Jan/Feb 2011

pulsationsThe Debit News MagazineSM Durbin Amendment Update Federal Reserve Issues Proposed Regulations

he Dodd-Frank Wall Street Reform and Consumer Protection Act, which includes the T Durbin Amendment, promises to deliver sweeping changes across the U.S. payments industry. Financial institutions, merchants, electronic payment networks and consumers all will be affected by the new reform regulations scheduled to take effect on July 21, 2011. The Durbin Amendment directs the Federal Reserve Board (FRB) to issue regulations limiting interchange fees received by card issuers with $10 billion or more in assets and restricting exclusive arrangements between issuers and debit networks. The legislation also authorizes the FRB to regulate network fees to prevent networks from using fees to circumvent the restrictions on debit interchange. It also gives merchants the right to direct the routing of debit transactions. Two provisions of the amendment took effect immediately. One prohibits payment networks from enacting rules that prevent merchants from offering discounts or in-kind incentives for pay- ing with cash, checks, debit cards or credit cards. Such discounts or incentives cannot differentiate on the basis of the card issuer or payment net- work. The second provision allows merchants to set a minimum value for transactions as long as the minimum does not differentiate between issuers or networks, or exceed $10. (continued on page 10) Reframing the Value of Depository Relationships The Intersection of Fees, Contact Channels and Loyalty

s the U.S. economy emerges from a recession, consumers are looking for value in everything they buy, including . Non-traditional service providers are entering the market as never before, and consistent service and product Adelivery are key to reinforcing customer loyalty. This was the primary take-away from the 2010 PULSE Debit Performance Webinar Series, “Maximizing Your Depository Relationships,” presented by Patricia Hewitt, director of Debit Advisory Service for Mercator Advisory Group. (continued on page 9)

Debit Continues to Discover® Debit Managing Future Gain Popularity Offers Greater Fraud and Recovery Page 7 Profit Potential, Page 11 More Opportunity Page 8 VIEW FROM THE TOP

Dear PULSE Participant,

assage of the Durbin Amendment as part of the Dodd-Frank Act is expected to result in significant changes to the electronic payments industry. Rather than Pstand idle as the Federal Reserve Board (FRB) developed regulations related to the amendment, PULSE has been at work behind the scenes, offering our expertise, conducting analyses and developing strategic plans to support our financial institution participants. One of the first steps we took was to provide input to the FRB Operations staff as they gathered the background information. We also provided responses to survey questions submitted by the FRB to PULSE and other payment networks, and we met with FRB staff Dave Schneider prior to the release of proposed regulations. As the rule-making process advances, we will continue our active dialogue with the FRB in an effort to highlight the interests and concerns of network participants. PULSE’s approach to Durbin has been and will continue to be a three-pronged “I believe PULSE strategy. First, ensure that the interests and concerns of our network participants are communicated effectively. Second, provide information and resources to keep our can be of greatest network participants fully informed. Third, develop and promote effective solutions for responding to the requirements of Durbin. value to our We have launched a comprehensive communications initiative for our participants that will continue to deliver news and expert analysis as the regulatory process advances. participants by Communications channels include: • Debit Regulations Webinar Series – Part of our ongoing PULSE Academy® program, delivering these webinars will provide insights and guidance during the development and implementation of the regulations. solutions for • Participant Briefings – Status updates will be provided to PULSE participants as responding to new developments occur. • Dedicated Resource Website – This microsite within the PULSE website compiles Durbin . . .” amendment-related news, facts and analysis from third-party industry experts (to the site, go to www.pulsenetwork.com/debitregs). • White Papers – We will publish a thorough analysis of the impact these regulations will have on participants, as well as white papers on other critical topics facing financial institutions in a post-Durbin marketplace. A selection of white papers is already available on our Durbin Amendment Resource Center site. I believe PULSE can be of greatest value to our participants by delivering solutions for responding to Durbin and maximizing the value of debit. We will do everything possible to preserve debit’s status as a valuable and growing form of payment. Thank you for your continued support of PULSE.

