The Economics of Unbundling

The Three-Legged Stool of PIN Network Negotiations

Originally published on December 9, 2016
Brandi Gregory, Cornerstone Advisors, Inc. 

In a world where all PIN networks appear to be created equal, it is important to understand that there are differences. Time and again we talk to financial institutions that have not reviewed their PIN networks in years or even those that have allowed the PIN Network decision to become part of their card processor decision. In both situations there is money being left on the table.

Mistake #1 – Card processor & PIN network should be independent decisions

Many card processors own PIN networks and will use those networks as perceived leverage in their contract negotiations. Don’t be fooled into thinking that paying a lower transaction rate in exchange for joining their network is a good idea. From our Cornerstone contract vault, we see that the "all in" transaction costs to process a debit transaction are currently running between $0.025 and $0.05 on average depending on processor and volume. For the purposes of this conversation, we will use $0.03. Based on the public interchange table, we know that networks on average give about $0.24 for interchange. In this scenario, you could accept a reduction of $0.01 to the processing fee which sounds great as you made a whopping 33% reduction in fees.  But in exchange you may be signing up for a network that only provides $0.22 for interchange. For that $0.01 gained in processing you lost $0.02 on every transaction in interchange.

Here is a chart that we extracted from the recent Federal Reserve Study that was published earlier this year with a comparison to rates in 2014 and 2013. More than 50% of PIN networks have seen reductions, some significant, to their average interchange rate since 2013. However, there is still a $0.10 differential between the highest and lowest; a difference that is worth more than a reduction in transaction processing costs.


Mistake #2 – Negotiate all three legs of the stool

Every PIN network negotiation is comprised of three components – network fees, incentives and interchange. As the table above clearly shows, the spread on interchange between the various PIN networks is enough to warrant a conversation. But the conversation is not complete if you don’t factor in network fees and incentives. If you earn $0.29/transaction but pay $0.06 in fees and earn $0 in incentives you may be better off with a different network. Networks are not known for fixing the interchange rate for the issuer so it is important to protect your interest by negotiating the fees and incentives while separately negotiating the processing fee. Without proper negotiation you are left with a lopsided stool of high fees and low interchange.

Mistake #3 – Multiple network options does not create greater acceptance

In the old days of PIN network access the thought was that you needed to belong to many networks to have appropriate coverage for your client base from coast to coast. This has not been true for at least the last 5 years and yet many issuers continue to belong to more than one unaffiliated PIN network. I believe it is because this is often the forgotten project, but understand that for every additional network you have on your card it could be costing you $0.01-$0.07/transaction. Remember that merchants decide how to route the transaction and rest assured that they will rarely route to the $0.29 Network if there is the option to send it to the $0.22 network. I believe once you realize this could be a big $$$$ problem, you will move this project up in priority.

Networks are aggressively trying to steal market share and you need to make sure you are properly rewarded and protected in your decision. So, while all PIN networks are created equal in theory, the cost component must be factored in and remember that this should always be a decision made separately from any other.

About the Author 

Brandi Gregory, Director at Cornerstone Advisors, Inc., a.k.a The Issuer Nerd, specializes in contract negotiations and payments.  She helps her clients achieve satisfaction with vendors and market pricing.  Brandi's experience includes relationship strategy, portfolio analysis, conversion management and accounting at Vantiv and Fifth Third Bank.  She is a regular contributor to Gonzobanker. 

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