State of the Industry Report September 2024

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CMSPI – IAC State of the Industry Report

For more information about dual-message vs. single-message debit, please see Section 1. PINLESS IN THE U.S. Many U.S. domestic debit networks lacked the technological capability to handle non-PIN authenticated transactions, including Card-Not-Present (CNP) transactions when the Durbin Amendment was first implemented in 2011. This was partly due to their historical origins as ATM networks. However, many of these networks have since developed PINless debit technology, allowing merchants to route dual-message debit transactions (see Glossary for more information). 255 Despite these developments, merchants have continued to find PINless routing opportunities limited. Single-message debit networks (typically domestic networks), represented under 5% of CNP spending, but represented 50% of CP spending, indicating a dearth of routing enablement for CNP transactions in 2021. 256 At the time, the Fed concluded that “some issuers [were] not enabling two unaffiliated networks to process card-not-present transactions,” leaving merchants with only one routing option for CNP transactions. In late 2022, The Fed Board issued final clarification that issuers must make competing networks available for routing on all types of debit transactions, including CNP debit transactions, by July 1, 2023. 257 Since this compliance date, CMSPI data indicates an increase in the availability and utilization of domestic debit networks for CNP debit processing. According to CMSPI estimates, U.S. merchants could save $3 billion annually if all debit cards are enabled for CNP network routing based on 2021 volumes. Interestingly, despite the Fed’s guarantees of CNP routing rights, CMSPI has observed a divergence in issuer enablement rates between CP and CNP PINless since July 1, 2023. CMSPI data suggests CP PINless enablement has actually contracted since early 2023, while CNP has grown. In an examination of ten of the top debit issuers in the U.S., CMSPI has observed that at least four appear to have disabled CP PINless despite having it previously enabled for use across a range of bank identification numbers ( BINs). ISSUANCE OF MONO-BADGED PIN CARDS LIMITING ROUTING RIGHTS PINless isn’t the only area where merchants’ routing rights are being squeezed. CMSPI has observed that there are dozens of debit BINs on the market that are badged with only one PIN debit network. 258 This may still be technically Durbin-compliant as there are still two unaffiliated networks on the card (one PIN/single-message network and one “signature”/dual-message network). However, as a result of having only one PIN network on the card, the merchant is forced to send the transaction to that network if the consumer enters their PIN. The lack of direct network competition by authentication method on these cards seems to explain why their interchange

Section 5.2.2 – Card Co-Badging and Routing In 1998, the U.S. Department of Justice (DOJ) filed an antitrust lawsuit against Visa and Mastercard, which included objections to the global networks’ exclusivity rules that prohibited issuers from issuing cards from rival networks. 244 Additionally, some issuers had pricing incentive deals encouraging them to mono-badge debit cards. 245 With growing exclusivity and diminishing competition amongst debit ATM networks 246 , scrutiny of the economics of the debit system inevitably spread. 247 One commentator described it as ‘perverse competition,’ 248 while a 2003 Kansas City Federal Reserve Report noted that “the usual competition- price relationship (that is, more competition lowers the price) does not necessarily hold for interchange fees.” 249 The market dynamic created a dilemma for merchants: either accept the interchange pricing or reject the networks completely. This created a significant issue as Visa and Mastercard accounted for 80% of the debit and credit markets by 2010. 250 The No Network Exclusivity (NNE) clause in the Durbin Amendment aimed to confront the market dominance of leading debit card networks. The legislation sought to ban practices of blocking competition, denying discounts, and resisting fee rate negotiation. 251 The NNE clause requires all issuers enable, or badge, at least two unaffiliated networks on each U.S. debit card, giving merchant transaction routing choice. Between 2011 and 2021 single-message exempt debit interchange fell from $0.31 to $0.27 on average per transaction due to debit routing competition. 252 As of 2021, merchants generally only had routing choice for in-store, PIN-authenticated, single-message debit transactions due to lack of full industry enablement and adoption of the Durbin Amendment routing requirements. 253 This means that dual-message transactions – essentially all Card-Not-Present (CNP) and non-PIN Card-Present (CP) – transactions have not typically been routable for merchants. With the lack of routing competition, dual-message exempt debit interchange rose from $0.51 per transaction in 2011 to $0.64 in 2021. 254

244 https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2003/wp03-10.pdf?la=en&hash=93288CF9037C- 6B3EE936EB51D15C586C

245 https://www.pymnts.com/next-gen-debit/2020/payment-card-networks-merchants-debit-routing/ 246 Product Innovation and Network Survival in the U.S. ATM and Debit Card Industry (ssrn.com)

247 https://www.govinfo.gov/content/pkg/FR-2011-07-20/pdf/2011-16861.pdf 248 https://constantinecannon.com/wp-content/uploads/2016/03/NYB104.pdf 249 https://www.kansascityfed.org/documents/6674/GuideATM_DebitCardIndustry_2003.pdf 250 https://www.durbin.senate.gov/newsroom/press-releases/durbin-chairs-hearing-on-the-payment-of-interchange-fees-by- the-federal-government 251 https://www.durbin.senate.gov/newsroom/press-releases/durbin-chairs-hearing-on-the-payment-of-interchange-fees-by- the-federal-government 252 https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm 253 Pages 1-2: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20221003a2.pdf 254 https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm

255 Networks: No PIN, No Problem – Digital Transactions; Attention Debit Issuers: The Fed Plans to Clarify Regulation II - PaymentsJournal 256 Federal Reserve Covered Issuer Interchange Report (2023) 257 https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20221003a2.pdf 258 A Bank Identification Number is typically represented by the first 6-10 digits of a debit card. Some digits of the BIN will provide clues about features of the card. For example, most cards badged with Visa will start with a 4, while most cards badged with Mastercard will start with a 5.