October 16, 2018
The signature-debit market has been dominated by Visa and Mastercard since its inception over 30 years ago. But the stability is changing as U.S. domestic networks, including NYCE, Star, Pulse and more, aggressively challenge the global networks for a fair share of all transactions.
The battleground involves the single- and dual-message transaction space. However, semantics apart, the very definition of single- and dual- warrants clarification. In single-message transactions (typical of PIN debit), the authorization and clearing/settlement data are in one message; In dual-message transactions (common in signature debit), the clearing/settlement message comes after the authorization, normally in an offline fashion. To the U.S. domestic networks, a dual message is effectively an online pre-authorization that is followed later by an online completion. This is nothing new for these networks as they implemented this type of processing in the 1980s for the processing of gas pump payments.
The support of dual-message signature transactions follows this same process, but the pre-authorization can be held up to seven days in some circumstances – to account for delayed shipping, for example. However, in the interests of efficiency and simplicity for all parties, merchants should use single-message whenever possible, only resorting to dual-message processing when necessary, such as at gas pumps, when shipping is delayed or for transactions with gratuities.
The other definition of dual-message is an online pre-authorization followed by a batch clearing file. This is the dual-message preferred by Visa and Mastercard, but this can be more time-consuming and costly when integrating with merchants.
U.S. domestic networks have until recently been shut out of many merchant segments because dual-messaging is essential for sectors like car rental, ride-sharing, e-commerce orders with delayed shipments, and many other transactions in which the final payment amount may not be known at authorization. This is changing as the stakeholders adopt the domestic networks capabilities and recognize the economic benefits to the entire ecosystem.
To grow their share, the U.S. domestic networks are all supporting transactions utilizing any cardholder authentication service. These offerings allow authentication by PIN, signature, and no PIN or signature, in single-message or dual-message format. The aim is simply to grow by opening-up the established payment rails to all transaction types. By offering universal debit payment acceptance, the domestic networks gain access to potentially huge new markets, including e-commerce, where credit cards, and Visa and Mastercard signature-debit cards dominate.
Given that e-commerce is the fastest-growing segment in both debit and credit, and that PIN debit has not routinely been accepted online, the new solutions allow domestic networks to effectively compete for those transactions.
In some ways, the ability for the domestic networks to move into the space once dominated by the global networks was made easier by the Durbin Amendment to the 2010 Dodd-Frank Act, which required that each debit card offer merchants a choice of at least two unaffiliated networks for transaction routing. Initially, this diverted a lot of traffic from the Visa- and Mastercard-owned networks to their rivals. But ultimately, the choice to offer debit through the domestic networks is up to the merchant or the merchant acquirer. The consumer who’s signing is ambivalent to which network is routing the transaction.
So why would merchants opt for the domestic providers rather than the global giants? Economics is the first factor as the interchange/fee structures are more competitive and they offer new sources of value. Also, the domestic networks are increasingly delivering innovation more quickly, including mobile wallet integration (Apple Pay, Google Pay, etc.), cardless cash ATMs, PIN-less purchase transactions, and support for EMV and tokenization.
Issuers also benefit from this migration, as the U.S. domestic networks have lower issuer fees as they do not have brand/volume assessments like Visa/Mastercard. And with the pre-authorized single-message service, the domestic networks generate fewer in-house support costs than the standard dual-message. Overall, financial institutions benefit from an increase in net income per transaction over Visa Debit and Debit Mastercard transactions.
As the world becomes increasingly digitized, the e-commerce market for payments becomes more critical to success. The U.S. domestic networks place the banks at the center of the consumer payment experience rather than a network brand, which can provide additional customer-relationship value.
The U.S. domestic networks are on the verge of a new era. Their broader set of offerings will relentlessly eat into the market share of their global competitors.