It used to mean little more than entree to an ATM, but nut any more. Even as the debit card strives to becomes a legitimate rival to cash and checks at the retail point of sale, bankers are already looking for additional ways to leverage their investments.

Debit cards are getting some respect - finally. Long regarded as the Rodney Dangerfield of the card business compared to their wealthier, more popular counter-parts on the credit side, debit plastic is suddenly hot. Bankers are focusing as never before on streamlining their delivery systems, as extremely efficient non-bank competitors encroach upon their territory, and they see direct debit as an important weapon in that battle.Top 20 Debit Card Issuers Bank Cards 1. BankAmerica 10,800,0002. Wells Fargo 5,820,0003. First Interstate 5,097,0004. NationsBank 4,500,0005. Citicorp 4,192,4506. Banc One 3,200,0007. Chemical Bank 2,600,0008. First Union 2,500,0009. KeyCorp 2,275,43710. Norwest 2,194,00011. Great Western 2,100,00012. Barnett Banks 1,811,76413. Wachovia 1,451,29214. Chase Manhattan 1,300,00015. Fifth Third 1,247,00016. Fleet Financial 1,230,00017. NBD 1,200,00018. National City 1,200,00019. PNC Bank 1,161,00020. BayBanks 1,107,219 Source: Bank Network News' EFT Network Data Book, 1995 Edition

The logic is simple: It costs a bank less for a customer to get money from an automated teller machine than from a live teller. It also costs the bank less to process an electronic transaction from a retail outlet than to process a check. So for the past 15 years or so, bankers have viewed debit cards largely as a way to reduce costs.

But today, with customer loyalty the key to profitability, bankers are looking to enhance relationships by using the 210 million cards in circulation to draw their customers closer. "Banks are beginning to wrap a lot of services around the deposit account," says Art Kranzley, president of Maestro, MasterCard's on-line debit program. "(There is interest on the part of) banks to package as many services that will represent the banking relationship."

Debit card usage at ATMs is expected to continue to grow, albeit more slowly now than during the growth curve of the past decade, but bankers are looking to the use of debit cards to pay for purchases at supermarkets, gas stations, convenience stores, mass merchandisers and other locations for the next big step up in transaction volume. They already are examining debit cards' potential in the burgeoning home banking and electronic bill payment market, as well as using stored-value cards "loaded" to make small-ticket purchases.

Bankers are leaving no stones unturned in the search for new ways for consumers to use their cards - transactions that not only will engender customer loyalty but also provide fee income. If the 1980s was the decade when ATMs took off, then the 1990s will be the era when banks find new applications for their debit cards and electronic funds transfer infrastructures.

[Expanded Picture]Years of training branch office employees to persuade customers to accept and use a debit card have paid off, as most deposit-account customers have debit cards and are regular users of ATMs. Indeed, a look at the traditional measures of debit card growth would lead one to believe that it is a mature industry.

Saturation Point?

Growth in the card base was less than 1% in 1994, following growth of little more than 2% over the previous two years. That leads bankers to believe that most of their checking account customers who want cards already have them. "We don't see great gains coming from increased penetration of our checking account base or uncovering new markets," says T. Christian Armstrong, senior vice president at Maryland National Bank. "We have an ATM-familiar and ATM-sensitive customer base now."

In a survey of the nation's 40 largest debit card issuers by the Bank Network News newsletter, over half said they expect card growth of no more than 1% to 3% over the next few years. Another 20% said they expected growth between 4% and 7%, and only 5% believe that cards will grow by 8% to 10%. This means that fully three quarters of the nation's leading card executives expect less than double-digit growth in the numbers of cards in circulation.

And while transaction volume growth remained solid at about 10% over 1993, that's a far cry from the heyday of the 1980s, when volume was growing by 25% or more each year. Transactions at ATMs accounted for 93% of 1994's volume, but grew by only 8% over 1993. However, the use of debit cards at retail locations - which accounted for a mere 7% of all volume - grew by an astounding 52% last year.

So what appears to be a maturing industry may well be poised for explosive growth - to the benefit of all those banks that have made huge investments in their debit programs over the years. There are big volume gains to be made - but not necessarily from traditional sources.

The brightest hope for increased use of debit cards comes, of course, from outside the bank environment. For years, pundits have predicted a huge increase in the use of debit cards at the retail point of sale, a phenomenon expected to leave ATM transaction growth in the dust. But visions in the late 1970s of a cashless and checkless society have been slow to come into focus.Debit Transaction Growth - 1984-1994 Year Monthly Volume % Growth (millions) 1994 746.5 10.11993 677.9 7.91992 628.1 13.51991 553.5 11.81990 495.2 13.21989 437.4 14.11988 383.1 12.51987 340.3 12.01986 304.0 2.21985 297.2 13.91984 261.0 30.5 Source: Bank Network NewsRapid Growth in the Terminal Base ATMs POS Terminals 1990 80,156 48,3411991 83,545 78,0711992 87,330 107,0561993 94,822 196,0001994 109,080 375,500 Source: Bank Network News' EFT Network Data Book, 1995 Edition

[Expanded Picture][Expanded Picture]That's partly because ATM acceptance, which was to lead the way for card usage outside the bank, came much slower than anticipated. While ATM usage slowly but surely gained momentum during the 1980s, growth in on-line debit card volume at the retail point of sale remained largely the province of a few West Coast grocers and gas stations.

