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June 30, 2016 by Brandi Gregory Brandi Gregory

The Payments Stress Test Somebody in the Bank Should Run

MoneyHandAn unfortunate turn of debit card events is happening for financial institutions unregulated by the Durbin Amendment (assets under $10 billion, which is most banks and credit unions). And, it’s bringing unwelcome bad news for non-interest income.

Many banks and credit unions will see non-interest income deteriorate for the following reasons:

Debit EMV issuance/acceptance: the acquirers are striking back.

As the liability for fraud shifted in October 2015, it was a non-event with the exception of the largest financial institutions. EMV Connection reported that 600 million chip cards were issued by the end of 2015 and predicts that number will rise to 900 million by the end of 2016.

The majority of EMV (Europay, MasterCard and VISA) cards on the street are issued by regulated (large) banks, which leaves a much larger percentage of financial institutions that are not yet issuing EMV. Large banks capitalized on the liability shift, and the acquirers/merchants weren’t ready because many retailers held off launching EMV acceptance at their terminals until after peak holiday shopping season. And, the large banks buried the acquirers in chargebacks the likes of which had no historical precedent.

Walmart sued VISA.

You read that right. Walmart sued VISA – again. (It’s that time of the year, right? Fourth of July picnic and a Walmart/VISA lawsuit.) This time Walmart alleges that VISA is violating Durbin by forcing the acceptance of a signature. It isn’t clear how this will be enforced as VISA is not issuing public comments and MasterCard is trying to stay out of it. To put icing on the cake, Walmart recently announced it is no longer accepting VISA cards in Canada over a merchant fees dispute. What are consumers to do if they don’t have an alternative payment method – leave their basket of goods?

While it may be hard for some to imagine VISA ever being denied by large merchants in the United States, keep in mind that the only credit card Costco accepts in the U.S. is now VISA, following its shift from American Express.

Meanwhile, many merchants altered their payment terminals to only accept a PIN on a debit EMV-card-present transaction. This change impacts all debit signature transactions for both MasterCard and VISA cardholders. Savvy consumers can challenge merchants to allow their transactions to be signature transactions, but how many really will?

Banks and credit unions are scrambling because they are rolling debit EMV out to cardholders with the message to perform signature transactions while large retailers like Walmart, Target, Home Depot, Lowe’s and Kroger are not having that anymore. Many banks and credit unions have spent years educating their cardholders on how to transact at point of sale (POS); some still assess a fee for a PIN transaction. And all of that education is being eradicated in just a few short months by acquirers.

If VISA prevails and merchants are forced to allow cardholders to choose their transaction method, it may be too late. Consumers are creatures of habit, so once merchants teach them to use PIN, what motivation would they have to go back to a signature transaction? And even if they did, would it make a difference?

The larger regulated financial institutions are most likely indifferent to this change in transaction processing since Durbin equalized their interchange on PIN and signature transactions. But, the unregulated banks and credit unions should care – a lot. Banks and credit unions should perform a payment stress test that forecasts the impact of volume shifts to non-interest income – just like a credit stress test, but on the other chunk of income that drives banking (not to mention banking relationships).

And just to add to the fun … Kroger sues Visa.

What started as a fraud mitigation effort with EMV is now back to just a battle over what everything seems to get down to: money. Merchants were not happy with how the U.S. opted to implement EMV without enforcing chip and PIN. They tried to force PIN at their terminals (which, if we are being honest, is not the same security as chip and PIN) and it resulted in VISA fining them until it was corrected. VISA even threatened to revoke their ability to accept any VISA debit transactions – a $29 billion impact to the Midwestern grocer. While the terminals still prompt for PIN first, consumers now have the ability to exit out to signature.

In response to the fines, Kroger has joined the growing list of merchants suing VISA. So let’s say VISA wins. What’s next?

POS signature/dual message debit: a disruptor lurks.

Even if VISA wins this lawsuit with Walmart, the coast is not clear for unregulated interchange erosion. The PIN networks are ready to roll out POS signature/dual message transaction processing. Doesn’t that sound like the muscle car of payments processing?

With POS signature/dual message, authorization occurs through the lower-revenue-generating PIN network and settlement follows later in a batch transaction exactly as it happens with VISA/MC signature transactions today. All the large PIN networks have the support ready and are simply waiting on the acquirers to support the transaction type. At this point, there isn’t a need to roll it out since the merchants are forcing PIN. Although it is unlikely that VISA/MC will see their volume convert to other networks, they haven’t pulled their largest lever yet – lowering signature interchange to compete with the POS signature/dual message debit rate tables that traditional PIN networks have created. Either way, it’s a hit to unregulated bank and credit union income on the same pool of transactions.

Three things banks and credit unions can do right now:

  • Run a payments stress test and stay smart. Understand sig/PIN penetration and how it impacts income. Smaller banks and credit unions should now deploy models and stress test to forecast impact just like the big banks.

Smart GonzoBankers might think this challenge could be tackled by aggressively marketing debit cards and making up the shortfall on volume, but the stress test found there was no way to optimally grow over the interchange problem with debit. Bummer, huh? But, at least credit is there as an option that works.

  • Get a credit card issuing strategy. The debit income problem is not going away, and plans are needed to recover as much of the income loss as possible. The majority of debit cardholders also have credit cards in their wallets. And that’s growing largely because big banks were motivated by revenue and the Durbin Amendment to get a credit card in their customers’ wallets.

Community banks and credit unions need to gain (or regain) their position in the wallet and avoid losing both transaction and brand power. If a bank already issues credit cards but penetration and usage are low, chances are 1) the product is uncompetitive; 2) there is no marketing calendar; 3) the product is buried three pages deep on the website; or 4) all the above.

  • Review network participation and cease belonging to more than one PIN network. Maestro or PAVD/Interlink cannot be avoided but the total number of other networks issued in can be.

Stress tests shouldn’t stress you out. So, make it a good summer and happy chipping and swiping.
-Brandi

Shout out to Terence Roche and Sam Kilmer for their contributions to this post.


For every 5% shift in volume from signature to PIN, debit interchange will be negatively impacted by 20%.

Are you prepared to lose 20% of your interchange income?

A Payments Stress Test from GonzoBanker’s mothership, Cornerstone Advisors, can help you get the balance right between credit and debit marketing. Our Payments Stress Test reviews your payments ecosystem metrics and provides an analysis of baseline versus adverse and severe impact scenarios.

Contact us today to learn more.

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2 Responses to “The Payments Stress Test Somebody in the Bank Should Run”

  1. Chris Soyke says:

    Brandi,

    Great to see your deep knowledge and payments expertise demonstrated for the broad community banking industry! Enjoyed that the day you published the court threw out the 2012 antitrust settlement. Lots of change to come, and anther reason to banks to manage payments holistically as business.

    Thanks Brandi!

  2. Chris Soyke says:

    Brandi,

    Great to see your deep knowledge and payments expertise demonstrated for the broad community banking industry! Enjoyed that the day you published the court threw out the 2012 antitrust settlement. Lots of change to come, and another reason for banks to manage payments holistically as business.

    Thanks Brandi!

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