Debit cards have been the subject of open warfare for quite a while now, but it seems that both sides have recently gathered impressive new weaponry.
Supporters of PIN-based debit cards are rallying behind a product that will make those cards work on the Internet, while proponents of signature-based debit cards have been buoyed by rising transaction numbers and by Citibank's recent decision to issue the cards to its depositors. Ultimately, the issue of whether one type of debit card will prevail over the other is likely to be decided in court. The so-called Wal-Mart case - a class action that pits four million merchants against Visa and MasterCard - will likely go to trial in U.S. District Court in the Eastern District of New York sometime next year, and will challenge the "honor all cards" rule that requires merchants who take Visa and MasterCard credit cards to accept those brands of debit cards as well.
Visa and MasterCard debit cards, which are signature-based, bear higher interchange rates than PIN-based cards, which do not carry the association logos. Retailers object to the higher fees, and are seeking the right to decide for themselves which types of cards to honor.
On one side - the side that has gained the most ground to date - are Visa U.S.A., MasterCard International, and the major banks that have lined up behind signature-based debit cards. Also known as "offline" debit cards, these products require a customer's signature at the point of sale. The sale takes place offline, and the transaction is processed within a few hours.
On the other side are the electronic funds transfer networks and retailers, which favor PIN-based debit cards. These cards, which require consumers to enter a personal identification number at the point of sale, debit a cardholder's deposit account instantly. This type has historically been known as an online debit card because of the electronic connection that takes place during the actual transaction, but the term has fallen out of favor because of potential confusion with the Internet, where, to date, these cards do not actually work.
The stakes are particularly high for the latter group. The EFT companies see their bread-and-butter business threatened by the proliferation of debit cards that do not pass through their networks, and merchants say the higher rates they pay for signature-based cards are onerous.
Fresh evidence suggests that the signature-based products are gaining ground, and for good reason: Visa, MasterCard, and banks have been promoting them heavily. And unlike PIN-based debit cards, signature-based cards can be used anywhere Visa and MasterCard are accepted - including on the Internet. Both types of debit cards have had healthy growth over the past four years, but signature-based cards are proliferating much faster. The number of transactions conducted on the two was more closely aligned in 1996 - 1.1 billion on PIN-based (online) cards and 1.2 billion on signature-based (offline) cards. But, according to recent projections by Dove Consulting of Atlanta, this year the number of transactions on signature-based cards will be five billion, while the number of transactions on PIN-based cards will be far smaller, 3.6 billion.
Lloyd Constantine, a principal at the New York law firm Constantine & Associates and the lead attorney for the retailers in the lawsuit, said PIN-based and signature-based debit cards have not been at a parity since 1990, when it was predicted that signature-based cards would disappear.
"Offline debit was viewed as being an obsolete, unsafe, niche product," with "extraordinarily high rates of fraud and unauthorized use," that could be issued only to the top portion of deposit account customers, Mr. Constantine said.
But Visa backed offline debit heavily in the early 1990s, and MasterCard - which in 1990 had put all its efforts into online through its Maestro initiative - changed courses and adopted Visa's tack, according to Mr. Constantine.
"What has changed is that people are now predicting that maybe online debit will go away - not because it isn't faster, safer, and cheaper and permits cash-back, but because of something Visa and MasterCard have done," he said. "By 1996, offline was threatening to put online out of business."
Today major issuers continue to introduce signature-based debit cards. Citibank, perhaps the last major bank without a sizable debit card program, has just introduced a MasterCard-branded card and plans by yearend to give it to all deposit account customers as a replacement for their automated teller machine cards.
Mark Rodgers, a spokesman for the Citigroup subsidiary, said the bank has issued a PIN-based debit card for about 10 years to a limited number of customers but for a long time did not perceive customer demand for a signature-based product. The spokesman said demand has risen over the past two years, but the product was delayed by the bank's conflict with Visa in early 1999. Former Citibank co-chairman John Reed clashed with Visa officials over various philosophical and practical issues, prompting Citibank to switch its primary allegiance to MasterCard.
Mr. Rodgers said the new Citibank MasterCard debit cards work online and offline. "If the PIN pad is there, it will settle through the NYCE network," he said. "If you do a signature-based transaction, it will settle through the MasterCard network."
