To hear the true believers tell it, millions of Americans will soon be using debit cards to buy everything from refrigerators to Big Macs.

Of course, such grandiose claims have been around for years. But there are signs that this time the debit card really may be on the verge of coming into its own.

After a decade of sluggish growth, debit card use at the point of sale is rising annually at nearly a 50% clip. And that pace is expected to rise markedly over the coming decade, making the business important for banks.

A recent survey by Visa U.S.A. found that 40% of active ATM users want the option of using their cards to make purchases. Considering that more than half of all American households have ATM cards, that's a vast pool of potential users.

In this three-part series, the American Banker examines the debit card business and its potential for banks. Today's installment focuses on the central question - has the time really come for debit cards?

In two stories to follow, the series will examine:

* The furious marketing battle between MasterCard's Maestro and Visa's Interlink, the two debit card networks battling for national prominence.

* The profits that the debit card business promise and, more specifically, how those profits will be divided among bankers, networks, and merchants.

Newfound Confidence

Predicting a turning point for the debit card is a risky business, as Dale Reistad knows well. For years, he and other payment system experts have predicted a boom, only to be proved wrong. (See story on page 6.)

But Mr. Reistad remains unbowed - and more confident than ever. "The growth of the debit card will be one of the big success stories in banking over the next 10 years," he says.

The banking industry could certainly use a success story. Credit cards, the big sister of debit cards, kept many a major bank profitable in the 1980s when other sources of revenue declined. But now credit cards themselves are showing signs of decline. Growth has slowed and the limp economy has resulted in a spate of personal bankruptcies, leaving card issuers holding bad debts.

Will debit cards take up the slack? They may not achieve the pervasive popularity of credit cards anytime soon, experts say, but they will emerge as a commonplace alternative.

One prediction does seem safe: Debit cards are not about to usher in the cashless society predicted a decade ago by its proponents.

The question is no longer one of supplanting traditional payment methods - checks, credit cards, or good old greenbacks - but of convincing consumers and bankers that debit cards should take their place beside them as a payment option.

Certainly, debit cards have a long way to go. Today they account for just 0.3% of all consumer payment transactions. By the end of the decade, according to The Nilson Report in Santa Monica, Calif, their market share will expand to 3%.

But while consumers find it easy enough to say they want another payment option, getting them to use it - at a time when there is increased skepticism about banks and their fees in all areas - is another matter,

Skeptics have posed a range of tough questions. Among them:

Why, are consumers - who previously had indicated little interest in making purchases with debit cards - now supposedly, ready to use them?

Are consumers really not going to be deterred by the loss of float, as advocates assert?

Will merchants be willing to drop their opposition to paying fees to card processors?

ATM Cards Ease the Way

Advocates respond by pointing to a fundamental change: Because of the proliferation of ATM cards, consumers are becoming comfortable with the idea of using them in retail stores.

These customers are a captive market waiting to be developed and a potent source of fees for banks that issue the cards, argues Wesley C. Tallman, president of Visa's Interlink point-of-sale network.

"Many financial institutions have found that, once value and utility have been established, they can charge cardholders anywhere from $6 to $20 a year in annual fees for the convenience of using the debit card," says Mr. Tallman.

He concedes that bank customers have previously resisted paying to use the card. But the new systems in place and the large number of merchants who are beginning to accept the card now make fees less objectionable, he contends.

Positive Developments

Other factors also are affecting the climate for growth.

For the first time, two competing nationwide systems are being developed to process point-of-sale transactions. Mastercard's Maestro system is poised to process its first POS transaction this month, and Visa is spending big marketing dollars to promote its program.

They are courting not only banks, but also regional ATM networks that they hope will link into their on-line systems.

Moreover, four superregional banks - CoreStates Financial Corp., Banc One Corp., PNC Financial Corp., and Society Corp. - have just formed a joint venture called Electronic Payment Systems to compete in the debit card market.

Merchants - the stores, gas stations, and supermarkets that will be targeted - also are showing more interest in the payment alternative. These companies must pay a processor for steering payments from the consumers' banks into their own accounts, but fees have come down.

