As significant numbers of consumers begin to use their debit cards at the point of sale, the scramble for revenue generated by these transactions is heating up.

Vying for fees are financial institutions, electronic banking networks, transaction processors, and merchants. Each contributes value to the debit process, yet opinions vary widely on the way compensation for this value should be divided.

Pricing is expected to have a significant impact on the willingness of the parties involved to push debit into a new stage of merchant acceptance.

In addition, experts said, some pricing practices, such as merchant surcharging, could damage consumer comfort with debit if not approached carefully.

"I think [debit] is still very workable with different pricing structures in different areas," said Nikki Waters, senior vice president of Star System Inc., which operates the nation's largest regional POS debit network, Explore.

"However," she added, "those that are applying the fees just need to be sensitive to both sides of the story and particularly sensitive to the end user, who is the consumer."

Ms. Waters is not alone in her concern. Participants at every level of the POS debit chain know too well how long it has taken the payment option to become a force, and they are loath to do anything to damage its continued growth.

Yet at the same time, most participants are beyond the point of investing money in the business without seeing some sort of return.

Whetting their appetites for debit revenue are explosive transaction growth and signs that merchants beyond supermarkets and gas stations are embracing the payment option.

According to POS News, a Chicago-based newsletter, the number of monthly on-line debit transactions in the United States grew by 59% in the year ending m June 1994. This dwarfs the average growth rate of 34% for the five previous years.

Much of the growth to date has been fueled by supermarkets and gas stations, which have been by far the most aggressive debit merchant categories.

However, as department stores, restaurants, and other merchants begin to equip their POS terminals with debit capabilities, transaction volumes are expected to go through the roof.

In fact, some predict the number of debit transactions will surpass the number of automated teller machine transactions as early as 1998. Debit transactions now number about 51.2 million per month nationwide, compared with more than 650 million monthly ATM transactions.

"I think as we see K mart and those types of big players roll this thing out, volume both here and elsewhere is just going to go crazy," said Thomas Randolph, manager of banking services at Mobil Oil Credit Corp., Lenexa, Kan. "You haven't seen anything until you get those guys on board."

Mobil is one of the more progressive debit merchants, accepting the cards at nearly 8,000 service stations. Its experience with debit is held by many bankers and network executives as evidence against merchant surcharging.

Although the company is eager to make debit pay, it does not charge consumers to use their debit cards at its pumps -- despite the fact that many regional networks allow such surcharges.

Mobil Credit does charge its service station operators a small transaction fee per debit transaction to offset the costs of maintaining links with debit networks.

However, Mr. Randolph indicated that the transaction cost to the station operators is offset by the operating efficiencies gained when consumers pay at the pump with a debit card instead of inside a store with cash.

"Probably about 10% of transactions at our [customer-activated terminals] are from customers using an ATM card," Mr. Randolph said. "What that does for us is cut three and a half minutes off the transaction time," which, he noted, is good for both the station operator and the customen

As more merchants emerge to support Mobil's position on debit's operational benefits, many banks and electronic banking networks hope that new debit merchants will forgo surcharging.

This would simplify pricing while also reducing the likelihood that consumers would face large, usage-discouraging charges.

"The potential for customers to be charged on both ends of a transaction -- of being surcharged by a merchant and then also being charged by a bank in some way -- could very well confuse them and result in a backlash that's not desired by any of the parties involved" in the debit business, said Thomas Tremain, vice president in electronic banking at First Chicago Corp.'s lead banking unit.

While many merchants agree with this point of view, others continue to express concern that they will not be able to offset investment in the debit terminals and network interfaces without surcharges. They also fear losing the ability to recoup costs should processors raise their merchant fees.

In making a case for surcharges, merchants often note that ATM fees have not hurt transaction volume.

Bankers counter that ATM fees only became prevalent once consumers were familiar with the self-service terminals. If the ATM pricing model is to be used for debit, they argue, then it would be years before debit charges to consumers are allowed at all.

Running under many bankers' opposition to merchant surcharging is the feeling that debit profits are somehow the banking industry's birthright.

After years of spending on an ATM infrastructure that never paid the expected dividends, financial institutions want to leverage their investment by exploiting the ATM cards that most consumers now carry.

In the words of one banker attending a recent point of sale debit conference: "We have been waiting more than 20 years to squeeze profits from these cards, and [POS] debit may be our first real chance to do so."

But the issue of merchant surcharging is hardly the only contributor to the unsettled state of POS debit pricing.

The networks that switch debit transactions among financial institutions maintain a dizzying array of pricing arrangements, and experts said there are few signs that pricing will be standardized at any time soon.

Some networks, such as Wisconsin's Tyme Corp., have issuer-based fees. This means the bank that issued the card used in a point of sale transaction pays the fees associated with the processing of that transaction.

Many others, including the national networks Interlink and Maestro, have acquirer-based structures in which the merchant bank or merchant processor picks up the tees.

In an increasing number of cases, networks are compromising on these two scenarios by splitting transaction costs between acquirers and issuers.

The split ratios vary greatly, but many in the industry feel that spreading the fees out is the most likely way to keep all parties interested in promoting point of sale debit to consumers.

"You really have to come down the middle of the highway on this," said Richard Lyons, executive vice president and chief operating officer at Internet Inc., the Reston, Va.-based company that operates the Most network.

"If you put all the benefit on the issuer side, there's not going to be merchant sign-ups.

If you do it the other way around, issuers will have no reason to promote usage of the cards."

Mr. Lyons, who gave a presentation on POS debit pricing at Faulkner & Gray's recent debit POS conference in Denver, noted that an average of all the nation's point of sale fee structures shows a shared burden of fees between issuers and acquirers.

Many expect networks with pure issuer or acquirer-based fee structures to migrate gradually to less radical stances that will allow all participants to see the benefits of debit implementation.

"There was a lot of controversy about who pays in the early days because there was no transaction volume to support debit and a lot of fixed costs to get covered," said First Chicago's Mr. Tremain.

"But the growth we're seeing in transaction volume leads me to believe that the pie will be plenty big, and that will lead to less pricing controversy rather than more." Who Pays? Switch fee structures at top regional POS networksNetwork Fee Paid byExplore 5c Split between issuer and acquirerMAC 2.5c-7.5c Split between issuer and acquirerJeanie 10c IssuerMost 8c SplitHonor 6c SplitSource: POS News

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