But this past year brought changes in the retail debit world, suggesting that long-held expectations for this service might finally come to pass. First, installation of terminals in retail locations has soared, which should lead the way for transaction volume increases. Also, the types of merchants accepting debit cards also expanded considerably. Mass merchandisers like Kmart and national chain restaurants like Denny's, for example, are jumping on the debit bandwagon.

Terminal deployment for debit card acceptance almost doubled last year, bringing the total number to 375,500. That's up from less than 50,000 terminals in 1990. (The number of ATMs, too, jumped by almost 10% last year, following several years of lackluster growth in the installed base.)Debit Card Growth - 1984-1994 Year Cards % Growth (millions) 1994 210.5 0.71993 209.1 2.11992 204.7 2.21991 200.3 4.61990 191.4 4.01989 183.9 7.61988 170.9 12.41987 152.0 8.61986 140.0 7.71985 130.0 30.01984 100.0 34.0 Source: Bank Network News

Success on Merchant Front

[Expanded Picture][Expanded Picture]A major factor in the increase in the number of locations for debit terminals last year was a big push by independent sales organizations to sign up merchants. These efforts led to big gains in the number of merchants installing electronic draft capture terminals for accepting credit cards in the 1980s, and their involvement in pushing debit installations bodes well for the electronic funds transfer business.

If it took bankers more than a decade to convince customers that using their debit cards at ATMs was good for them, how long will it take to convince them of the benefits of using the cards at other locations? Consumers, already overburdened with plastic, make little distinction between network and service marks on their cards, making the marketing of POS services more difficult. With so many types of cards in circulation, and with regional and national networks overlapping and off-line and on-line cards carrying different marks even when offered by the same organization, marketing direct debit at the point of sale is much less straightforward than ATM usage.How Issuers Promote Debit On-line Off-lineIssuers Utilizing POS POS Statement Stuffers 69% 73%Cross-selling 44 36Branch office advertisements 38 45In-store promotions 31 18ATM messages 25 9Media advertisements 25 55Direct mail/brochures/newsletters 37 NAEconomic incentives/rebates NA 36 Source: Bank Network News survey of the 40 largest debit card issuers.

To encourage their bank members to push debit, several networks are introducing interchange rates, or reimbursement fees, in which card issuers pick up a few cents each time one of their customers uses the bank's debit card. The acquiring bank pays the fee, but it usually passes it on to the merchant.

According to the Bank Network News survey, the most common method for promoting debit card usage, for either on- or off-line programs, is the statement stuffer, which about three-quarters of the banks use. Forty-four percent of the banks surveyed said they use cross-selling methods to promote on-line services, and 38% said they used branch office advertisements. For off-line debit transactions, economic incentives or rebates are becoming popular, with more than one-third of the banks using such methods.

Though some banks have launched media campaigns to promote debit card usage at retail locations, the industry has yet to mount a full-fledged attack to make debit cards as ubiquitous as credit cards.

Even so, the nation's 10 largest POS networks are seeing transaction volume increases of an average of 50% a year, with Visa-owned Interlink leading the way. (POS programs are usually sponsored by regional networks, which account for nine of the top 10 networks.)

The use of debit cards at the point of sale isn't the only area bankers are exploring to make their debit cards more valuable to consumers. They are also considering how debit cards might eventually fit into the growing home banking and bill payment market, as well as allowing customers to access more bank products and services through ATMs. For instance, a growing number of ATM deployers are permitting customers to apply for loans through the machines.What Services Are Offered Now Service % Offering On-line POS via regional networks 85Off-line national POS 71Using ATMs to market other services 62On-line national POS 47Home banking 44Bill payment 44Loan applications on ATMs 38Home shopping 6Prepaid debit 6 Source: Bank Network News survey of the 40 largest debit card issuers

Bank Network News found significant interest in debit-card-based services beyond POS. The survey revealed that 85% of the top 40 banks already offer on-line POS services through regional networks, 71% offer off-line national POS and 47% offer on-line national POS.

Still, only 38% offer the ability to apply for loans through ATMs, and only 6% have some form of a pre-paid debit card program. Of those banks that have no such efforts in place, 60% said they were likely or very likely to offer loan services through ATMs, and some 40% said they would probably launch pre-paid debit programs eventually.

While the millions of ATM and POS transactions will continue for a while to make up the bulk of the industry's revenue, banks are looking hard to find new sources to mine. BankAmerica Corp., for instance, pulls down more than $1 million per month by providing statement print-outs to customers at ATMs.

Real growth in debit card usage depends on consumer acceptance, and it is up to banks to make sure their customers understand the benefits they get from debit cards. "A lot of it boils down to consumer education," says Una Somerville, Visa senior vice president.

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