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Optimizing transaction environments in the aftermath of the Durbin Amendment

Expanding transaction routing from two networks to multiple networks adds a whole new level of infrastructure and monitoring complexity for bank issuers, acquirers and payment processors. Even the merchants seeking out least cost routing choices will still demand top processing performance.

May 22, 2011 by Marc Borbas — VP, Marketing, INETCO

I have heard a number of our customers and prospects within the US payments industry raise the question of how the proposed Durbin Amendment will affect existing debit transaction processing operations.

The answers vary depending on your role within the payments eco-system:

Issuing Banks are searching out new channels of revenues and figuring out how to make debit operations run as lean and cost efficient as possible. 

Card networks are focusing on delivering competitive service offerings and a balanced value prop to both merchants and card issuers. 

Processors and acquirers are looking at ways to optimize their debit processing infrastructure to meet new routing regulations and to offer a competitive, least-cost routing solution. 

Merchants are concerned with whether they will take on a higher risk of fraud and finding alternative payment methods to combat the potential decline in PIN debit transactions.

Consumersare finding alternative payment and banking methods that are cheaper than their rising debit and checking fees. 

Regardless of your role within the payments eco-system, I believe you can count on one thing being certain from an IT operations perspective:  Optimizing the performance of the end-to-end payment transaction environment is about to get harder for you.  Let’s consider why. 

Supporting multi-routing and least-cost routing options
The Durbin Amendment suggests that neither the bank issuers nor the card networks may restrict the ability of merchants to direct the routing of the electronic debit transaction. The intent is to foster competition between card networks and potentially break the “duopoly” that has been formed with Visa and MasterCard networks. 

When at least two unaffiliated networks compete for transaction routing, the price merchants pay will optimize. 

Expanding transaction routing from two networks to multiple networks adds a whole new level of infrastructure and monitoring complexity for bank issuers, acquirers and payment processors.  Even the merchants seeking out least cost routing choices will still demand top processing performance.  Although it is still unclear whether routing will be based on transaction type or card type, or whether a merchant can choose a network routing matrix based on a location or regional basis, the need for robust transaction monitoring is certain.

Success will also be dependent on the ability to achieve operational efficiencies through network and application performance optimization, and decreased support costs. 
 
Increased competition means card networks need to revisit features and functionality to stay in the game.  In addition to the traditional focus of selling to bank issuers only, they will have to revamp their network based value propositions to meet the merchant’s needs. 

The push towards Chip & Pin
In exchange for the interchange rate caps, many issuing banks, card networks, acquirers and payment processors feel it make sense for merchants to support the mandatory deployment of technologies such as EMV to drive down the costs of fraud protection.  Like any technology migration, the roll-out of PIN pads accepting EMV will increase the risk of service disruption.  Regardless of who pays for these roll-outs, acquirers, card networks, issuing banks and payment processors will still need to consider ways that enable them to continuously monitor for transaction anomalies, performance issues and fraudulent behavior.  

Emerging alternative payments applications
To implement Durbin, the Fed may be proposing either of two scenarios:  1) that all cards carry at least two unaffiliated network brands, or 2) that they carry at least two unaffiliated signature-debit and at least two unaffiliated PIN-debit brands.  If increased competition is the goal, it is safe to say option 2 would be the correct interpretation. 

It is still not clear whether that means alternative payment systems, such as the network run by PayPal, will be included on the list of card networks.

If alternative systems are considered networks by the Fed, the new routing and non-exclusivity rules could help alternative payment providers to get their brands onto more cards, meaning broader service and payment application support from issuing banks, acquirers, merchants and payment processors. This could be especially true if the alternative payment providers can arrange to handle signature debit, adding authentication routines on top of automated clearing house settlement. 

That translates into higher electronic transaction volumes, more networks, new payment applications and the need to program and configure POS terminals to support a variety of new alternative payment schemes.    

So how do you efficiently manage more complex transaction routing, a growing number of third party applications and networks, and multiple transaction protocols and message types without blowing your IT infrastructure and resources budget?  Good question.  If there was ever a time for IT operations teams to make the long term investment into improving their transaction management capabilities, it could be now.   

About Marc Borbas

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