How a bank-owned debit network upends payment processing

• Key insights: JPMorganChase, Wells Fargo, PNC and other large banks are in talks to purchase parts of Fiserv's debit-processing business.
• What's at stake: A bank-led debit network could create pressure for card brands and other legacy payment providers. 
• Forward look: Payment experts say other debit networks may be an attractive option for large technology companies that are building AI-powered shopping. 

With big banks pursuing a deal to acquire Fiserv's debit business, the debit-routing market is set for a shakeup regardless of how the Fiserv discussions play out. 

"There is a potential for a 'feeding frenzy' even if the [Fiserv] debit network isn't sold," Richard Crone, a payments consultant, told American Banker. 

The Wall Street Journal, citing unnamed sources, said Fiserv has been in discussions with JPMorganChase, Bank of America, Wells Fargo and PNC involving a sale of parts of the bank technology seller's debit-processing business. The talks focus on Fiserv's Star network, which is valued at about $15 billion, according to estimates based on Star's 3 billion yearly payment volume.

Big revenue but not a slam dunk, either

There are numerous debit-card networks, which manage the electronic communication between banks to process transactions, relieving the banks of having to manage these connections individually. The largest are Visa's Interlink, Mastercard's Maestro and Discover (now Capital One's) Pulse. Fiserv also operates the Accel network, which has not been named as a bank target in media reports. Fiserv rival FIS operates the NYCE debit network.

"This is a win for FIS because their network just became more valuable," Phillip Philliou, a payments consultant, told American Banker, adding a joint venture between banks and FIS or an acquisition would be potential outcomes. 

Fiserv and FIS did not comment. 

There's a potential regulatory play for the banks. By owning a debit network, the large banks could be exempt from debit-volume caps under the Durbin Amendment to the Dodd-Frank law because the payments would include a bank-issued card routed over a bank-owned network, according to KBW analysts. By owning a debit network with Durbin exemption, the 10 largest debit-card issuers could boost gross revenue between $460 million and $3.5 billion, according to KBW. 

While that benefit seems obvious, there are drawbacks that argue against a bank-led debit network. 

"We appreciate the notion of large banks wanting to own an independent debit network as it could allow them to circumvent Durbin debit-interchange regulations. However, the regulatory risk is high, in our opinion, and backlash from large retailers would be swift and severe," William Blair analysts said in a research note. "It is also unclear to us how a group of banks might manage an owned debit network." 

For Fiserv, the deal would come as it battles to reverse an earnings slump and changes its leadership. Payment industry analysts say a Fiserv/Star sale is not a certainty, and would run into pushback from clients, but the chatter portends a future rush by large banks and technology firms to add debit processing rails, either through acquisition or partnership. 

"Accel has been a part of its ecosystem a lot longer than Star. That said, Star has a more robust merchant network and likely represents more standalone value to an acquirer," Tony DeSanctis, senior director at Cornerstone Advisors, told American Banker. "The evolution of payments channels and networks makes this a good time to extract value from the Star Network. How the bank that buys it leverages it is a whole different discussion."

Pressure on small banks and legacy card networks

Even if nothing comes of the talks, the rumor of a deal means banks are considering new options for debit card rounding. 

"The talks themselves represent a message to Visa about how its largest debit issuers now view the relationship," Aaron McPherson, principal AFM Consulting, told American Banker. "That threat exists even if no deal ever closes."

Visa is most threatened, in the near term by Interlink routing volume and potentially by front-of-card presence, McPherson said. "However, in the longer run, it runs into Visa's Intelligent Commerce strategy. Visa assumes banks will use them for trust and credentialing for AI agents, and if banks have their own network, they might not."

Other debit networks and their community bank clients are next most threatened, McPherson said, noting Star routes debit for roughly 2,800 financial institutions. "If Star ends up owned by a megabank or consortium, those smaller issuers will be sending traffic across rails owned by their biggest competitors, so they are likely to look for alternatives."

While the Fiserv deal could be seen as a bank-led counter to Capital One's acquisition of Discover's network, McPherson said Capital One is least threatened, because the prospective deal validates their thesis without really matching Discover's capabilities. 

"Star would require significant upgrades to compete with Discover/Cap One, and it's not clear the cost would be worth it, particularly since merchants have some capability to route around the higher costs." 

Large technology firms may be interested in acquiring debit networks in anticipation of a maturing agentic commerce market, according to Crone, adding the burgeoning AI technology creates opportunity for new shopping and payment-product development paired with debit networks that could significantly increase the value of these networks. 

"Getting back to agentic commerce, that provides a rationale for a deal beyond the interchange arbitrage, which is just how you sell it to the CFO," McPherson said. "It's acquiring an option to upgrade a Durbin-exempt chassis into a rail for agentic commerce, tokenized-deposit settlement, and programmable money. That's the real durable opportunity."

—Joey Pizzolato contributed to this report.