Sincerely,

Dave Schneider President

All debit all the timeSM 2 PROFESSIONAL DEVELOPMENT

PULSE Programs Deliver Value to Attendees on a Variety of Topics ne of the most important value- 2010 Programming In fiscal 2010, these programs were added services PULSE offers Programs offered last year include: attended by more than 6,200 individuals Onetwork participants is access to • PULSE Academy sessions on customer from over 2,400 financial institutions, a a range of professional development service, payments revenue generation significant increase over 2009 attendance. programs. and PULSE Internet PIN Debit “Planning is well under way on our 2011 From PULSE Academy® sessions to • Two Debit Performance Webcast professional development lineup, which our Debit Performance Webinar Series to Series: one on managing will emphasize high-interest payments the new Insights & Solutions eForums and another on maximizing deposi- topics, revenue generation strategies and introduced in 2010, PULSE’s professional tory relationships (see article, page 1) the impact of the Durbin Amendment,” development program features a wide • Two Insights & Solutions eForums: said Steve Sievert, PULSE senior vice presi- variety of topics and formats from which Managing Change After an Economic dent of Communications and Marketing. to choose. All sessions are offered at no Downturn in April, and Managing To be added to our professional charge to network participants. Replays Future Fraud and Recovery in October development contact list, or to suggest of past sessions are available for (see article, Page 11) a topic for a future session, e-mail on-demand accessibility. [email protected].

For more information on available programs, visit the Professional Development section of the PULSE website at www.pulsenetwork.com/pd, or contact Melissa Voelkner at [email protected]. Free Videos Promote Debit Card Use

ooking for exciting new ways to promote debit card use to your Laccount holders? PULSE is making available to network participants the videos entered into the DebitFacts.org “Are You Debit Smart?” Video Contest. To view all contest videos, go to www.debitfacts.org, mouse over “Are You Debit Smart?” in the site navigation and select “View Qualifying Video Entries.” To view the winning videos, visit www.debitfacts.org/are-you-debit-smart/ winners. To embed the video of your , go to the page on DebitFacts.org that contains the video, right click on the video and select “copy embed html.” For instructions on how to use this code to embed the video into your website, visit www.youtube.com/youtubeonyoursite.

3 p u l s e n e t w o r k . c o m Get More from Your Debit Program Oliver Wyman offers strategies for increasing debit profitability

ebit has consistently been the U.S. Debit and Credit Purchase Volume fastest-growing payment income source for financial institutions over D 2,000 40% the last decade. Debit transactions increased an average of 20 percent per 1,500 30% year from 2000 to 2006, according to the Federal Reserve Payments Study published in 1,000 20% 2004 and 2007. Even during the economic downturn of 2008 and 2009, debit volume 500 10% Debit, % of total continued to rise at high single-digit Transactions, billion growth rates, while credit spending saw 0 0% significant declines. 2003 2004 2005 2006 2007 2008 2009E To aid our financial institution partici- pants in maximizing the value of their Credit Debit Debit (as % of total) debit programs, PULSE released Debit Source: The Nilson Report Growth Strategies, a report from leading independent management consulting Where to Begin rewards programs. Currently, 58 percent firm Oliver Wyman. As demonstrated The first step is to take an in-depth of institutions report offering some type in the white paper, institutions that are look at your debit program to understand of debit-related rewards program. However, committed to optimizing their debit card the basic drivers behind it, and how your others cite cost as a barrier to adopting programs realize two substantial benefits: institution performs compared to your similar programs. Merchant-based rewards higher revenue and improved account peers. Based on this evaluation, you are one option to defray the costs holder relationships. establish a baseline and identify strategies associated with rewards. that are relevant to your cardholders. Debit remains the fastest-growing Debit as a Revenue Generator payment source, and the preferred method According to the 2010 Debit Issuer Study, Performance Improvement Strategies of payment among consumers. Increased the average active debit cardholder per- Card penetration, activation and usage card penetration and usage, as well as forms 17 point-of-sale (POS) transactions are vital to the success of your debit stronger account holder relationships that per month and generates an average $87 program. It is critical to get debit cards into inspire loyalty, have enormous potential to in gross interchange revenue per year for the hands of as many account holders as boost your debit revenue. the card issuer. High-performing debit possible, and ensure they are comfortable For more detailed tips and strategies programs can yield $121 per active card with card features and benefits. Incentives for debit growth, download the full white each year in gross interchange revenue for activation and use can inspire cardhold- paper at www.pulsenetwork.com/research (versus $69 for less active programs). In ers to keep their debit card top of wallet. (login required). Call your account manager short, the financial institution that engages Once you have covered the basics, today at 800-420-2122 and let PULSE help actively in its debit program will realize consider taking your debit performance to evaluate and maximize the value of your significant percentages of their monthly a higher level of use, and therefore revenue debit program. profits from debit interchange. generation, through promotions and

Discover Outranks Competitors in ID Fraud Resolution mong U.S. credit card issuers, and Operations for Discover. “Prompt and finished second in detection this year, Discover ranks highest in identity decisive identity fraud issue resolution and second overall among the 26 issuers Afraud resolution, according to a new exemplifies Discover’s commitment to in the study. report by Javelin Strategy & Research. security and safety.” Javelin added five new security features “Discover routinely assesses and Discover has ranked among the top- to its analysis this year and revised its enhances its fraud prevention, detection scoring issuers since Javelin introduced its methodology to challenge issuers to offer and resolution systems to continue Card Issuers’ Identity Safety Scorecard six new, cutting-edge security capabilities. protecting cardmembers,” said Carlos years ago. In addition to achieving the For more information on the report, visit Minetti, president of Consumer Banking highest score in resolution, Discover www.javelinstrategy.com/Brochure-179.

