A new policy and fee structure from Visa are having asignificant impact on the already complicated debit interchangemarket and, in some cases, are making that market more difficultfor credit unions to navigate, according to paymentsexecutives.

Prior to the Durbin amendment, debit card issuers had to includeat least two networks on each card, one for signature and one forPIN-authorized transactions. Visa issuers use VisaNet forsignature-based transactions and Interlink for PIN-basedtransactions.

Post-Durbin amendment, Visa-issuing credit unions must have atleast three networks available on their debit cards to includeanother PIN-authorized network from a completely separatecompany.

Most Visa-issuing credit unions had to add another PIN-basednetwork. For Visa the change meant a drastic loss in overall debittransaction volume and income. Visa reported losses in the hundredsof millions of dollars in the months following the implementationof the Durbin amendment from lost processing contracts and losttransaction volume.

In an attempt to stem the losses, at least due to thecompetition to Interlink, Visa instituted a rule in April 2012 thatPIN-authorized transactions that could be routed over VisaNet mustbe routed that way. Nothing forbids the use of the same network forboth signature and PIN-authorized transactions. According topayment CUSO executives, Visa's PIN Authorized Visa Debit policy isthe one causing the greatest change in debit markets and thegreatest headache to credit unions trying to stabilize their debitinterchange.

“I have to give it to Visa, the PAVD policy is a brilliant wayto help keep up their volumes,” said David Hall, vice president ofpayment solutions for Fiserv. “I think it has meant some collateraldamage for issuers, but those were not intended and their impactvaries from issuer to issuer.” In addition to supplying creditunions with core processing and other software services, Fiservalso owns the ACCEL/EXCHANGE network and the merchant-processingfirm, SpotPay.

Hall explained that PAVD's impact varies depending upon how thecredit union's debit program is structured and what otherPIN-authorized processor it has. Transactions routed over PAVDoften carry a higher interchange rate than do transactions routedover many PIN-authorized networks. And PAVD transactions are almostalways more expensive. So if a credit union makes roughly the sameamount of interchange from a transaction routed over PAVD that itwould from one routed over its other PIN-authorized network and thePAVD transaction carries a higher cost, the credit union could windup in the hole on every PAVD transaction, Hall added. On the otherhand he noted that the credit union could come out ahead if thePAVD interchange minus the cost still comes in higher than from thecredit union's other PIN-authorized network.

This interchange versus cost aspect of PAVD had been in place along time, Hall explained, but it had never really been a factor indebit program economics because PAVD was used so rarely.

“Maybe two or three debit transactions a week might come overPAVD before, now they are up 35% or 40% at some credit unions,” hesaid.

Visa also implemented a fixed acquirer network fee, Hall andother payments executives said, which encourages retailers to keeprouting as many transactions as possible over Visa's networks. Itoffers discounts for volume growth and allows for further discountswith negotiation, mostly with the largest retailers and merchantprocessors, according to the executives.

“Let's say you are a pretty large and sophisticated merchant,”remarked Dan Lozier, director of client relations at The MembersGroup. “You might know enough to get with your merchant processorand tell them that when a debit transaction with a PIN comes in youwant it handled in this way or that way. But many small merchantsaren't going to know that. They are going to rely on their merchantprocessor who might have negotiated an [FANF] agreement.”

The net result, Hall and Lozier noted, are more debittransactions coming in over Visa's PAVD than might haveotherwise—and that could be good for some credit unions and bad forothers.

Visa executives who agreed to speak on background about PAVD andFANF stressed that the brand sought to both protect its owntransaction volumes and help its issuers to better theirsituations. PAVD usually brings a higher interchange rate thanoffered by other PIN-only networks, they said. Bringing in more ofthose transactions should help most issuers. Further, the Visaexecutives maintained that Visa put FANF in place only afterretailers complained that it did not discount for volume enough.“We kept having retailers asking why they paid the same interchangerate on the first transaction as on the 500th,” said one. “FANFchanges that and should bring our issuers better value.”

The Visa executives also stressed that Visa was eager to workwith credit unions on how to better understand and improve theirdebit interchange income.

“In April 2012 Visa instituted several changes to our U.S. debitstrategy to better enable us to compete in the new regulatoryenvironment in which merchants have greater choice over the routingof debit transactions,” Visa said in a prepared statementresponding to reporters' questions about the impact of the newpolicies.

“Visa's changes—which included modifications to oureconomics—were designed to benefit not only Visa, but alsomerchants and financial institutions, including credit unions.These economic modifications were intended to provide merchants andacquirers with financial incentive to route transactions to Visawhile allowing us to maintain our investments in Visa's secure,reliable network.

“In the wake of debit regulation, many U.S. financialinstitutions also have had to revisit their own debit strategies.This process can be challenging, particularly for credit unions andcommunity banks. That is why Visa has dedicated resources to helpcredit unions individually and collectively maximize the growth oftheir portfolios and their overall economics in a post-regulatoryenvironment,” the statement concluded.