A new policy and fee structure from Visa are having a significant impact on the already complicated debit interchange market and, in some cases, are making that market more difficult for credit unions to navigate, according to payments executives.
Prior to the Durbin amendment, debit card issuers had to include at least two networks on each card, one for signature and one for PIN-authorized transactions. Visa issuers use VisaNet for signature-based transactions and Interlink for PIN-based transactions.
Post-Durbin amendment, Visa-issuing credit unions must have at least three networks available on their debit cards to include another PIN-authorized network from a completely separate company.
Most Visa-issuing credit unions had to add another PIN-based network. For Visa the change meant a drastic loss in overall debit transaction volume and income. Visa reported losses in the hundreds of millions of dollars in the months following the implementation of the Durbin amendment from lost processing contracts and lost transaction volume.
In an attempt to stem the losses, at least due to the competition to Interlink, Visa instituted a rule in April 2012 that PIN-authorized transactions that could be routed over VisaNet must be routed that way. Nothing forbids the use of the same network for both signature and PIN-authorized transactions. According to payment CUSO executives, Visa’s PIN Authorized Visa Debit policy is the one causing the greatest change in debit markets and the greatest headache to credit unions trying to stabilize their debit interchange.
"I have to give it to Visa, the PAVD policy is a brilliant way to help keep up their volumes," said David Hall, vice president of payment solutions for Fiserv. "I think it has meant some collateral damage for issuers, but those were not intended and their impact varies from issuer to issuer." In addition to supplying credit unions with core processing and other software services, Fiserv also owns the ACCEL/EXCHANGE network and the merchant-processing firm, SpotPay.
Hall explained that PAVD’s impact varies depending upon how the credit union’s debit program is structured and what other PIN-authorized processor it has. Transactions routed over PAVD often carry a higher interchange rate than do transactions routed over many PIN-authorized networks. And PAVD transactions are almost always more expensive. So if a credit union makes roughly the same amount of interchange from a transaction routed over PAVD that it would from one routed over its other PIN-authorized network and the PAVD transaction carries a higher cost, the credit union could wind up in the hole on every PAVD transaction, Hall added. On the other hand he noted that the credit union could come out ahead if the PAVD interchange minus the cost still comes in higher than from the credit union’s other PIN-authorized network.
This interchange versus cost aspect of PAVD had been in place a long time, Hall explained, but it had never really been a factor in debit program economics because PAVD was used so rarely.
"Maybe two or three debit transactions a week might come over PAVD before, now they are up 35% or 40% at some credit unions," he said.
Visa also implemented a fixed acquirer network fee, Hall and other payments executives said, which encourages retailers to keep routing as many transactions as possible over Visa’s networks. It offers discounts for volume growth and allows for further discounts with negotiation, mostly with the largest retailers and merchant processors, according to the executives.
"Let’s say you are a pretty large and sophisticated merchant," remarked Dan Lozier, director of client relations at The Members Group. "You might know enough to get with your merchant processor and tell them that when a debit transaction with a PIN comes in you want it handled in this way or that way. But many small merchants aren’t going to know that. They are going to rely on their merchant processor who might have negotiated an [FANF] agreement."
The net result, Hall and Lozier noted, are more debit transactions coming in over Visa’s PAVD than might have otherwise—and that could be good for some credit unions and bad for others.
Visa executives who agreed to speak on background about PAVD and FANF stressed that the brand sought to both protect its own transaction volumes and help its issuers to better their situations. PAVD usually brings a higher interchange rate than offered by other PIN-only networks, they said. Bringing in more of those transactions should help most issuers. Further, the Visa executives maintained that Visa put FANF in place only after retailers complained that it did not discount for volume enough. "We kept having retailers asking why they paid the same interchange rate on the first transaction as on the 500th," said one. "FANF changes that and should bring our issuers better value."
The Visa executives also stressed that Visa was eager to work with credit unions on how to better understand and improve their debit interchange income.
"In April 2012 Visa instituted several changes to our U.S. debit strategy to better enable us to compete in the new regulatory environment in which merchants have greater choice over the routing of debit transactions," Visa said in a prepared statement responding to reporters’ questions about the impact of the new policies.
"Visa’s changes—which included modifications to our economics—were designed to benefit not only Visa, but also merchants and financial institutions, including credit unions. These economic modifications were intended to provide merchants and acquirers with financial incentive to route transactions to Visa while allowing us to maintain our investments in Visa’s secure, reliable network.
"In the wake of debit regulation, many U.S. financial institutions also have had to revisit their own debit strategies. This process can be challenging, particularly for credit unions and community banks. That is why Visa has dedicated resources to help credit unions individually and collectively maximize the growth of their portfolios and their overall economics in a post-regulatory environment," the statement concluded.