All debit all the timeSM 4 IndustryVoice Businesses Must Up the Fight Against Cyber Criminals

the time to do so. Unless businesses have a security expert check the code, they “Many executives won’t realize it may contain vulnerabilities that could allow intruders to hack the think that, just website and access files on the company’s computer network. While hackers use many methods to because they are breach websites, the most popular is called “SQL injection.” That is when a hacker ‘web compliant,’ injects malicious code into an open field, such as a search box or a username or By Jeff Multz password field. their system is safe.” Vice President, SecureWorks Once he enters the code, the hacker could acquire access to the administrative part of the business’s website, where he hieves today don’t have to scale The first thing a business should do is could alter the site or obtain access to have a security expert review the source buildings, slice holes through the documents on the network. That might floor or bypass alarms like a code for all its web pages. Each time the T include trade secrets or clients’ usernames, source code is changed to add a new James Bond character to steal riches. These passwords and payment information. feature to the website, make sure a security days, it takes cyber criminals mere minutes Many executives think that, just to plunder business accounts via the expert reviews it. because they are “web compliant,” their If a business does not have its source Internet through numerous little holes system is safe. Compliance rules tell busi- in website applications. code, it should employ a security expert nesses to lock the doors and windows of to try to break into the site using numerous Web application attacks constitute their website but don’t show where the the fastest-growing method hackers use hacking techniques. This process is called doors and windows are and how to lock “penetration testing” or “web application to steal funds, private information and them. And, just because the doors are all entire databases from companies. While reviews.” locked one day doesn’t mean they remain If any vulnerabilities are found, fix the any Internet page is considered a web locked 24/7/365. application, the most popular web attacks code as soon as possible. Additionally, There are numerous vulnerabilities businesses must install, maintain and are through pages that contain a slot for throughout a network system, and plenty users to type information into, such as a continuously monitor a web application of companies that are compliant have firewall to prevent web applications from search box or a space for a username been hacked, costing them hundreds of or password. being infiltrated while the code is being millions of dollars as well as damage to fixed or tested. Businesses should also their reputations. Businesses would be perform external web application Common Website Vulnerabilities better off approaching security first and Computer programmers create web scanning on an ongoing basis, at least compliancy second, because compliancy quarterly and every time they deploy pages using code, or computer language, will not necessarily keep a company such as HTML or JavaScript. Typically, new code. secure. A good security consultant will Lastly, retain security experts to programmers are tasked with creating automatically review the steps a company an application that works and delivering it monitor your server and firewall logs should take in order to be secure and 24/7/365, in real-time. If logs are monitored as quickly as possible. So, if a bank wants compliant. an application that allows its clients to just a couple of times a day, by the time transfer money, or if a retail store wants malicious activity is noticed, the hacker Ensuring Web Code Security likely has acquired access to your site’s an application that allows customers to What should an organization do to order a product, programmers create the financial information and stolen valuable be secure? Anything and everything it information. application as quickly as possible. If it works can. Unfortunately, there is not one single and online users find it easy to navigate, layer of protection an organization can the business is happy. At least for a while. implement to ensure safety. It is the sum Often, programmers either don’t know of many layers of protection that will keep how to write code securely or don’t take most criminals away and cause them to look for easier prey.

Jeff Multz is vice president of SecureWorks, a market-leading provider of world-class information security services with more than 2,900 clients worldwide, spanning North America, Latin America, Europe, the Middle East and the Pacific Rim. He is a former computer programmer for financial institutions. For more information, visit www.secureworks.com.

