PINless Debit: Regulation II Clarification July 1st Enforcement Date & the Dependencies Needed for Maximum Savings

Author: Alan Vickness

Merchants are waiting on “PINs” and needles, counting down the days until they can take advantage of the Federal Reserve’s Regulation II debit rule clarification July 1st deadline.

This ruling was passed last October 2022 and has already fundamentally changed the landscape of routing card-not-present debit payments, even before the arrival of the effective date of the new ruling.

The clarification settles a grey area in the 2011 Durbin Amendment. The Durbin Amendment was a landmark piece of legislation for the payments industry that required at least two unaffiliated debit networks be available for processing debit card transactions.

Unfortunately, there was ambiguity in the original rule, as it did not clearly define debit card transactions as including both card-present and card-not-present (online) volume.

Because of this vagueness, issuers believed they were compliant with the original rule once they enabled two unaffiliated debit networks, regardless of payment channel (card-present or card-not-present). In other words, many issuers would not bother enabling card-not-present routing because the Fed did not clearly state that card-not-present needed to fall under the broader category of Debit transactions in the original ruling.

And so, eleven years later, the Fed had to swoop in and “save the day,” as research concluded that competing networks were often not available for routing card-not-present debit card transactions. The need to address the Durbin Amendment’s ambiguity had been made more apparent when the COVID-19 pandemic shook the economy. One of the defining changes of the pandemic was the sharp rise of card-not-present transactions. As mentioned, the original rule did not clearly state that card-not-present was to be included with card-present, limiting choice in the routing of these PINless transactions.

Not having routing choice for card-not-present transactions comes at a hefty cost for merchants. Specifically, with the exponential growth of card-not-present volume in the post-COVID era. The effects of the original ambiguity were greatly exacerbated when more consumers and businesses began to purchase online. This volume increase of PINless debit transactions, combined with the meteoric rise of transaction costs, leaves merchants with no choice but to foot the bill and frustratingly absorb the cost increases. As debit routing is done behind the scenes, merchants did not have control over the rising fees they were taking on as a result of the vagueness in the original ruling, cutting into many companies’ profits.

Needless to say, if the Fed could spin the world back to 2011, they would define clearly that debit transactions include both card-present and card-not-present. After many years, this clarification is potentially a big win for many merchants. An added benefit is the behind-the-scenes nature of debit routing, which means the merchant experience should not be affected. However, obtaining the benefits of this clarification will not always be as simple as waiting for July 1st, then automatically saving money. Before we rebrand the Fed as our superhero, there are two key factors at play that must be considered before merchants are able to reduce their transaction costs for card-not-present debit volume: issuer enablement/adoption and processor support.

The Fed’s October ruling should theoretically take care of the issuer enablement, as the new regulation mandates that all issuers must have at least two unaffiliated debit networks enabled for processing card-not-present debit transactions. However, the looming question is, how exactly will the Fed enforce this mandate? Before the clarification, most issuers did not have PINless debit routing enabled. And even after the ruling came out, as of a few weeks before the July 1st enforcement deadline, many still have not participated in the changes. Will all issuers be enabled by July 1st? Follow Optimized Payments for more updates on the approach to this important date, as we keep laser-focus vision on the situation, and are eager to share the insights and knowledge we gain from it.

The other contributing factor to PINless debit cost savings is to determine whether or not your processor can support the least-cost routing of card-not-present PINless debit volume to the debit networks such as Interlink, Maestro, STAR, Accel, NYCE, and Pulse.

It is imperative to understand whether or not your processor has the functionality to support this routing, as the lack of processor support could still limit your choice in card-not-present routing and ultimately be the kryptonite that halts CNP debit savings for many merchants.

The October Regulation II ruling should encourage all merchants to consider developing a PINless strategy or fine-tuning their existing strategy. There are lots of exciting opportunities for merchants to save on their PINless routing with such an impactful clarification. But it is not always easy or clear how to navigate such changes. The payments landscape is complex and dynamic, making it difficult for even large or proficient teams to stay on top of the amount of information and changes there are to contend with. Having the education and diligence, or simply the guidance, to optimize your payments systems is key to maximizing savings. Please reach out to Optimized Payments if you have questions, or want to discuss the ruling and its effects further. Our experienced team of experts prides itself on being ahead of the curve in the payments landscape, and knowledgeable of the changes occurring in payments. We have had our fingers on the pulse of this situation and are eager to educate and share knowledge with anybody who may benefit from our payments insights.

Finally, my colleague, Tom Wrigley, and I would like to extend an invitation to attend our PINless debit webinar. It is aimed to equip you with the knowledge to help formulate the best PINless strategy to reduce transaction costs and maximize savings. The webinar is June 29th from 1PM – 2PM EDT. I would highly encourage and welcome all to attend this webinar to learn more about the Regulation II clarification, the benefits of PINless debit, and the technical requirements needed to maximize savings. Many valuable pieces of information and context will be provided, as well as insights that will leave you with a better understanding of the topics, allowing you to position your business for growth and savings. Don’t miss out! The registration link is included below.

Register for Webinar

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