Internet PIN-debit once was seen as a way for merchants to earn a cheaper interchange rate on card-not-present transactions conducted online. That benefit, however, disappeared when the Federal Reserve Board recently cut the fees banks can charge merchants who accept debit cards. The new fees go into effect Oct. 1.
Now companies such as Acculynk Inc. and Adaptive Payments are repositioning their products to financial institutions as a way to convert fraud-prone signature-debit transactions to the more-secure PIN-debit format.
“If the regulated banks are going to get 21 cents and 5 basis points to cover debit transactions and the PIN doesn’t take away from the consumer experience, why wouldn’t you want to have a more secure, clean debit transaction if you are an issuer?,” Ashish Bahl, Acculynk CEO, tells PaymentsSource.
Financial institutions have started to ask the same question.
Electronic transfer networks say they have been in discussions with banks about encouraging more secure debit card transactions over the Internet.
Shazam is the only network so far that supports Internet PIN-debit technology from Acculynk and Adaptive.
In January, Shazam made a strategic investment in Adaptive (
The Des Moines, Iowa-based network announced in March that Acculynk’s PaySecure online PIN-debit payment system was compatible with banks and credit unions in its sphere (
Shazam’s own data show that fraud accounts for as much as 8% of a bank’s overall signature-debit activity compared with less than 0.1% of PIN-based transactions, Dan Kramer, senior vice president of marketing and merchant services for the network, tells PaymentsSource.
“Those large issuers that fall into the nonexempt category have the impetus to really try and reduce their fraud costs, even more so now that they have a ceiling on interchange fees,” he adds.
Kramer believes it behooves financial institutions to push PIN-debit as much as possible in both the physical and online worlds to lessen fraud costs. Banks will see reductions in top-line revenue thanks to debit-interchange rates, but “their bottom lines, if they push to reduce fraud, should grow,” he says.
Star, First Data Corp.’s electronic funds transfer network, also is positioning itself to take advantage of banks’ desire for more-secure debit transactions.
“With (the Fed's new debit interchange rates), we are seeing strong interest from our issuers and merchants about not only adding security layers, but also authentication,” Julie Saville, Star’s vice president of product management, tells PaymentsSource.
Star plans to focus more heavily on security in developing future payment technologies, Saville says. The network also currently is developing a way to support authenticated Internet purchases.
“Our goal would be to allow each of our issuers a choice of what authentication vendor they want to use,” she says.
Star does not currently have agreements with any authentication vendors, a First Data spokesperson says. The authentication products that Star decides to support as part of its roadmap will depend largely on interest from its issuer members, she adds.
First Data, however, announced Feb. 14 that it would give its merchant-processing customers the option to activate Acculynk’s PaySecure product (
While many banks puzzle over how to make up revenues likely to be lost due to pending lower debit interchange rates, Acculynk and Adaptive Payments executives suggest their Internet PIN-debit products are in a better competitive market position now than they were before the Fed's new debit fees were finalized. The Fed promulgated its rules as a result of last year's so-called Durbin amendment within the Dodd-Frank Act.
Acculynk enables consumers to use PIN-debit cards to make purchases online by integrating its PaySecure software into a merchant’s online-checkout system. After a consumer enters a card number into a designated field, the system determines whether the card is eligible to be used with a PIN. The consumer has the option to complete the purchase as a signature-debit transaction or as a PIN-debit one.
A virtual PIN pad that appears on the screen scrambles the numbers as a safety precaution each time the consumer enters a digit. The issuing bank’s brand also appears at checkout, providing additional peace of mind for the consumer.
Adaptive uses what it calls a five-factor authentication process that combines cardholder information and transaction data with the PIN consumers are accustomed to using at the point of sale or at ATMs. The technology also validates a consumer’s Internet protocol address and phone number used in the transaction.
Merchants integrate the E-commerce Checkout system into their checkout software. To complete a transaction, consumers enter their phone number in a dedicated field on the retailer’s checkout page. An automated system then calls them to verify the transaction details, and they enter their card PIN using the phone to complete the transaction. A hardware-security module on Adaptive’s back-end system encrypts the PIN before Adaptive sends the transaction information to a payment gateway to begin the processing cycle.
Both companies recently released mobile versions of their products.
Acculynk is giving its partner merchants the option to integrate PaySecure into a mobile application’s checkout process as a payment option (
Adaptive in August introduced a mobile card reader that plugs into the bottom of Apple Inc.’s iPhone (
Ralph Bianco, Adaptive’s chief operating officer, believes Internet PIN-debit failed to gain significant traction early this year because uncertainty surrounding the Durbin amendment somewhat “paralyzed” the market.
“A few months ago, potential clients were telling me we had a nice approach, but let’s see what happens with Durbin,” he says.
The focus after the Fed issued its final rules in late June almost immediately turned to fraud prevention, Bianco says.
“Issuers are saying this makes more sense than it did before,” he says. “PIN-debit networks have always been on the bandwagon because it’s all about incremental volume.”
Bianco, however, believes banks' intentions with Internet PIN-debit will become clearer depending on their decisions regarding debit-network routing.
Part of the Fed’s final ruling bans arrangements that networks such as Visa have had with banks under which they exclusively process both an issuer’s signature and PIN-debit transactions. The Fed’s rule will require issuers to equip their debit cards with at least two networks that are not affiliated with each other–Visa’s signature-debit network and First Data Corp.’s Star PIN-debit network, for example.
“No big banks have declared what their intentions are with alternative routing and we don’t anticipate that will happen until April,” Bianco says.
Merchants might ultimately decide Internet PIN-debit’s direction, notes Paul Tomasofsky, president of Two Sparrows Consulting in Montvale, N.J.
Merchants likely will try to steer consumers away from credit to debit for online purchases, he suggests.
“I think merchants will maybe try to give an extra incentive for debit or make some change at [online] checkout and do all these things to give consumers the incentive to use debit,” Tomasofsky says.
Banks may see increased signature-debit transactions as a result, but it is worth noting that is the area where they experience the most fraud, Tomasofsky says. The banks will need to figure out a way for their debit cardholders to use PIN-debit online or in some other secure fashion, he adds.
“I think that momentum is going to build, but it’s going to take time,” Tomasofsky says.
Acculynk’s Bahl also views merchants as the determining factor, especially the largest retailers, such as Wal-Mart Stores Inc. The Bentonville, Arkansas-based retailer is a leader in steering consumers toward debit at the point-of-sale.
“The issuers have won in terms of absolute pricing, but if they can move more volume from credit to debit, they may end up winning the war,” Bahl says.
Bahl notes that savvy merchants such as Wal-Mart will continue to push for debit in order to take complete advantage of cheaper interchange rates.
Whether Acculynk and Adaptive can take full advantage of that remains to be seen. But both companies believe they are in a prime position to do so.
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