Despite Merchants, Off-Line Debit Taking Off

Off-line debit cards have generated no end of controversy among merchants, but evidence is mounting that the cards are a hit with consumers.

Transaction volumes grew dramatically last year. While on-line debit is also on the rise-and people in the industry predict both can thrive-the consumer acceptance may help the banking industry to fend off merchant objections.

Merchants dislike off-line debit cards such as Visa check because they cost more to accept than the on-line versions, which tend to be associated with regional automated teller machine networks.

Merchants are usually charged a flat fee for an on-line debit and a percentage of the sale amount for an off-line payment. A food industry study said the averages are 29 cents and 80 cents, respectively.

On-line payments are instantaneously posted to cardholder transaction accounts. Settlement of off-line transactions through the Visa and MasterCard networks takes a day or two, as is true of credit cards.

To consumers, the chief difference is that off-line cards usually require a signature while on-line cards are authorized with personal identification numbers.

MasterCard and Visa rules that bar retailers from discriminating between the card associations' debit and credit brands prompted a 1996 lawsuit. In the Wal-Mart case, so called for its biggest plaintiff, retailers contend that the pricing and other terms violate antitrust laws.

The case is pending in U.S. District Court for the Eastern District of New York, in Brooklyn.

Record growth in off-line debit may signal that national card association advertising campaigns are paying off.

The transaction processing giant First Data Corp. said it handled 745 million off-line debit card transactions in 1998, 55% more than in 1997.

Visa Debit Processing Service, a Denver-based unit of Visa U.S.A., saw a 120% increase in off-line volume last year. In May, the three-year-old Visa division said it had processed more than a billion transactions since its inception, and projected hitting the two billion mark next year. About 85% of the volume has come from off-line cards.

"It took the on-line industry probably 20 years to get to a billion transactions," said Paul Martaus, president of Martaus & Associates, a consulting firm in Mountain Home, Ark. In less than three years Visa "did it all by themselves."

One testament to the growth of off-line cards is that some of the regional on-line networks, which had been wary of losing market share, have begun handling the transactions.

Pulse EFT Association of Houston started offering off-line debit services three years ago, and in May transaction volume was up 386% versus the same month in 1998.

Mary Brown, senior vice president and director of marketing at Pulse, said it responded to demand from member banks, 49 of which now use this service.

Star System Inc. of Maitland, Fla., said off-line debit represents 28% of its volume. In 1998 it processed more than 375 million off-line transactions, up from 234.5 million in 1997.

"If you're a major processor, the off-line market is growing so large and so rapidly that you can't ignore it," said Hugh Gallagher, senior associate at First Annapolis Consulting in Linthicum, Md.

In the 12 months throught March 31, 6,305 banks issued Visa check cards, generating 3.3 billion transactions worth $147.7 billion. In the same period a year earlier, 5,681 banks were issuing the product, generating 2.3 billion transactions worth $103.5 billion.

First Annapolis said the Visa debit unit has 15% to 20% of the off-line processing market. First Data said its share is 40%.

Visa check and its MasterCard equivalent, once known as MasterMoney, have "captured the imagination of the consuming public," Mr. Martaus said.

Steven Collins, vice president of business development for debit at First Data Resources Inc. in Omaha, said Visa in Denver caters to smaller banks than does First Data.

In 1998, First Data won debit processing contracts from SunTrust Banks Inc., BankBoston Corp., and Bank of New York Co., Mr. Collins said. They brought the number of off-line debit card accounts serviced to 32 million. First Data recently picked up an additional five million accounts in an acquisition from Bank One Corp.

First Data handles more than 212 million accounts overall, including credit, debit, retail cards, and gas cards. Visa Debit Processing Service handles 20 million off-line Visa check card accounts.

Despite the card associations' heavy advertising-Visa has featured celebrities such as Bob Dole and Shirley MacLaine; MasterCard has added debit to its repertoire of "Priceless" commercials-on-line debit competition remains robust.

NYCE Corp. of Woodcliff Lake, N.J., said its on-line transaction volume was 15.8 million in April, up from 9.8 million in April 1998.

Mr. Collins of First Data predicted on-line debit would remain strong for the foreseeable future. He said Visa's processing system, which can handle on-line and off-line transactions on the same network, is a good model.

Last fall, Visa caused controversy with Visa check 2, or VC2, which works both on- and off-line. Concerns raised by merchants and regional network executives-that VC2 is expensive to accept and has adverse competitive implications-limited market acceptance to a few community banks.

With or without VC2, most banks want "a single point of connectivity (for) all their debit processing needs," said Peter Korpady, vice president of business development at Visa Debit Processing Service.

More processors are "migrating to the philosophy" that they should handle both products, Mr. Korpady said. "We think there is a role for both off-line and on-line cards," he said.

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