Having successfully nudged lawmakers to reconsider interchange caps, card issuers and payments networks are weighing the ramifications of another, less-discussed part of the Durbin amendment: so-called steering rules.
The Federal Reserve Board’s proposals implementing the amendment to the Dodd-Frank Act would require some issuers to add networks to their cards as well as prevent them from inhibiting retailers from routing transactions over the network of their choosing (
The Fed’s proposal could shift transaction volume away from Visa Inc. to MasterCard Inc. and to smaller competitors that operate PIN debit networks.
“We see upside in the PIN space. That’s where the battlefield will be,” Chris McWilton, president of U.S. Markets for MasterCard, said today during at a symposium hosted by Keefe, Bruyette & Woods in New York.
MasterCard has said it could be a potential winner (at Visa’s expense) from the “network exclusivity” rules included in the Fed’s proposal (
Under one option, issuers would be required to offer at least one network routing option for PIN transactions that is not affiliated with their cards’ signature network, typically either Visa or MasterCard. A second option would require issuers to provide at least two unaffiliated routing options for both signature and PIN transactions, ensuring that merchants have at least two options for either category.
Experts are skeptical of the second option because it hypothetically could allow for Visa transactions to be routed over MasterCard’s network and vice versa.
“It’s like having Coke and Pepsi on the same can,” McWilton said. “It’s a real mess and we’re thinking about how we would deal with it.”
Visa, which owns the lion’s share of the debit card market, in recent years has enticed banks to enter exclusivity deals under which they use the company’s network to route signature transactions and its Interlink network for PIN debit transactions.
Bill Sheedy, the group executive for the Americas at Visa, said at the conference he is not clear on how the provision will impact his company because there too many variables in what the Fed might do and how issuers would respond.
However, having cards with multiple PIN debit networks on them is not new, Sheedy said.
“We’ve competed in that marketplace,” Sheedy said. “I have a better sense for what that might look like.”
About 79% of Visa’s PIN-debit volume from among its top 10 U.S. issuers comes from exclusive relationships, Jason Kupferberg, an analyst with UBS Securities LLC, said in a December research note. For MasterCard, which has a much smaller share of the overall debit card market, that figure is 35%.
Under the proposal, such issuers would have to either replace their PIN debit network with one not affiliated with their signature network operator or add an additional PIN routing option. MasterCard until recent years passed on the PIN debit market because most of the competing PIN debit networks were owned by banks, which would have forced it to compete against its own customers, McWilton said. As financial institutions sold the competing networks to other companies, MasterCard began pushing on the PIN side, though its position is still very low, McWilton said.
Other PIN debit network operators say they are gearing up for more business.
Discover Financial Services sees a “significant opportunity to gain share” for its Pulse PIN debit network from the exclusivity rules, Roger Hochschild, the Riverwoods, Ill.-based credit card company’s president and chief operating officer, said at the conference.
“The competitor that we see most in the market place is Visa” with its Visa network on the front of the card and Interlink network on the back of the card, Hochschild said.
“A lot of the dedicated Visa issuers are looking for alternatives,” Hochschild said. “We are in discussions with some very large banks about that and we think that can create a significant opportunity for Pulse to gain market share.”
If the Fed adopts its second option, Discover could benefit because it also offers signature debit processing, though it is a very small part of its business, Hochschild said, adding that he thinks it is unlikely that option will be adopted.
Payments technology vendors First Data Corp., Fiserv Inc. and Fidelity National Information Services Inc., which each operate PIN debit networks, have made similar statements in recent months.
Whether retailers will take advantage of new ability to “steer” to consumers to use cheaper payment brands is a separate question.
Some experts anticipate that with the cost of accepting debit cards dropping under the Fed’s pending interchange caps, merchants will push debit cards over credit, which could affect Discover and American Express Co., which does not issue debit cards.
Dan Henry, AmEx chief financial officer, said during the conference that large, big-box merchants are the most likely to try promote debit cards over credit cards using discounts.
“Certainly they have the greatest capability to do that type of thing,” Henry said, noting they have sophistication built into their point of sale systems. However, they still have to train their cashiers.
Henry also said he questions whether retailers can afford incentives that would convince regular credit card users to pay with a debit card instead.
“I’m just not sure how easy it is for a retailer to find a way to share enough with the consumer to really [motivate] them to want to switch to a different product,” Henry said.
