How Technology Is Transforming Debit

Part I: Why Your Network Partner Matters

This is the first of a four-part series of articles entitled, "How Technology Is Transforming Debit." In this kick-off article, we review the current debit landscape and share what we think issuers should consider when it comes to technology and debit. In future Debit Downloads, you’ll find additional articles on tokenized transactions, the rapidly evolving world of what we like to call “connected commerce” and why the Common AID still matters for issuers.

A Quick Refresher on Regulation II

It’s hard to believe it has been over a decade since Reg II and the Durbin Amendment became a part of our collective debit vocabulary. It’s even harder to believe we’re still talking about it more than 10 years later, yet here we are.

For those who need a quick refresher, Reg II implemented the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. This legislation mandated that debit issuers enable their debit cards in at least two unaffiliated networks. In other words, your cards have to be in at least one network that isn’t owned by your front-of-card brand. For example, you might have Visa as your global card brand, Interlink on the back of your cards (due to a Visa mandate to use their affiliated network) and PULSE® as your unaffiliated network.

So what does Reg II have to do with debit issuer success and the evolution of debit technologies? As an issuer, you don’t control how a transaction is routed, but you do control the options available. When choosing your networks, the focus should be on getting the best economic value from your debit program. This is why it’s important for issuers to participate in all transaction types at each of your debit partners – because it increases the routing options available to merchants when your cards are used. If your back-of-card network offers better net revenue, you want it to be a routing option. Your secondary debit network’s capabilities, service and product roadmap are also crucial to your success.

Issuers need an unaffiliated debit network that can perform and deliver at the same level as their global front-of-card brand. This will provide your cardholders, and your institution, with a consistent and positive experience. Your debit partners also need to have a deep understanding of how payments are evolving and how consumer behavior is shifting.

The Current State of Debit

Consumer shopping behavior is changing rapidly as technology advances and becomes more widely available. And merchants are seeking to satisfy consumers’ increasing desire for omni-channel, connected experiences in which they can consistently interact with merchants across all channels: physical store, website and mobile app.

In addition, more people are seeking low- or no-touch payment experiences at the point of sale (POS). Contactless cards fit the bill, but many consumers will continue to opt for traditional PIN debit due to the higher security it provides. While there has been a significant pivot from in-store purchases to paying online, POS transactions will account for the majority of consumer purchases for some time. PIN transactions should continue to be a primary focus for an issuer’s payment strategy in the coming years, but as cardholders’ wants and needs continue to shift, the way you think about your payments partners should shift as well. 

But these shifts are bigger than merely the increased use of card-not-present (CNP) payments.  . We’ve gone from a world of in-person grocery shopping and dining out with friends, to groceries and cheeseburgers picked up or dropped off on our front porches. These are newly ingrained consumer behaviors that have fueled the increase in CNP transactions. Consumers are also increasingly paying for goods and services with card data saved with the merchants they frequent. These “card-on–file” (COF) transactions include storing cards in your Amazon account and recurring payments such as monthly Netflix fees.

As debit has evolved towards CNP and COF transactions, one thing has remained constant: issuers’ responsibility for Reg II compliance. And one thing the pandemic has brought about is an increase in debit use among consumers. As in other times of economic uncertainty, debit continues to be a resilient form of payment that consumers embrace. This is another reason that issuer participation in all transaction types across all network relationships is so important. It’s also why issuers need a debit network that is planning for tomorrow’s slate of payment options, not just keeping pace with today.

But these shifts are bigger than merely the increased use of card-not-present (CNP) payments – both e-commerce and mobile wallet transactions. We’ve gone from a world of in-person grocery shopping and dining out with friends, to groceries and cheeseburgers picked up or dropped off on our front porches. These are newly ingrained consumer behaviors that have fueled the increase in CNP transactions. Consumers are also increasingly paying for goods and services with card data saved with the merchants they frequent. These “card-on–file” (COF) transactions include storing cards in your Amazon account and recurring payments such as monthly Netflix fees.

