Manfred added.