Posted: Feb 21, 2018
Comments: 0
Author: Lou Grilli

Use of debit continues to grow as consumers shift their cash and check spend to the convenience of plastic. According to the Fed, the number of debit payments increased from 56.5 billion in 2012 to 69.5 billion in 2015, the largest increase in the number of payments among the payment types. More recently, and more relevantly, Trellance credit unions saw their Visa Signature Debit transactions grow year over year in January 2018 by 8.83%. Yet at the same time, credit unions are seeing a decline in average debit interchange. So, what is going on?

Up until not too long ago, a debit card user at a point-of-sale (POS) was presented with a choice of signature or entering a PIN. Issuers preferred that cardholders choose signature, as it results in higher interchange to the issuer. Three events converged to remove the choice facing the cardholder at the terminal.

First, the Durbin Amendment network routing provisions under Regulation II required that issuers add at least one unaffiliated network (that is non-Visa/MasterCard) to the list of networks that the debit card can access. This was enabled by having a chip on U.S.-issued debit cards with multiple “application identifiers” (AIDs), a U.S. Common Debit AID and the card brand’s “global” AID. The POS terminal looks for a matching AID to route the transaction for authorization. The U.S. Common Debit AID can be used at all U.S. merchants who have enabled EMV debit on their POS system, including Star, NYCE, Accel, etc. Merchants took advantage of this common AID when debit users chose PIN to route the transaction to a PIN network which offered the merchant lower interchange.

Next, in an effort to speed up transactions at the POS, the card brand networks loosened requirements for merchants to collect PIN, initially for transactions $25 and under, and later increased to transactions $50 and under. Still, debit users had the option to choose PIN versus signature. Many credit unions created rewards programs around this, offering points every time a user chose signature, which yielded greater interchange to the issuer.

The final straw in removing choice came in December 2016 in the form of a clarification in an FAQ document produced by the Federal Reserve Board. In this document came an interpretation of Regulation II that the merchant is not required to present choice to the cardholder. Most big-box retailers took immediate advantage of this and reprogrammed their terminals to route debit transactions over an authorization network with which that merchant has a favorable interchange rate.

Given this background, we have seen a dramatic shift to PIN in the face-to-face environment (that is, at the POS) at EMV enabled terminals due to the Common AID, along with it, lower interchange to the issuer for each debit transaction.  Most merchants that have adopted EMV are choosing the Common AID which enables the transaction to be routed to the PIN network on the card. 

To get more specific as to why average debit interchange is declining when the absolute number of debit transactions is growing can be seen in the next graph.


As this chart shows, for exempt transactions (institutions less than $10B in assets), Single Message transactions (PIN) have a debit interchange average of about $0.26. Dual Message transactions (Signature) debit interchange averages about $0.51 per item.  Merchants want to take advantage of the lower, PIN, interchange. 

While the Trellance member/owner credit unions continue to see growth in overall debit transactions, the mix of these transactions is changing dramatically.  According to recent Visa statistics, based on the overall Trellance member/owners, Visa Signature Debit transactions grew year over year in January 2018 by 8.83%.  However, based on the same timeframe, PIN based transactions grew by a whopping 25.32%.  We can assume other PIN networks, such as the NYCE Network, saw relatively similar growth rates. 

So, as you can see, while the overall debit business continues to grow in the credit union industry, the blend of the transaction mix, PIN vs. Signature is changing.  This change will result in a lower blended interchange rate.  While the absolute dollar amount of interchange income will continue to grow, the average per transaction, given the change of blended rate, will decline.  This will make budget forecasting of growth balanced with average decline very challenging for credit unions.   

Contact any of the Trellance consultants for help developing strategic plans to maximize your credit union's card portfolio revenues and profits.


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Lou Grilli

Lou GrilliLou Grilli

Lou is the AVP of Product Development & Thought Leadership at Trellance. In this role, he is responsible for managing the organization’s product portfolio, as well as providing leadership on industry trends related to data analytics and payments.

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