5 p u l s e n e t w o r k . c o m ATM Owners Targeted in Fee Disclosure Lawsuits

ATM screen, or on a “Until June 2009, the FDIC’s Compliance paper notice issued Examination Manual permitted notice of by the ATM, after the the fee to be located either on the ATM transaction is initiated machine or on the screen. Going forward, but while the consumer though, only having the notice on the still has an opportunity screen will likely not be enough and could to cancel the transac- expose ATM operators to liability.” tion, if desired. The IBAT made the following recommenda- notice also must be tion to its member institutions: posted in a prominent “To avoid litigation, it is imperative that location on or at the your bank regularly inspect its ATMs to ATM – a requirement assure that the notices are present. You of which many ATM should keep a record of your inspections, operators appear to and you might consider retaining date- be unaware. and time-stamped photographic evidence TM owners across the country are “Texas is a hotbed of activity for these of your compliance.” being sued for alleged failure to class-action lawyers,” said the Independent In the Bank Technology News article, Aadequately disclose ATM surcharges. Bankers Association of Texas (IBAT) in a Dumesel and Hagans recommended that More than 25 such class-action lawsuits communication last October. “The nearly ATM owners confirm that their notices have been filed by a single plaintiff’s 30 class-action suits filed in Texas allege comply with EFTA language, and keep attorney in Dallas federal court, according that the subject ATMs were missing the maintenance and repair records for at to an article in the December 2010 issue notice that was supposed to be posted least 18 months. of Bank Technology News. on the machine.” For more information on this topic, The Electronic Funds Transfer Act (EFTA) Lawyers Bryan S. Dumesil and William read FDIC Financial Institution Letter requires that ATM operators give notice G. Hagans, authors of the Bank Technology FIL-66-2009 at www.fdic.gov. that a fee will be imposed for ATM use, and News article, explained the situation as disclose the amount of that fee before it is follows: imposed. This notice must appear on the PINless Bill Pay Expands to Include More Biller Types

wider variety of PULSE merchants 2010, the service was expanded to also now have the ability to accept bill include the following biller and payment Apayments through PULSE’s PINless types: Bill Pay service. The expansion of PINless • Transportation Bill Pay broadens the range of biller types • Prepaid telephone top-up services from which cardholders may choose, • Residential services making the service even more valuable. • Healthcare and mail-order pharmacies PULSE has offered PINless Bill Pay since • Physical fitness services 1995 as a way for cardholders to pay bills • Charitable and religious organizations over the Internet or telephone with their The new category definitions are ATM/debit cards, but without entering PINless Bill Pay Pricing detailed on the PULSE Participant and their PIN. The service has proven to be PULSE PINless Bill Pay currently has Acquirer Fee Schedules. These revised beneficial to all parties. three pricing categories: Utility, Telecom fee schedules, as well as a complete list Prior to the expansion, cardholders and Other. The pricing for the three of merchant category codes for the biller were limited to utility, telecommunications, categories remains the same, but the categories, are available to network partici- cable television, government, education, categories were expanded to include a pants in “Forms & Requirements” on the insurance, lender, real estate and financial broader range of billers. There were no PULSE website at www.pulsenetwork.com institution billers. Effective November 1, changes in PULSE merchant fees (login required). associated with these revisions.

All debit all the timeSM 6 Consumer Study Looks at Security of Online Purchases redit cards continue to be the The number of PayPal transactions dominant payment method for reported by consumers has doubled since Conline shopping. In a recent survey the previous Cardbeat survey. Not long conducted by Auriemma Consulting ago, PayPal was viewed as occupying a Group publication Cardbeat, 70 percent niche in online payments, used primarily of respondents said they use credit cards for eBay purchases. Now, nearly two-thirds to make purchases on the Internet. But of PayPal transactions are generated from other payment methods are making non-eBay sources. inroads into the online shopping arena. Earlier this year, PULSE launched While most survey respondents who Internet PIN Debit, a new online payment shop online use credit cards for at least option that is expected to impact the some of their purchases, 39 percent way consumers pay for purchases on the For more information on PULSE Internet use PayPal for some transactions and web. Internet PIN Debit enables debit card PIN Debit, visit Products & Services on the 37 percent use debit. While credit cards issuers to capture web-based transactions PULSE website. For a playback of the PULSE are viewed as the most convenient online currently made with credit cards and alter- Academy webinar on the product, go to payment method, PayPal was rated the native payment methods such as PayPal. www.pulsenetwork.com/pd and click on most secure by survey participants. “PULSE Academy” (login required).

Debit Cards Continue to Gain Popularity Among Consumers

ecent studies show that consumers increased at a rate of 14.3 percent per year are reaching for their debit cards DEBIT CARD PAYMENTS BY TYPE* for the same time period. Consumers cite Rmore frequently than ever, displacing (billion transactions) security, speed and convenience as their both cash and credit card payments. primary reasons for choosing PIN debit Consumers have long appreciated the over signature. pay-as-you-go aspect of debit as a means 14.8% Annual Growth The study also looked at ATM usage of managing budgets and curtailing and found that the number of ATM revolving debt. Those benefits have 37.9 withdrawals increased 0.8 percent per year become even more relevant in the to 6.0 billion in 2009. These transactions context of the current economic climate. 14.5 PIN had a total value of $629 billion, an increase In fact, research conducted by (38%) of 2.8 percent per year since 2006. The TowerGroup asserts that debit usage has 25.0 average ATM withdrawal increased slightly been accelerated by the recession. The 9.4 from $100 to $106. report finds that debit use now accounts (37%) Among the Federal Reserve study’s for more than half of all noncash conclusions is that, with electronic purchases. payments now representing more than 15.7 23.4 Signature “After the economic trough, we do (63%) (62%) three-quarters of all noncash payments, expect debit cards to remain more popular the migration from paper to electronic than credit cards,” said Brian Riley, senior payment methods shown in previous research director of bank-card services at 2006 2009 studies is continuing, in some cases at TowerGroup. Riley believes that “the increasing rates. The study cited greater *Includes debit transactions funded from demand recession’s mental effect on people” will deposit accounts; does not include “prepaid” debit. adoption of electronic options such as

