By Ken Musante
Humboldt Merchant Services
PIN debit has long been a low-cost alternative to signature debit and credit card processing. Specifically on higher ticket items, PIN debit is far more cost effective, with interchange caps placing a ceiling on total interchange paid on each transaction.
The interchange caps have typically ranged from $0.30 to $0.65. Given the recent change to Interlink's and Pulse's interchange schedules, however, PIN debit is looking and being priced a lot more like signature debit and credit card interchange. With apologies to lesser PIN debit networks, the top 10 PIN debit networks and their 2006 and 2007 POS volume are shown in a chart accompanying this article.
PIN debit has four main cost components:
Over recent years, PIN debit networks have implemented rule changes to allow PIN debit transactions the same protections as signature debit and credit. These new rules provide additional protection for cardholders to dispute transactions. Specifically, the PIN networks have shored up their "quality of goods" dispute rules. These changes make it easier for cardholders to dispute transactions for reasons such as:
PIN debit networks are expanding their usage and marketing. In addition to offering issuers more interchange, they are increasing the utility of the product by allowing cardholders the same chargeback rights they have with signature debit or credit transactions.
This allows PIN debit networks to market their services on the same footing for cardholder protection. PIN debit networks are expanding their merchant base to include merchants who were previously out of reach.
Now - with an increasing number of mobile devices enabled for PIN debit - service merchants, delivery merchants and kiosk locations are accepting PIN debit. Further, consumer demand is on the rise, fueling PIN debit growth. Providing consumers the choice of both PIN and signature debit results in more transactions and greater spending. The downside, however, is the transactional growth also increases disputes.
PIN networks are fighting for independence and growth. STAR, Maestro, NYCE and Pulse are all owned by for-profit companies. Interlink is owned by Visa Inc., which is now a publicly traded for-profit company. As a result, these organizations are working to drive additional traffic on their networks. One way to do that is by increasing interchange.
Until recently, PIN debit networks had interchange caps. Pulse and Interlink just announced, however, the elimination of interchange caps for certain interchange categories. This will have significant impact on merchant pricing.
Many other PIN debit networks remain with interchange caps in place. STAR, for example, has an interchange cap of $0.65 for Group 3 retail merchants. The actual interchange for this category is 0.75% + $0.15. So at any transaction amount at or above $66.66, the interchange does not increase for that specific transaction.
I hasten to add, this interchange is only for Group 3 retail merchants, and this category excludes petroleum, small ticket and medical retailers, quick service restaurants (QSRs) and supermarkets. Nonetheless, this is a huge category of merchants containing all but the very largest retail merchants.
Additionally, although each debit network has slightly different interchange categories, most are similar to STAR in that they break down the categories as follows:
*Nearly all retail merchants fall into the standard tier. Interlink, for example, requires volumes of $350 million per year in Interlink volume to reach the next level of interchange.
The cap or ceiling on interchange allowed many acquirers to price merchants with a fixed PIN debit fee such as $0.80 per transaction. This was especially attractive to merchants with large average tickets.
For example, a merchant with a $1,000 average ticket and fixed $0.80 fee would have far lower fees than that same merchant with a pricing structure of 0.75% plus $0.30. The former merchant's total cost would be $0.80, but the latter's would be $7.80 - a $7 difference.
Recently, Interlink and Pulse eliminated their interchange caps for standard retail merchants. This is a interchange increase. Interlink is the largest PIN debit network. At Humboldt Merchant Services, Interlink accounts for over half (52%) of our PIN debit volume and Pulse accounts for 9%.
By eliminating interchange caps, a $1,000 transaction for a retail merchant will see Interlink's cost skyrocket from $0.50 to $7.65. This is a 1,430% increase. While I acknowledge most PIN debit transactions are not $1,000, the point is the difference is so severe, we can no longer price merchants with just a transaction fee.
To illustrate why: Even on retail merchants with most of their transactions below $50, it would take approximately 75 smaller transactions to make up for the one $1,000 transaction. Obviously, not a position an acquirer can afford to be in.
Since all PIN debit networks are fighting for the same transactions, and since Interlink and Pulse will gain transactions from this move, I expect other PIN debit networks to follow suit and eliminate interchange caps for retail merchants as well. I am cringing in anticipation of our new interchange bill once Interlink's and Pulse's caps are removed.
Also, effective April 4, 2008, Interlink instituted an ISA fee. This is for all U.S. merchants accepting foreign transactions and is in addition to interchange. The fee is 0.40% of all international transactions.
Certainly the percentage of international transactions is small, but a 40 basis point increase from the largest PIN debit network is more obvious than the nose on my face (and if you have ever seen me, you would understand the emphasis of this analogy).
What can you do? Know the interchange categories for PIN debit. Understand the difference between merchant categories for PIN debit, and price all retail merchants with both a transaction fee and percentage of transaction.
Ken Musante is President of Humboldt Merchant Services. Contact him by e-mail at firstname.lastname@example.org or by phone at 707-269-3200.
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