Online retailers may soon pay lower fees for purchases made online with debit cards.
Payment processing giant First Data Corp. is acquiring Acculynk, which specializes in technology that allows e-commerce merchants to accept debit cards at checkout, the companies recently announced. Both companies declined to disclose the sale price but said the deal should be finalized by mid-May.
First Data, which serves about 6 million businesses and 4,000 financial institutions in more than 100 countries, and Acculynk are both based in Atlanta. The companies have worked together since 2009, with First Data reselling Acculynk’s debit technology on and off during that time.
According to Top500Guide.com, of the top merchants ranked, 20 use First Data as a payment processor. Acculynk deals with debit transactions in which a consumer makes an online purchase by typing in a debit card number, expiration date and the CVV code—without entering a PIN code. Acculynk’s online debit network expertise will enhance First Data’s e-commerce payment offerings by enabling online retailers with First Data accounts to add Acculynk’s PaySecure functionality for an additional fee, says Chris Foskett, executive vice president and head of corporate and business development for First Data..
“[The acquisition identifies] First Data as a leader in debit processing, and it provides Acculynk with access to First Data’s massive merchant base,” says Thad Peterson, a senior analyst with market research and consulting firm Aite Group LLC. “Debit is an essential element of the global payment ecosystem, and it will continue to expand.”
For any online transaction, retailers incur several fees that are consolidated under one umbrella surcharge called the merchant discount rate. It typically is made up of:
- An acquiring fee that goes to the payment processor.
- An interchange fee that goes to the financial institution that issues the payment card.
- A switch fee that goes to a network provider like Visa or MasterCard—or the “rails” money rides on.
The switch fee is typically 12 cents to 14 cents, says Acculynk CEO Ashish Bahl, but Acculynk can lower the charge to 2 cents to 5 cents with discounts it has negotiated with various PIN networks. When a customer makes a purchase, Acculynk’s technology detects the lowest fee among all eligible networks for that card and routes the transaction accordingly.
If a consumer buys a wallet at Nordstrom Inc. (No. 18 in the Top 500) using a SunTrust Bank debit card, for example, one of the associated PIN network brands might be Visa, which could charge 14 cents for that department store’s transactions, and the other might be the First Data-owned Star Network, which could charge 3 cents. For a merchant without access to technology like Acculynk’s, there is a 99% chance the transaction will be processed through Visa or MasterCard by default, Bahl says. With Acculynk’s model, the payment would route through Star and save the retailer 11 cents without altering the customer’s experience.
PIN networks have two functions: They can authenticate a user with PIN entry, including at ATMs or at store checkout counters, as well as move money, Bahl says. Merchants can opt to transfer funds paid by debit without authentication, resulting in PINless transactions. Over the last several years, PIN networks have innovated with this PINless debit format, which communicates with the networks in the same way as conventional debit but doesn’t require a PIN verification, according to Steve Mott, principal of consulting firm BetterBuyDesign.
This is especially common when the dollar amount for purchases is low and retailers are willing to accept the risk for fraud, which is heightened without the added identity verification for the consumer provided by PIN entry. These generally are used for transactions less than $25—although the industry standard has been upped to anything less than $50—and payments such as automatic electronic payments for utility bills, Mott says.
Debit transactions typically are cheaper than credit for merchants since the Durbin Amendment in the Dodd-Frank Wall Street Reform and Consumer Protection Act put a cap on debit interchange fees. There are no such regulations for credit card transactions, Bahl says. Credit card companies make more revenue on credit transactions and what’s called signature debit payments, which require signature verification in person but are run as credit payments online, according to Mott. Merchants accepting credit cards can expect fee rates to be between 2% and 3% while debit card transaction fees range from about 0.7% to 1.5%.
Visa and MasterCard have their own PIN networks—Plus and Maestro—which they use as needed, Mott says. National PIN networks, also known as electronic funds transfer networks, include Star, NYCE and The Exchange, which all are owned and operated by processors; Pulse, which is owned by Discover; and about 10 other smaller networks such as Shazam, Jeanie and Alaska Option. In addition to some processors, big merchants have the capability to look at a card number and do lower-cost routing to the cheapest PIN network. But smaller merchants don’t have the means to do that, and most transactions get routed to the more expensive Visa or MasterCard networks, Mott says.
First Data’s acquisition of Acculynk is not merely an instance of buying another company’s intellectual property, according to Peterson and other payment experts. While the intellectual property is valuable, “the capability to provide lower-cost debit routing is the big deal,” Peterson says.
PIN debit transactions account for about 10% of total card payment volume in the United States, Mott says. Online debit card payments are expected to reach $137 billion in the United States this year, or 27% of total online retail purchases, according to Javelin data. That number is expected to swell to $170 billion by 2020. Online payments volume is expected to grow by 52.4% from 2015 to 2020, according to Javelin data. So the savings for retailers using lower-cost debit routing services can add up quickly.
Debit card usage varies by age and income level. Millennials under the age of 30 are heavy debit card users, Bahl says, so merchants such as REI (No. 74) and Ticketmaster stand to gain the most from lower transaction fees. Tiffany & Co. (No. 127) is likely see the vast majority of purchases made with credit cards, whereas Burlington Stores Inc. (No. 615) would see the reverse trend with mostly debit transactions, he says.
While Acculynk was “creating the plumbing” to connect to PIN networks, it also was possible for the technology company to add in the least-cost routing function, Mott says. “Since that’s online, it complements the [least-cost routing] capabilities [First Data] and others have offline at [the point of sale], so Acculynk is a real good fit—especially for multichannel merchants.”
Michael Moeser, director of payments practice with Javelin Strategy & Research, says the deal provides First Data with another capability for its acquiring business—or a middleman’s payment gateway connecting a credit card brand to an issuing bank for authorization—which he ranks in the top three in the United States. First Data did $18.56 billion in purchase volume in 2015, followed by Vantiv Inc. with $17.67 billion and Chase with $14.97 billion, according to a March 2016 ranking by The Nilson Report. When a customer pays for a Subway sandwich by swiping a Wells Fargo Visa debit card, for example, the Subway franchise doesn’t connect directly to the Visa network or Wells Fargo & Co. Instead, the merchant goes through an acquirer’s payment gateway, which then connects to Visa, which in turn connects to Wells Fargo to authorize payment.
“For Acculynk, joining one of the largest acquirers will tremendously change its outlook as they will no longer be swimming upstream against giant acquirers,” Moeser says.
“As more and more retail purchases move to the digital world, it will be critical for acquirers to have the latest and greatest technology to serve merchants with an e-commerce business or division,” he says. “Acculynk provides this to [First Data], as [First Data] provides to Acculynk a steady set of business customers to serve.”