A 'dual message' that puts issuers' flexibility on the spot

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Recently, a number of domestic debit networks have begun implementing strategies to capture a set of transactions that historically were exclusive to the global debit card networks.

They are doing this by introducing a dual-message transaction option (with signature, or no CVM required). This may have significant downstream repercussions for issuers and it has the possibility of being implemented without prior consent from financial institutions.

Many financial institutions are still participating in up to seven debit networks. The setup need not be this complex, as the larger domestic debit networks have reached parity in most key metrics, including acceptance, uptime and system redundancy. As banks and credit unions have the opportunity to optimize and simplify their debit programs, the domestic debit networks are working to keep their competitive motivators alive.
This move by the domestic debit networks may capture some of the dual-message activity from the financial institution’s front of card brand, such as Visa, Mastercard or Discover. Banks and credit unions must pay attention to anything that can alter transaction routing. These expanded transaction sets have the ability to disrupt the customer experience, add complexity to issuer back office operations, and impact issuers’ contractual obligations to their global networks.

Some believe that the net position for interchange and fees for such transactions could be equal to or better than that of the financial institutions’ front of card brand, but each issuer situation is different. The larger merchants may choose this option as part of a least cost routing strategy, even though it does not necessarily favor the institution.

Many domestic debit networks do not have perfect insight into the economic arrangements negotiated between the global debit networks and issuers, and as such, may not be able to present a compelling business case for certain issuers to participate in these transactions. Some institutions likely have incentives related to volume commitments in their global debit network agreements, which may be subject to claw backs if dual-message volume is routed to a domestic network.

While the domestic debit networks are doing this under the guise of more competition being better for everyone, their efforts to capture a larger share of debit transactions presents conditions that may not be attractive for certain financial institutions. Some institutions may elect to opt out of participation in these transactions as part of waiver processes or through contract amendments.

Be on the lookout for notices of expanded transaction and routing options. The decision may be “mandated” and become part of the operating rules and procedures for these domestic debit networks. Of course, financial institutions can also choose to align with domestic debit networks not offering this dual-message routing option in their attempt to simplify debit network relationships.

Financial institutions need domestic debit network options, but not too many. Be persistent in monitoring changes. Market shifts such as this are not necessarily negative disruptions; they can be opportunities to identify cost savings or revenue gain if addressed proactively.

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