Though proponents of signature-based debit have many reasons for glee - among them, that the Visa check card is "the fastest-growing product in Visa's history," according to Jeff Kann, the executive vice president of Visa U.S.A. - the PIN-based debit faction is fighting back. Some of the major electronic funds transfer networks are uniting behind a soon-to-be-introduced product that will for the first time let consumers use PIN-based debit for purchases on the Internet.
NYCE Corp., the biggest EFT network in the Northeast, developed the product, SafeDebit, a card with rounded edges that fits in the CD-ROM drive of a computer and performs the dual function of authenticating the cardholder to the network and facilitating a debit card transaction that would run over an EFT network, not an association network. The cardholder enters a PIN, and the account number is encrypted and sent over the network. The merchant never sees the number and therefore cannot store it in a database.
Star Systems Inc., the nation's largest EFT network, agreed in March to license SafeDebit from NYCE and promote it to its bank members. Last week, Pulse EFT Association of Houston, the third-largest network, said it would do the same.
That leaves MAC, the network owned by Concord EFS Inc., as the only large network that has not signed on. Concord EFS recently made a deal to buy Star Systems, but the two networks are to be run separately for a while after the deal closes.
While the support of the EFT networks is important, banks have not rallied behind SafeDebit the way they have behind the Visa check card and its MasterCard equivalent. NYCE, which has been promoting SafeDebit for some time, has so far announced only two banks licensing it: North Fork Bancorp of Melville, N.Y., and Michigan National Bank, Farmington Hills subsidiary of National Australia Bank PLC of Melbourne.
NYCE is aiming for a commercial rollout in early 2001. "For SafeDebit to be successful, it has to be adopted by the majority of the PIN debit networks throughout the world," said Paul A. Tomasofsky, vice president of NYCE's advanced product group. "So our strategy has been to work with what would normally be our competitors."
Mr. Tomasofsky drew an analogy to credit card companies uniting behind the magnetic stripe. "The adoption of one standard is beneficial to the whole industry," he said.
Stan Paur, president and chief executive officer of Pulse, said that several member banks have expressed interest in SafeDebit but his expectations are low.
"I think it is probably premature to suggest there will be enormous volume tomorrow or the next day," Mr. Paur said. "We're in the very embryonic stages. Gradually, debit will be a form of payment over Internet channels."
Industry observers also expressed skepticism. "Is this the wave of the future?" asked James L. Accomando, a card industry consultant in Fairfield, Conn. "That's to be seen, because not everybody has joined forces. They're growing step by step." As a category, merchants may not be technically prepared to accept SafeDebit, he said.
Alanna Kellogg, president of The Kellogg Group, an electronic banking consulting firm in St. Louis, called SafeDebit a "brilliant product" but one with no perceivable market demand and a huge potential downside.
"If the card is compromised, the hassle for the consumer is so much greater than a credit card because the card draws against" a deposit account, Ms. Kellogg said. In the event of fraud, instead of disputing a charge on a credit card, a consumer could wind up fighting with a bank to get money restored to an account.
Mr. Paur of Pulse said online debit products "will keep evolving over time, and improving."
Meanwhile, the controversy over the two forms of debit will have its day in court. A federal judge in Brooklyn, N.Y., granted the retailers' lawsuit class action status, and an appeal by Visa and MasterCard of that decision is likely to be heard in December in the U.S. Court of Appeals for the Second Circuit. After the appellate court rules on the class action issue, a court date will be set for the trial, according to Mr. Constantine, the lawyer for the plaintiffs.
Mr. Constantine said he sees several additional phenomena affecting the debit tug-of-war. The rapid consolidation of the regional EFT networks means that Star, MAC, NYCE, and Pulse will "have the size, infrastructure, and merchant relationships to be truly national networks" that could thrive if PIN-based debit proliferates.
For the moment, Mr. Constantine said, companies are hedging their bets, awaiting the outcome of the Wal-Mart case. Products such as the Visa check card 2, which works both online and offline, are an example, as was Citibank's stalling before putting out a signature-based card, he said. SafeDebit and other products that bring online debit to the Internet will probably not take off until the case is settled, Mr. Constantine said.
The merchants are seeking permission to choose what form of debit card they accept. If they win, Mr. Constantine said, online will be the overwhelming choice, and the banking industry will be forced to lower interchange rates for offline. "If our case results in a free-market determination, online debit will ultimately be the product for the next decade," he predicted.
Jennifer A. Kingson contributed to this article.