be around for a while because “it will take Source: 2010 Federal Reserve Payments Study debit cards, online bill payments and decades for households to regain the net prepaid cards as a driving factor. worth they had in 2007.” For more information on the 2010 The 2010 Federal Reserve Payments 14.8 percent per year from 2006 to 2009. Federal Reserve Payments Study, go to Study, conducted triennially, found that More specifically, PIN debit increased www.frbservices.org. total debit card transactions increased 15.6 percent per year, while signature debit

6 7 p u l s e n e t w o r k . c o m Discover Debit A better choice® in signature debit iscover Debit offers an uncompli- Comprehensive Security – Helping to cated approach to signature debit manage risk is a top priority for both PULSE Dthat provides convenience to and Discover. We employ stringent fraud cardholders, as well as security and prevention and data security tools to help competitive program features to financial you minimize losses from fraudulent activi- institutions. The program is the first and ties. Program security measures include: only alternative to Visa and MasterCard • 100 percent authorization signature debit offerings. requirement “Discover Debit is a compelling choice • Transaction monitoring in the debit market,” said Jeff Trachtman, • Address Verification Service (AVS) senior product manager, Discover Debit. • Card Identification Data (CID) “Its features and benefits make it a better • Discover Information Security and choice in signature debit, in terms of Compliance (DISC) program economics, security and functionality.” • DebitProtect® fraud detection system

Why Discover Debit? Why now? More Opportunity – Adding a new brand Discover Debit has many advantages to your signature debit portfolio can build for financial institutions, including superior stronger, lasting relationships with current revenue opportunities, easy implementa- account holders and establish new tion, simple program operations and accounts. Offering Discover Debit in unparalleled customer support. In addition, addition to your current signature debit the program features proactive fraud and brand enables you to target inactive security measures, broad acceptance and cardholders and those with ATM-only numerous value-added services for both cards, or create a new business debit cardholders and merchants. offering. Cardholders get convenience, tools to help them keep their businesses Here are some of the key differentiators security and reliability, a widely strong, including human resources and that separate Discover Debit from compet- respected brand. In fact, Discover has legal services. ing signature debit programs. been honored as one of the top brands in the U.S. for 13 consecutive years, finishing Make the Smart Choice Greater Profit Potential – Recent pricing in a tie for first place in the 2010 Brand Keys Discover Debit’s enhanced revenue, changes have significantly strengthened Customer Loyalty Engagement Index. broad acceptance, comprehensive security Discover Debit’s competitive position. and unique marketing opportunities Financial institutions have the potential to Card Types combine with PULSE’s superior customer build more profitable consumer and busi- The Discover Debit Consumer Card is a service and support to raise the bar for the ness signature debit programs through the dual-function debit card that can be used debit industry. Our relationship managers product’s highly competitive interchange at an ATM, or with a PIN or signature at any will keep you connected, informed and rates, lower network expenses, transparent participating merchant. The card gives your successful. fee structure and simplified billing. account holders convenient access to their For answers to questions you may funds along with a host of features, includ- have about Discover Debit, or to design a New Locations – Already widely accepted, ing identity-theft recovery assistance and signature debit program that meets your Discover Debit is adding more merchant zero liability. needs, contact your PULSE Account locations every day. Our broad acceptance The Discover Debit Business Card Manager today. is driven by partnerships with the 125 enables financial institutions to offer small- merchant acquirers that account for 99 business customers access to additional percent of all volume in the U.S.

Discover Debit Sweepstakes

Discover Network launched a national sweepstakes for all Discover Debit issuers. Designed to build brand awareness and increase loyalty among cardholders, the sweepstakes began January 1, 2011, and will run through the end of 2011. Each time your cardholders use their Discover Debit cards for signature transactions, they will have a chance to win a prize. There will be 150 daily prizes of $25, one weekly prize of $25,000 and the grand prize of $1 million. There is no cost to issuers for participation in the sweepstakes. To take part, or for more information, please contact Jeff Trachtman at 832-214-0256 or Sandy Dennler at 224-405-4309.

