What Is Debit Routing?
Debit routing refers to the process of selecting the payment network through which a debit card transaction is processed. As a merchant, when a customer pays with a debit card, you have the ability to choose which network—such as Maestro, Interlink, STAR, or NYCE—will handle the transaction.
Each debit network comes with its own fee structure and processing efficiency. The objective is to route transactions in a way that minimizes costs while ensuring swift processing. Historically, debit cards were restricted to a single network, making cost optimization impossible. Before debit reform, 40-50% of debit cards had only one network option, with 79% of Visa debit volume at major banks lacking a competing network. This lack of choice forced merchants to absorb high interchange fees with no alternative routing options.
The Durbin Amendment and Its Impact
The Durbin Amendment is a law passed in 2010 as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that controls bank fees for debit card transactions. This act impacted debit routing by requiring banks with over $10 billion in assets to support two or more unaffiliated debit networks for processing transactions. On July 1, 2023, the Federal Reserve clarified that this law also includes online and card-not-present transactions.
- Lower fees: The Durbin Amendment set a limit on interchange fees for regulated banks to 21 cents plus 0.05% of the transaction amount. Before this rule, the average fee was 44 cents per transaction. More competitive pricing among banks and processors means lower costs for merchants.
- Increased competition: Previously, card issuers could exclusively partner with major networks, creating de facto monopolies. Now, smaller networks like NYCE, STAR, and Accel have gained market access, forcing established players to improve their service offerings and reconsider their fee structures. This competitive pressure has resulted in enhanced routing technologies, better reporting tools, and value-added services as networks strive to differentiate themselves beyond price alone.
- Transparency: Increased competition has pushed networks to be more transparent about their offerings, with many offering a clear breakdown of its fee schedule, which can include interchange, transaction and assessment fees.
Key Players in Debit Routing
To get a feel for debit routing, you must first understand the key players:
Merchants
Merchants are businesses that accept debit card payments. Efficient debit routing benefits them because it leads to lower fees and faster transactions. Merchants can then reinvest every cent they save on processing into their business.
Issuing Banks
Issuing banks are the entities that provide debit cards to consumers. They manage the funds in a customer’s account and ensure transactions are authorized and secure. They have the responsibility to ensure the consumer’s money is accessible and safe.
Payment Processors
Payment processors are the middlemen in the transaction. They receive the payment information from the merchant and communicate with the issuing bank to process the payment. Processors ensure each transaction is quick and accurate, minimizing errors.
Debit Networks
Debit networks, such as Visa Debit and Mastercard, are the roadways linking issuing banks and payment processors. They allow the funds to move safely from the customer’s account to the merchant’s account. These networks also set the rules and fees for each transaction.
In order for efficient debit routing, all of these key players must cooperate.
How Debit Routing Works
Understanding how the steps of debit routing work will help you master the art of smooth and rapid transactions.
Transaction Initiation
The process starts when a customer swipes or taps their debit card at a merchant’s terminal. This action sets the entire debit routing process in motion.
Processor Selection
Once the transaction starts, the processing system checks all networks the debit card is eligible for and finds the best one based on cost, speed, reliability and other factors. Some processing systems use automated logic to choose the best option.
Network Routing
After selecting a processor, the transaction travels through a debit network that directs it to the issuing bank.
Authorization
Next comes the authorization stage, where the issuing bank verifies the customer has enough funds. This confirms the transaction can proceed safely and helps prevent fraud.
Settlement
After the authorization, the funds are transferred from the customer’s account to the merchant’s account. The settlement process is the final step in the merchant getting paid.
Having the freedom and ability to make decisions throughout the process lets you make the best choices on each transaction, instead of getting locked in to a one-size-fits-all sequence that doesn’t actually work in all situations.
Benefits of Debit Routing
You can enjoy a handful of benefits by making the most of debit routing.
Cost Savings
When your debit card processing system chooses the most cost-effective path for each transaction, your processing fees drop. You may only save a few pennies per transaction, but this can add up to significant numbers over time.
Increased Competition
When multiple processors and networks compete for transactions, it creates a market where better prices and services are available. This competition ultimately benefits both the merchant and the consumer.
Improved Efficiency
By choosing the most efficient debit routing, transactions can be completed more quickly. This can lead to faster checkouts and fewer delays, making a more positive encounter for everyone involved.
