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Issuers must quiz EFT networks on fraud prevention with Durbin finalized

21 cents and 5 bps not enough to cover costs of online fraud and chargebacks at current experience levels notes Acculynk


Atlanta, GA, July 5, 2011 — As the ink on Durbin dries, debit card issuers will be finalizing contracts with their new secondary PIN network partner in order to comply with the prohibition against exclusivity in the Federal Reserve Board’s recent announcement. Before they do, issuers still have time to ensure their new partners have a solution to reduce fraud in online debit transactions which is now vital to the economics of debit card e-commerce. A leader in online debit transaction authentication, Atlanta-based Acculynk’s Ashish Bahl outlines and addresses four important questions issuers should ask of a network partner before they sign with a secondary EFT network.

1) What are the economics of online debit now that rates are out? Issuers should ask if their new EFT network partner offers a way to allow them to continue to be profitable with debit as an online payment type, especially with the current rate of growth in debit and the potential for increase post-Durbin. Most issuers are telling us that with Durbin rates now at 21 cents plus five basis points per transaction, they are underwater with card not present signature debit transactions. Most of our issuing partners recognize that fraud and chargebacks in the online debit world are significantly higher for signature debit than for pin debit with a higher level of authentication. In fact, we find that signature debit fraud is five times higher than online PIN debit. Asking your new EFT partner to clarify the economics of both signature and PIN debit will lead to a better decision. 2) How will you reduce fraud on card-not-present (CNP) transactions? This question is important as issuers can and should look to their secondary network partner to contribute to fraud and chargeback reduction. For example, ACCEL Exchange and several other EFT networks offer online merchants a simple online PIN debit solution that significantly enhances debit authentication and reduces fraud, resulting in improved economics for the issuer. 3) Which internet debit authentication solution do you use? Issuers should check with their EFT partner to be sure that they have a widely adoptable authentication solution that will allow them to build their e-Commerce debit business. Right now there is talk of reducing fraud by introducing transaction limits or increasing the selectivity of signature debit as a tender type. If your EFT network provides debit authentication that reduces fraud and chargebacks on internet debit transactions, you can grow your online transaction volume profitably. 4) What is your experience to date with Internet PIN debit? Be sure to understand how well the network’s solution has actually performed in reducing fraud and chargebacks for online debit, which is even more important given the new profitability pressures.

Historically, even though PIN debit is more secure, signature debit was highly attractive to issuers based on the higher interchange rate. With the reduction in transaction-based revenues due to the now finalized Durbin regulation, card issuers are faced with product and pricing decisions to stay profitable. Signature debit still represents the majority of debit transactions despite the increased fraud cost: based on issuer feedback, the Fed reported signature debit fraud at 13.1 basis points versus 3.5 basis points incurred on PIN debit transactions. Fraud is even more pronounced in the CNP environment where, according to CyberSource’s 2010 Fraud Report, fraud is 90 basis points.

Online PIN Debit is an option that allows EFT networks to reduce fraud for online debit transactions. In a recent study, the Pulse EFT network found that with the second level of authentication provided by online PIN debit chargebacks in comparable categories were reduced by 77% and fraud has been de minimis.

With the PaySecure online PIN pad offered by Acculynk, the consumer enters their PIN into the PIN pad that floats over the merchant check out page. A consumer’s PIN, which the consumer is familiar with from use at the ATM and the point of sale, provides a fraud-reducing second factor of authentication simply not present with signature debit. Issuers who embrace Internet PIN debit will keep costs for online transactions to levels that allow for some level of positive margin.

Offering a clear case to issuers for online PIN debit, “Post Durbin, Will Internet PIN Debit Become the New Darling of Debit Card Issuers?” is the just released white paper from Acculynk.

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