Sticker Shock

The New York Cash Exchange, the New Jersey-based regional teller machine network, had unsuccessfully been promoting debit cards at the point of sale for more than five years. The chief resistance came from stores that were reluctant to pay fees to bank processors.

Now NYCE and several other networks have seen the light. Starting last year, the ATM network made concessions on pricing, agreeing to absorb part of the transaction cost. Terminals soon followed at the big north-eastern supermarket chains.

"We spent a long time trying to resolve the unresolvable argument - who benefits most - the merchant or the bank? Who should pay?" says Hugh H. Fraser, a senior vice president of NYCE. "NYCE would not be where it is today if we'd continued [with] that argument."

No Fumbling for Cash

Proponents are also telling merchants that debit cards are an effective tool for faster turnover and for marketing. When gas or groceries are bought with a card, there is no fumbling for change by the consumer or the cashier.

Moreover, the computer systems already in place at large supermarket and gas station chains can be enhanced to collect data on buying patterns that emerge from debit card charges.

Indeed, a number of large supermarket chains in regions previously resistant to debit cards have recently introduced POS terminals. Among them are ShopRite and Pathmark, two New Jersey-based chains; Price Chopper Supermarkets of Schenectady, N.Y.; and Wegmans Food Markets Inc. of Rochester, N.Y.

Large areas of the nation continue to resist, however.

"There's not much going on in the center of the country, with the exception of St. Louis and Iowa," says Ron Dennis, senior vice president at Speer & Associates, an Atlanta-based card consulting firm. "In the West, there's not much happening in Kansas, Nebraska, or from northern Texas to Colorado. In the Northwest, there are only isolated pockets of activity."

But advocates point out that inroads are being made in important markets like Illinois and New York, which previously had shown little interest.

That's partly because debit cards have started to shed their bad reputation among banks, they say. In the early years of debit card promotion, a customer could overdraw a checking account through debit card transactions because banks had to wait until the close of business for all transactions to be recorded. Today's on-line systems can check a customer's account balance before approval of the transaction is granted.

Fees Are a Roadblock

The biggest remaining obstacle to debit card proliferation, however, remains the fees, which are the only real source of profit for bank issuers. Merchants think that current processing fees are high, while consumers have not yet shown a willingness to pay either annual card fees or transaction fees.

Transaction volume for debit cards has always been strong in the West, where Interlink originated in 1985, and in pockets of the Southeast, such as Florida, where older consumers who do not like to carry cash use the cards.

In contrast to the East Coast promoters of the card, Wells Fargo & Co. and other California banks for years waived fees for merchants and consumers. Ironically, Wells and its biggest West Coast competitor - Bank- America - have begun to impose fees.

When Wells levied a $12 annual fee on its debit card holders last month, consumer groups rose in protest.

"We have several layers of concerns," said Ken McEldowney, executive director of Consumer Action, an advocacy group based in San Francisco. "One is the lack of disclosure at the point of sale about the fees charged, and another is the poor disclosure by banks themselves about the fees you can expect."

Competitive Concerns

The fee issue, though dissipating among merchants, has not gone away entirely. The Atlantic-Richfield Co., one of the biggest debit-card-accepting merchants, now competes directly with other transaction processors. In the early 1980s, Arco stopped accepting bank credit cards at its gas stations, claiming that processing fees were too high to pass along to customers.

"We wanted to keep gas prices low and competitive," said Annie Reutinger, an Arco spokeswoman.

By 1986, Arco had converted all its gas stations into self-service operations where purchases were processed through a proprietary debit card system. Arco now leases its system to some outlets of Carl's Jr., a California-based fast food chain, and to the Albertson's supermarket chain, which is based in Idaho.

Finding a Champion

But while fees remain an obstacle, Visa and MasterCard will give debit cards a much-needed boost by promoting the concept to retailers and consumers.

POS debit has been the headless horseman - in most areas, there has been no champion." says Mr. Fraser of NYCE. "No one - not banks, retailers, or consumers - has tried to make it happen."

Now that is changing, in part because of the card organizations' nationwide point-of-sale networks, he says. "What MasterCard and Visa can do is add marketing muscle and consumer education to get this off the ground."

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