All debit all the timeSM 8 Reframing the Value of Depository Relationships (continued from page 1) “The opportunity for financial • Activation: Offer instant card issuance DNMDEBIT NEWS MINUTE institutions is to differentiate themselves or in-branch pick-up. This gives you by establishing an emotional connection an opportunity to educate the with account holders,” said Hewitt. “The consumer. Utilize sweepstakes, or give difference in value between an unengaged them a coupon for a local restaurant account holder and an attached one is or business. Make it valuable enough to Launch Contactless Cards tremendous. This is particularly important for them to activate their card. Digital Transactions as institutions revisit fee structures.” • Utilization: Focus on the first 90 days Canadian debit network Interac of the account life cycle. Remind them announced plans to launch the Interac Value-Based Fees about zero-liability protection to FlashTM contactless debit card this year, Financial institutions will need to promote online use. Emphasize the giving cardholders the option to pay for motivate consumers to choose services benefits of cash back. Offer online lower-value items faster than ever. The based on value, not price, as the Durbin transaction tracking and reporting. first two Flash issuers will be Scotiabank Amendment and other regulations take and RBC Royal Bank, both of which will effect. Hewitt highlighted approaches “If you have high-penetration rates roll out the cards in summer 2011. The that can focus account holders’ attention and low usage, you may want to target first acquirer is TD Merchant Services, a on overall value: your very best customers. If you have unit of Toronto-Dominion Bank. Interac • Bundled services: Offer a variety of low penetration and activation but high says additional issuers and acquirers will bundles, possibly at the same price, usage, target your usage campaigns to be disclosed in the near future, and prompting account holders to select increase portfolio depth,” said Hewitt. national merchants will make formal based on value. How should financial institutions announcements about acceptance. • High-value services: Look for services measure their success? By benchmarking that provide high value to your best themselves against their peers and customers. Remote deposit capture incorporating debit card metrics into their Future of Debit Rewards in Doubt is a great example. overall account profitability calculations. Cardline • Customizable offerings: Break up Also, make sure your employees are able Debit card issuers and networks alike the bundle for the consumer. Enable to talk about the value of debit cards expanded their debit rewards offerings them to create their own account by effectively. Only 40 percent of cardholders in 2010, but the future of such programs varying fees to match desired services. say they were informed about the features is in doubt as a result of the Federal • Capitalize on fee expectation: and benefits of their debit card when they Reserve Board’s proposed debit Expedited payments is one service opened their account, according to interchange rules. A new report by account holders expect to pay for; Mercator Advisory Group’s Customer Mercator Advisory Group lists the top charge a premium for it. Monitor Survey Series, May 2010. 50 debit card rewards programs based on purchase volume. Only one of the top Portfolio Optimization Uncertainty Ahead 50 issuers has announced plans to phase Hewitt recommends that financial In this environment, it is important that out debit rewards, but Mercator expects institutions focus on what she calls the financial institutions focus on the value other institutions to make similar changes “value wheel” of depository accounts (see they provide account holders. in the coming months. diagram). This means achieving a balance To download Hewitt’s presentation or of penetration, activation and utilization listen to an on-demand replay of the two- in your debit card portfolio. part webinar series, go to the PULSE Debit Telco Mobile Payments • Penetration: Recalibrate your screen- Performance Webinar page in Professional Initiative Formed ing process at least annually, to ensure Development on the PULSE website at PaymentsSource you are keeping up with changes in www.pulsenetwork.com/pd. AT&T, T-Mobile and Verizon have consumer behavior. Convert ATM-only launched a new mobile payments joint cardholders, offer personalized cards venture (JV) known as Isis. The JV will and consider business debit. route contactless transactions over the Discover Network. Former GE Capital executive Michael Abbott will head the new mobile commerce network. Isis “If you can color in all three will utilize near-field communication technology to enable consumers to segments of the value use their mobile phones to conduct wheel, you’re going to be that point-of-sale transactions. Barclaycard Utilization Penetration US is expected to be the first issuer on customer’s primary financial the network. institution.” Activation – Patricia Hewitt, Mercator Advisory Group

