Staying ahead of industry trends is essential for businesses aiming to optimize costs and improve transaction efficiency. One trend gaining significant traction is PINless debit routing, a method that’s reshaping how merchants manage payments by offering substantial benefits in cost savings and streamlined processing.

At Optimized Payments, we’ve analyzed data before and after the PINless Clarification, uncovering significant trends and actionable insights. In this post, we’ll delve into the origins of PINless debit routing, particularly in the context of the Durbin Amendment, the advantages of implementing it, and the recent shifts in eligibility that are making it an increasingly attractive option for merchants.

What Exactly is PINless Debit Routing?

While many merchants are familiar with the concept of PINless debit, some may still be unclear about what it entails, often encountering the term without a clear explanation.

Simply put, PINless debit is a debit transaction where the cardholder doesn’t need to enter a PIN. Recently, this method has become increasingly associated with card-not-present transactions.

Traditionally, card-not-present transactions were processed as signature debit, which routed transactions through credit networks like Visa or Mastercard, incurring both interchange and network fees. However, with PINless debit, these transactions can now be routed through debit networks such as Star, Accel, Nice, or Pulse, leading to significant savings by reducing both interchange costs and network fees.

The History of PINless Debit Routing

To fully understand the significance of PINless debit routing, we must turn back the clock to 2010 when the Dodd-Frank Act was passed. One of its key components, the Durbin Amendment, capped interchange rates on debit cards for large banks at five basis points plus $0.22.

The biggest news from the Durbin Amendment was this cap. However, the amendment also required each debit card to have two unaffiliated debit networks that merchants could use to route transactions. The original ruling didn’t explicitly state which channels this applied to, so many issuers took the position that enabling two networks solely in the card-present environment was enough to meet the requirements. As a result, only about 35% of debit transactions in the card-not-present space were routed through a PINless debit network.

This practice led to growing dissatisfaction among merchants, which became more vocal as ecommerce volume surged during the COVID-19 pandemic. In response, the Federal Reserve issued a clarification in October 2022, explicitly stating that the Durbin Amendment must apply to both card-present and card-not-present transactions.

As of July 2023,  every transaction, whether it’s in store or online, must have two debit networks that it can be routed to.

Benefits of PINless Debit

PINless networks generally offer lower network fees and reduced interchange expenses. When evaluating transaction processing costs, these expenses typically fall into three main categories:

Interchange Fees – The largest portion, paid to the issuing bank.
Network Fees – Paid to entities like Visa, MC, or PINless debit networks such as Star and Pulse.
Acquirer Fees – Usually the smallest, paid to your direct processor.

PINless debit routing can reduce costs in two of these categories—network fees and interchange fees.

On average, businesses can save up to seven basis points on every transaction routed through a PINless network. This savings becomes evident when comparing the network fees charged by signature debit networks like Visa and Mastercard with those of PINless networks.

For example, Visa and Mastercard charge assessment fees—14 basis points for Mastercard and 13 basis points for Visa. Over the last five years, both networks have added license fees for using their networks, typically around one basis point, though this can vary depending on your organization. Additionally, new digital fees have been introduced, such as Mastercard’s Digital Enablement Fee of two basis points and Visa’s Digital Commerce Fee of just under one basis point. When combined, Visa/Mastercard network fees usually average around 17 basis points.

In contrast, PINless networks typically charge a switch fee of about ten basis points. They usually do not charge license fees, although some PINless networks are beginning to introduce license fees, following the trend set by Visa and Mastercard.

There are also potential savings in interchange fees. Debit cards fall into two categories—regulated or unregulated by the Durbin Amendment.

Regulated Debit Cards: Issued by large banks, these have fixed interchange rates set by the government at five basis points plus $0.22 per transaction. The rate remains consistent whether the transaction is processed through Visa, Mastercard, or PINless networks, so there are no savings to be gained.

Unregulated Debit Cards: Issued by smaller banks, these offer potential savings on interchange fees, depending on the merchant’s industry. Some industries see minimal savings, while others experience significant reductions.

For instance, PINless bill pay programs can offer savings of up to 100 basis points in certain industries compared to Visa and Mastercard.

Shifts in PINless

Before the clarification, only about 35% of all debit cards were eligible to be routed through a lower-cost PINless network. Today, approximately 65% of debit cards can be routed through these networks, meaning PINless eligibility has nearly doubled over the past 12 to 18 months.

This is crucial because the more volume you can route through PINless networks, the greater your potential savings. Compared to two years ago, your potential savings with PINless debit have almost doubled due to this increased adoption.

You might be wondering about the remaining 35% of debit cards that are still ineligible.
This is due to two main factors: issuer non-adoption or issuers only adopting networks like Maestro or Interlink as the second debit network on their cards. As mentioned earlier, the interchange and network fees for Maestro and Interlink are nearly the same as those for Visa and Mastercard, offering little to no savings.

We continue to track this data quarterly, and while the growth in PINless eligibility has plateaued over the last two quarters, we expect it to continue increasing gradually over time.