PINless Debit Payments—Here we go again…

March 25, 2015     By : Dean Nolan

This past January the media was flooded with articles quoting Whole Foods Market statistics, saying that their mobile payment volume grew 400% due to Apple Pay. Now, here we are in March, and almost nobody is talking about the recent meteoric growth in PINless Debit payments. Since January 2015, some issuers have seen their PINless Debit payment volumes increase by more than 500%.

Why is Apple Pay, a payment accepted at only 2% of Point of Sale (POS) locations nationally, getting all the buzz while PINless Debit, a faster growing emerging payment, capable of being accepted at millions of e-commerce and POS merchants, is hardly getting mentioned?

A Brief History of PINless Debit Payments

To explain what’s happening, let’s start with some history. PINless Debit payments refer to debit card purchases made over an EFT Network (Star, Pulse, NYCE, etc.) without a customer entering their PIN. PINless Debit payments started in the late 1990s within the VRU Channel as a method for EFT networks (PIN networks) to penetrate the card-not-present space. Over time they’ve expanded to support Internet payments (2001), Call Centers (2005) and, most recently, payments at the POS.

When first launched, there were security concerns related to PINless Debit payments enabling an EFT network transaction that did not have a PIN. As a result, PINless Debit payments were restricted to payments within “known party” merchant categories, such as utilities, insurance, lenders and government. As these security concerns faded, the breadth of eligible merchant categories expanded as well, which brings us to today where PINless Debit solutions from STAR, Pulse, NYCE and others are accepted at POS for unauthenticated transactions under $50.

Are PINless Debit Payments a Threat?

The evolution of PINless Debit to the physical POS is significant and threatens to be much more disruptive to the payments industry over the next few years than mobile payments.   Payments under $50 represent the vast majority of debit card payments today.   With many of the largest retailers in the country—Walmart, Target, McDonalds, etc.—starting to deploy PINless Debit as part of their payment routing strategy, competition for these payments among debit networks will likely increase, accompanied by a likely reduction in fees and interchange rates as networks fight to be the preferred routing option.

On the surface, the introduction of a new, potentially lower cost, competitive payment option sounds like a great development for the payments industry, and for consumers. However, with PINless Debit, this may not be the case. Whereas mobile payment solutions, like Apple Pay and other emerging payments, offer innovative new value propositions and improved consumer experiences, PINless Debit is being deployed as a back office routing change that provides (at best) no change to the consumer experience.

PINless Debit Payments and Consumer Experience

Looking more closely, with PINless Debit consumers will swipe their debit cards to make unauthenticated purchases under $50 without seeing any difference at the POS. However, in the background, the merchant’s least-cost routing processes will look at the routing options available and route the payment down the path most beneficial to the merchant.  The result could be a payment flipping from Signature Debit (Visa and MasterCard) to the PINless form of PIN debit without the consumer’s knowledge or explicit consent.

Consumers affected by this change will include those dealing with debit card fraud, where Signature Debit network protections have historically been stronger than those of PIN networks, and those banking at smaller financial institutions, where their unauthenticated small ticket purchases may now become subject to PIN debit fees.  Another group impacted will be participants in incentive and reward programs who will lose benefits that are based on signature debit card activity.

In each instance, debit card issuing financial institutions will need to adjust their fraud, fee, incentive and reward policies to accommodate this change and develop consumer education programs to let their cardholders know why their payment experience has changed when they didn’t do anything different from what they’ve been doing for years.

What Does All This Mean?

So, what does this all mean? In the end, rather than becoming a new consumer payment choice and advancing the payments industry, PINless Debit seems to be nothing more than the latest salvo in the ongoing, zero-sum Merchant vs. Issuer battles that have held the debit industry back for years. The resulting impact will have Merchants experiencing lower costs, Issuers adjusting their business model to recapture lost revenues, and Consumers once again losing as they see their benefits erode.

Getting back to my original question, “Why is this not getting more coverage?”—Perhaps the answer is that the media and consumers have grown weary of this ongoing infighting and are simply indifferent to the whole situation.

If this is the case, let’s hope traditional payment industry players get the message and start following the lead of the many non-traditional players who are making headway in the market by focusing on delivering innovative new value propositions and enhanced consumer experiences.  Otherwise, the next time a major development from traditional players isn’t covered by the media, it may be due to irrelevance rather than indifference.

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Dean Nolan

Dean Nolan

Dean is an experienced fintech professional and has worked with financial services firms including global payments networks, financial services processors, global banks, community banks and credit unions. He is also an advisor to a start-up in the biometric authentication market. He likes sharing his thoughts with the LTP community in the form of articles.
Dean Nolan
  1. #1 Herb Fellman 25 March, 2015, 15:30

    Dean – Thanks for this article.
    I’m not surprised that EFT networks are trying to offer the same array of authentication options that V and MC already support for debit mag stripe transactions (signature, PIN, no cardholder verification method). For an EFT network, this seems like a necessary and low-risk strategic move that can be accomplished without trying to alter acceptance or consumer behavior. What’s surprising to me is how long it has taken networks like STAR, NYCE and Pulse to get these capabilities in place.

    I do agree with you that issuers need to be keenly aware of how routing options and merchants’ POS strategies may impact the payment experience. Issuers that continue to differentiate rewards, fees and fraud protection based on a transaction authentication method will find it increasingly difficult to communicate and implement these policies in a way that makes sense to their customers.

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