8 9 w w w . p u l s e - e f t . c o m Preparing for Regulatory Changes (continued from page 1) Networks also cannot prevent federal of the alternatives for interchange fees and Next Steps agencies or institutions of higher educa- network participation will be adopted. Until the final rules are outlined, it is tion from setting a maximum value for difficult for financial institutions to devise a Interchange Fees – The proposed rule credit card transactions, provided the definitive strategy. However, there are steps outlines two interchange rate alternatives. maximum does not differentiate between your organization can take to prepare for Alternative 1 provides for a “safe harbor” issuers or networks. the impending changes. rate of $0.07 per transaction for regulated On December 16, 2010, the FRB First and foremost, make your institutions. If an issuer’s average variable released proposed new Regulation II to institution’s voice heard by providing a cost exceeds $0.07, the issuer may receive regulate the U.S. debit card market, as formal comment to the FRB’s proposed a per-transaction fee equal to its average required by the amendment. Regulation II. The deadline for submitting variable cost up to $0.12 per transaction. Although regulation of debit inter- comments is February 22, 2011. Alternative 2 caps interchange for regu- change only applies to institutions with It is also critical that your organization lated institutions at $0.12 per transaction. $10 billion or more in assets, smaller issuers fully understands all of the revenue and may be affected because the regulation cost components of your debit card Network Participation – The proposed includes no provision requiring networks program. Your checklist should include: rule outlines two alternatives that would to set interchange rates that distinguish • Costs, including fees charged by apply to all debit card issuers, regardless of between regulated institutions and networks and processors, as well as asset size. In Alternative A, each debit card exempt ones. expenses for issuing and marketing must participate in two unaffiliated debit In addition, because the proposed cards, rewards, chargebacks and fraud networks (typically one signature network interchange rates do not distinguish • Products and fee structures tied to and one PIN network). In Alternative B, between signature and PIN debit, the your demand deposit accounts, and debit cards must participate in two revenue differential between the two opportunities to cross-sell account unaffiliated signature networks and two forms of debit may decline or disappear. holders on relevant offerings unaffiliated PIN networks. Based on the draft rules, debit interchange • Debit network affiliations so that you revenue for regulated card issuers is are prepared for either network Fraud Prevention Costs – The Durbin expected to decline by an estimated participation alternative 73 percent, from an average of $0.44 per Amendment authorizes the FRB to permit regulated institutions to receive additional transaction today to, at most, $0.12 per You also should conduct an in-depth compensation for their fraud prevention transaction when the regulation takes review of your institution’s fraud preven- efforts, if such efforts meet standards yet to effect, according to a white paper pub- tion system. PULSE can help evaluate be determined. The Fed is seeking advice lished by Oliver Wyman. The white paper the effectiveness of your program and on how to implement this provision and, is available in the PULSE Durbin identify potential fraud risks. We can review given the complexity of the decision, does Amendment Resource Center at the latest fraud mitigation tactics and not believe it will be ready to release a www.pulsenetwork.com/debitregs. technologies, and assist you in formulating proposal by April 21, 2011, when final rules Here is a summary of proposed strategies to strengthen your protections. are expected to be published. Regulation II’s key provisions. Only one As the changes set forth by the Durbin Amendment come to fruition, PULSE is committed to working diligently to minimize the impact on your organization. We have launched an initiative designed to provide information, analysis and guidance to our participants throughout this process. Participants have already begun to see new channels of communication from PULSE, such as regular updates, a web- based Durbin Amendment Resource Center and a webinar series, all dedicated exclusively to debit card regulations. In a June 2010 study, Lightspeed Research reported that 48 percent of consumers make purchases more often with debit than with any other form of payment. We believe that debit will continue to be the preferred payment choice for consumers, and we remain committed to helping you maximize the value of your debit portfolio. For more information on how we are preparing for a post-Durbin marketplace, call your PULSE account manager today.

All debit all the timeSM 10 Managing Future Fraud and Recovery PULSE Insights & Solutions eForum Focuses on Prevention