As debit has evolved towards CNP and COF transactions, one thing has remained constant: issuers’ responsibility for Reg II compliance. And one thing the pandemic has brought about is an increase in debit use among consumers. As in other times of economic uncertainty, debit continues to be a resilient form of payment that consumers embrace. This is another reason that issuer participation in all transaction types across all network relationships is so important. It’s also why issuers need a debit network that is planning for tomorrow’s slate of payment options, not just keeping pace with today.

Having a Seat at the Table

Front-of-card brands often set the pace and control the technologies being implemented in payments. That makes it crucial to have an unaffiliated network that has input into the industry groups that define standards. This helps ensure that the interests of all payments stakeholders are considered. This collaboration on how new payment technologies will be implemented is one way PULSE represents our constituents, including issuers. We’re an active participant in many of these groups, including the US Payments Forum, EMVCo, FIDO Alliance and W3C.

Because of our participation in these industry groups, we’ve been able to make confident strategic investments in our technology and infrastructure to support new methods of payment and consumer authentication as they approach market readiness. These investments have allowed us to evolve our network to support all debit transaction types. And that’s important amid a global pandemic, when two of the three most-used debit transaction categories – grocery and pharmacy – are expected to continue to migrate to the CNP channel. And the third most-used category – petroleum – may follow suit in the foreseeable future as connected cars become a reality. 

Issuer Expectation for Debit Support

All of your debit partners need to be able to implement new payment technologies smartly and prudently so the resulting products deliver high value, minimize impact to issuer systems and processes, and are consistent with how the global front-of-card networks deliver similar services. In this way, issuer systems and processes can leverage common systems, processes and skills, regardless of which network processes the transaction, dispute or other service.

Your expectation should be that this all happens consistently across all of your debit networks. As new technologies are being deployed (resulting in more CNP transactions) issuers need to be able to ensure both their cardholders and their institution are having high-quality experiences and receiving comparably strong support, regardless of network. Here are two examples that illustrate why this is so important:

  1. Global networks require issuers to send account-update files that are used to update card information such as PANs, expiration dates or other data with COF merchants. When a secondary network accepts the same account-update file formats as your global network, as PULSE does, this minimizes the impact on your institution. Networks that ask issuers to send them account updates via ISO 8583 transactions create the need for a one-off investment and process for issuers.
  2. Global networks’ dispute rules and systems support a consistent “compelling evidence” approach to determine if the issuer or merchant is ultimately liable for a disputed CNP transaction. A secondary network whose dispute rules and system support a different approach makes dispute management difficult for issuer staff, who must apply different rules, criteria and processes depending on which network processes the transaction.

Other areas where differences in network delivery are important include the data in authorization requests and stop-payment functionality. Even more important is that support for CNP functionality in standard network transactions is comparable. These transactions include dual-message, multi-shipment support; CVV2/AVS verification; and the estimated and incremental authorizations that are so critical to servicing today’s payment types, from paying Lyft drivers to purchasing groceries online and having them delivered.

Key Takeaways:

  • Reg II and the Durbin Amendment are still relevant to you as an issuer. Your unaffiliated or secondary debit network(s) should be able to deliver new transaction use cases with the same experience you and your cardholders receive with your front-of-card brand.
  • Connected commerce will continue to take shape and be a part of our lives. Your debit partners should have long-term vision, a clear strategy and a roadmap for their products and offerings. But most importantly, they should have access to the industry standard bodies that are defining how new technologies will power tomorrow’s payments.
  • Work with secondary debit networks that provide advanced disputes solutions, robust transaction messaging and fraud mitigation capabilities that are on par with your front-of-card brand.

In Part 2 of this series, we will examine game-changing debit industry technology advances and offer guidance for how issuers can protect their interests as new technologies are deployed. These technologies include connected commerce, the Common AID and tokenized transactions.

Learn more about how technology in impacting debit transactions and routing choice in the PULSE Payments & You resource center.

 

 

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