Difficult to believe, but we are nearing the end of first quarter. Already there have been some interesting debit and “pay now” industry changes and announcements.
Debit EMV chip card issuance is back in full swing after a brief pause during the holiday season. I am predicting that the debit migration to EMV will reach close to 50% by year end. Cheers to those issuers who are taking the time to provide cardholder education iteratively through multiple channels. Of course, this education is most effective if consumers’ favorite merchants are also accepting debit chip transactions. Some merchants have already rolled out EMV for both debit and credit and are recognizing the Common U.S. Debit AID. Others are waiting until they can successfully deploy both, and yet other merchants are delaying EMV altogether until the fraud shift creates a tipping point and they are incented to migrate.
As a part of the changes at the point of sale, more debit transaction types are finding their way into the market including PIN-less debit, PIN Authenticated Visa Debit, and also dual message debit. Routing is getting more complicated. I will be covering the topic of debit routing in the second quarter in Mercator Advisory Group research and hope to sort out and clarify these transaction types.
The abundance of routing choices that merchants now have is creating some interesting customer experiences at checkout. If you have any insight on the two scenarios below, I would welcome the opportunity to discuss them with you:
- Trader Joe’s has changed the messaging on its point-of-sale device for Visa debit cardholders. After the card is inserted, the customer is given the option of “Visa” or “Other U.S. Debit Networks.” Since most consumers have no idea what a debit network is, and the logos for debit networks were removed from the backs of cards years ago, the cardholder is most likely going to choose Visa. Perhaps this is a gentle form of steering.
- Kroger has been letting its debit cardholder customers know that it will require cardholders to use their PIN with their debit cards in their stores. This requirement is certainly the company’s prerogative, but it will be interesting to see how consumers react to having less choice.
The changes in debit transactions have also led issuers to reconsider which transactions they deem eligible in their debit rewards programs. Many debit rewards programs previously provided benefits only for signature transactions. Now that cardholders have lost their ability in most instances to control the transaction, issuers have been allowing all debit transaction activity for rewards and adjusting the payout to maintain profitability.
For more information on debit rewards, see Mercator Advisory Group’s recent research report, 2016 Annual U.S. Debit Rewards Review.
In the report, we examine the important forces in the U.S. debit market that are driving changes to debit rewards programs. As revenue for debit declines and expenses increase thanks to EMV, issuers are looking for ways not only to maintain their debit rewards programs but also to manage the programs with some level of profitability. This is being achieved through more merchant-funded discount programs and also by opening up the debit rewards programs to include other account activities beyond debit transactions. By including additional account relationships, the financial institution gains a broader rewards capability and also can expect support from more lines of business to support the rewards payouts.
In second quarter I will take a look at the progress in faster payments initiatives, including same-day ACH. In particular, I plan to focus on the business case for faster payments to answer the questions, Will consumers and businesses be willing to pay for a faster transactions, and are there enough of these instances to make the investment in systems and updated fraud capabilities pay off? Here too, if you are aware of the costs involved in implementing a faster payments solution or have thoughts on revenue opportunities, I would welcome the opportunity to discuss them with you.
Director, Debit Advisory Service