inancial institutions are experiencing an unprecedented level of fraud. The Fnature of these attacks is changing continuously, so the rules and techniques used to detect and prevent them must keep pace. This was a principal theme of the second PULSE Insights & Solutions eForum, held in conjunction with the 18th Annual ATM, Debit & Prepaid Forum in Phoenix in October. The panel discussion took place in front of a live studio audience, and was attended via webcast by more than 800 viewers from over 400 financial institutions. The session, moderated by Steve Sievert, PULSE senior vice president of Communi- cations and Marketing, featured a diverse panel of experts. Chris Hernandez, senior vice president of Operations at UMB Financial Corporation “If criminals are targeting your ATM, incorporating more than 70 parameters for in Kansas City, Mo., stressed the impor- they’re probably targeting more than just defining fraud and flagging transactions. tance of trust between UMB and its that one ATM. I know it sounds painful, but The bank also limits international card customers, as well as the benefits of you need to spend a lot of time at your access and continuously informs customers educating account holders on how they ATMs. You need to send people out during through multiple channels. can help prevent fraud. He also empha- the day to check them. Criminals are out “On the front end, we try to educate sized the need for financial institutions to there, and if they see that you’ve got an our customers because there are so many collaborate with their peers to share fraud attenuated presence, they will move on.” customer breaches. On the back end, we tactics and information. use technology to look at patterns of trans- “Over the last year to two years, we’ve Real-World Fraud Prevention actions so that, when fraud does occur, we really ratcheted up collaborative forums The eForum also featured case studies can react promptly. When a breach occurs, and created new communication channels. from PULSE participants. Richard Bradfute, the quicker you identify it, the quicker you We’ve even seen some of what we’d chief information officer of James Polk can shut it down.” considered long-time competitors opening Stone Community Bank, championed For on-demand playback of the up their doors to us, and us to them. So it the use of social media to connect with eForum, a full transcript, case studies and has been very productive,” said Hernandez. and educate customers about fraud more, go to www.pulseeforum.com. For Jeff Multz, vice president at information prevention. more information on upcoming PULSE security services provider SecureWorks, “It’s important that financial institutions Professional Development programs, noted that fraud mitigation is an ongoing interact with customers in a secure way log on to the PULSE website at process that should be ingrained in the using social media. The Internet is an www.pulsenetwork.com/pd. business culture of every organization. exceedingly dangerous place. There are “It’s an evolution, not a revolution. 500 million Facebook users right now. The way the hackers and the bad guys are That’s roughly one-twelfth of the world’s getting us changes hourly. So the rules population. There are going to be some you use to detect or prevent them have bad guys out there. It’s incumbent upon got to change in real time. The reality is, banks to warn customers that are already it has to be a cultural approach to doing using social media of some of the pitfalls. business. We have to educate not only We have an obligation to our customers employees but also customers. It’s an to be involved with them and help guide outward-reaching program that’s an the way.” ongoing, repeatable, necessary part of Nick Anderson, senior vice president doing business today.” of Operations for Trustmark National Bank, Mike Urban, senior director of Fraud discussed the importance of a multi-level Product Management for FICO, recom- approach to fraud mitigation. Trustmark mended a simple approach to preventing uses rules-based fraud detection software, skimming and other criminal tampering.

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PULSATIONS is produced quarterly by PULSE. Please send information for the newsletter to: Anne Rhodes, PULSATIONS Editor PULSE 1301 McKinney, Suite 2500 Houston, TX 77010 [email protected] PULSATIONS can be viewed on the PULSE Web site at www.pulsenetwork.com/PULSATIONS.

Seconds with... Tony Zeis Senior Vice President, Switch Services

Improved Service Through Enhanced Technology Although I am new to the PULSE staff, I processing platform. The new technology expanded data, allowing institutions to worked closely with the company for many environment is scheduled to replace the analyze their transaction activity in new years in my former role with a technology current one in the first half of 2011. It will ways and benchmark themselves against provider. Technology is the backbone of include new production and certification, their peers based on a host of factors. our operations, and the reason I joined as well as production-level testing and Projects such as these involve adjust- the company. development systems, enabling us to fully ments on the part of the organizations PULSE hired me to spearhead technol- load-test all future tuning, reconfigurations, with which we do business. Processors ogy projects that are instrumental to our upgrades and changes prior to their will have to make coding changes in ability to serve customers in the years to introduction. preparation for new reports and come. One such project was a software The largest of the technology projects warehouse files, and participants will upgrade on our processing platforms. under way at PULSE is the integrated pro- have to convert to a new exception item Although this implementation did not cessing platform, or IPP. This project will be system. The enhanced functionality will go as smoothly as we had hoped, I am implemented in phases, beginning in April significantly improve the way we provide pleased to report that it is now complete. 2011 and continuing into 2012. information to our customers, as well More importantly, the upgrade positions The IPP consists of enhanced fee billing, as your ability to use that information the network to better serve our future data warehousing/analytics, reporting, to grow your debit business. growth and that of our customers. settlement and adjustment systems. It will We also have invested significantly in provide PULSE processors and financial the next generation of our debit switch institutions with greater access to

IN CLOSING PULSE Supports Houston Food Bank As part of Discover Cares Month, more do not have access to school-provided than 20 PULSE employees recently volun- breakfasts and lunches. Staff also boxed teered at the Houston Food Bank. The food to meet the basic needs of the Houston Food Bank feeds 80,000 people elderly in the Houston area. each week through a variety of activities PULSE volunteers helped process and partnerships with hunger relief 1,100 backpacks of food for children and agencies. enough food boxes for 525 seniors. The PULSE staff worked at the food bank’s meals were distributed to hungry adults packaging and distribution center, prepar- and children in the Houston community. ing food bags to meet the nutritional needs of children on weekends, when they

©2011 PULSE A Services Company

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