Better Customer Experience
Debit routing also benefits customers by delivering a seamless and speedy transaction process. Fast and reliable transactions help deliver a good customer experience, which can lead to repeat business.
Debit routing doesn’t just save you money by reducing costs — it’s a component of enhancing the success of your business as a whole.
Least Cost Debit Routing (LCR)
Least Cost Routing (LCR) focuses on dynamically finding the most cost-effective way to process transactions. When determining the best pathway, it considers variables like transaction size, eligible networks, interchange and network fees and merchant incentives.
Some best practices for implementing LCR include:
- Implement automated routing logic: Use software that automatically selects each transaction’s cheapest and fastest route.
- Regularly review network performance: Monitor how each network and processor performs. Regular reviews help ensure you’re always getting the best deal.
- Optimize with data analytics: Use simple data tools to analyze your transaction history. This data can highlight patterns and opportunities for further savings. While doing so, keep an eye on metrics like the “experience rating,” which helps measure the overall quality of the transaction process from the user’s point of view.
Using LCR allows businesses to maximize their savings, while still making the customer’s experience as excellent as possible.
Challenges and Considerations
Along with the many benefits, there are some challenges that come with debit routing. Understanding these can help businesses prepare and adapt:
- Technical integration: Connecting new, more robust, routing systems with existing payment technology can be challenging. It requires careful planning and sometimes technical support to ensure smooth integration.
- Compliance: Businesses must adhere to regulations and standards when processing debit transactions or face penalties.
- Dependency on processors: Relying on a few payment processors can be risky. If one processor faces issues or has routing limitations, it could disrupt the entire transaction process. Diversifying and having backup options can reduce this risk.
- Data insights: You must gather data in real time to optimize your debit routing. Without this, you might be using outdated data and failing to maximize your savings.
By addressing these challenges before they arise, businesses can ensure that they have sustainable and compliant systems set up to take advantage of the benefits debit routing offers.
Future Trends in Debit Routing
Debit routing is constantly evolving. Some trends to remain on top of to be more competitive include:
PINless Debit Routing
PINless transactions are becoming more common. This can help make checkouts faster and make shopping more convenient. It also expands the processing options for e-commerce.
Enhanced Security
As technology advances, security measures also improve. Some technologies on the leading edge of debit card security are biometrics and tokenization. Preparing to meet enhanced levels of security before they become widespread can keep you from scrambling in the future.
Advanced Analytics
With advanced analytics, processing systems can receive pricing insight in real time, allowing them to make more informed routing decisions.
Wider Adoption
As more businesses see the benefits of debit routing, we can expect wider adoption among small- and medium-sized merchants.
Keeping up with — or staying ahead of — these emerging trends in debit routing will help businesses secure their positions.
Implementing Debit Routing Strategies
To make the most of debit routing, businesses need clear strategies. Here are some practical steps:
Partner With the Right Payment Processor
Choose a payment processor with flexible routing options. The more options you have, the greater chance you have to save money.
Leverage Analytics Tools
Use powerful, user-friendly analytics tools to monitor your transaction data. Look for trends and opportunities to reduce costs and improve the overall customer experience.
Optimize Routing Logic
Review and adjust your routing logic to ensure you always use the best route for each transaction. Revisit this often to make sure nothing changes over time. Automated systems can help with this, but it’s important to manually check on this process, too.
Monitor KPIs
Keep track of key performance indicators (KPIs), such as cost savings, authorization rates and network efficiency. Use these metrics to tweak your routing logic to enhance your savings and efficiency.
Making proactive adjustments and working consistently to optimize your processes can help you get the most possible benefits from debit routing.
Simplify Your Debit Routing With VeriFee
Debit routing is a great opportunity for your business to reduce costs, improve efficiency and deliver a better customer experience. If you use the correct debit routing strategies, technologies and partnerships, you’ll always remain on the fast track to maximizing your savings.
At VeriFee, we aim to empower businesses with clear, actionable insights that simplify complex payment systems. We believe in shining a light on the invisible parts of processing fees and ensuring companies get a fair deal. Whether you’re a small business or a large merchant, mastering debit routing can lead to significant savings and a smoother, more efficient payment process.
Start exploring debit routing optimization today with VeriFee to drive cost efficiencies and enhance your payment strategy.
