Consumers are starting to warm to point-of-sale debit, and banks are faced with choosing between MasterCard's and Visa's national debit program. The real action, however, is with regional EFT networks.
For years, point-of-sale debit has been described as the phenomenon in waiting: It's about to explode. It's about to take off. It's just around the corner.
The past year has finally given credence to the descriptions. As the payment product gets more usage, banks have to choose between issuing Visa International's Interlink or MasterCard International's Maestro, each card association's on-line debit card. Unlike credit cards, a bank can only issue one brand, either Visa's or MasterCard's; no "duality" of debit brand is in effect. The same goes for MasterCard's MasterMoney and the Visa check card, which are debit cards but are off-line and not settled at the time of the transaction.
It's not a small decision: How banks fare in debit cards could prove to be a major factor in warding non-bank competitors from consumers' demand deposit accounts. Debit cards are, for now, the property of banks, and high consumer use of the product will keep the bank's core relationship within the bank.
Yet some bankers and industry observers wonder about the importance of the MasterCard/Visa debit choice. While MasterCard and Visa have been working hard to develop national ATM and point-of-sale debit networks, regional electronic funds transfer networks may end up dominant.
Attempts to build Maestro Interlink have been hampered by merchants' hesitancy to accept debit cards and a public still unaccustomed to using ATM cards for purchases. While Interlink has established on-line debit in states where there has been none, such as Colorado, EFT network consolidation will leave less untapped territory for the nationals. Some even talk of regional EFT networks reaching reciprocal agreements that would allow cardholders to use cards within different networks, bypassing Maestro and Interlink altogether.
Regional network executives insist that the regionals will keep the lion's share of the debit business, pointing to their dominance in ATM volume, which dwarfs Visa's Plus and MasterCard's Cirrus national ATM networks.
"Most of the on-line POS programs have been developed regionally," says Stan Paur, president of the Pulse network, based in Houston. "There have been efforts via Interlink and Maestro to create a national program."
Paur's view may be biased, but the numbers bear him out. Regional networks, and not Interlink and Maestro, dominate the debit market. Maestro's transaction volume is very small, say industry observers. The Visa-owned national Interlink network was by far the largest POS debit network with 18.8 million monthly transactions last June, or 38.5% of the total 48.2 million total transactions. But Visa bought the network from a consortium of four California banks. And although it appears that Interlink is expanding outside of California, 90% of Interlink's transactions still originate on the West Coast.
And last November, First Interstate Bancorp joined the Star EFT network, bringing in more than 5 million cards into Star's debit program. Meanwhile, EFT power houses like Electronic Payment Services (owner of the MAC network) are increasing volume and coverage areas.
On-line debit cards are ATM cards that can be used at merchants that a network has signed up to accept the card. Often, the card can be used at both a regional network and a national network merchant. For example, a bank issuing a Pulse ATM/debit card could also have the Maestro or Interlink logo on the card, making the card accepted at merchants who accept Pulse cards for purchases and at merchants accepting Interlink or Maestro.
When a cardholder makes a purchase at a merchant signed up by his regional network, the regional network switches the transaction. National networks come into play when the cardholder makes an on-line debit purchase outside his or her network's area or the merchant is signed up for Interlink or Maestro only. For example, if a cardholder travels from Chicago to New York, the cardholder would have to use a merchant signed up to accept Maestro or Interlink to make an on-line debit purchase.
Up 59% in a Year
Though still comprising a small total of all purchases, point-of-sale debit transactions, including automated clearing house transactions, have soared in recent years. There were 51.2 million POS transactions last June, a 59% increase from the previous year. Terminals that read on-line debit cards almost doubled in the same period, to 344,000 terminals from 155,000.
But since most debit purchases are regional and outside the national networks, some wonder if and when Maestro or Interlink will make a splash.
"Maestro and Interlink are not going to be much of a factor in the debit card business for quite some time," says Charles Raphael, first vice president and director of retail delivery systems at NBD Bancorp. "People are going to use their debit card 95% of the time in their own market."
Because debit purchases tend to be through local networks, banks' efforts to promote debit will be local in nature, favoring regional networks. "As debit begins to explode, there is a natural tendency to operate in the marketplace you work in," says Ron Braco, senior vice president of electronic banking for Chemical Banking Corp.
Braco says that debit card use and marketing will probably mirror that of ATM use and marketing: "We market Cirrus and Plus much more from a convenience point of view, as regional networks market themselves as a part of your daily life," he says.
Traditional debit market segments have been local merchants for which debit is a cash substitute - primarily supermarkets and gasoline stations. Broadening the merchant base still remains a big challenge. "(Interlink and Maestro) will probably have to develop relationships directly with merchants, particularly national or super-regional (retail) chains that operate over several different networks," says Liam Carmody, president of Carmody & Bloom, a New Jersey-based consulting firm.
For their part, Maestro and Interlink say they are broadening market acceptance. Interlink boasts that it has 50,000 merchants operational, and Maestro 32,000. "We're getting out of the supermarket and gasoline merchant segments and now starting to penetrate other segments," says Arthur Kranzley, president of Maestro.
And for its part, Interlink says it is broadening quickly from its California base. "The majority of our merchant locations are outside of the west," says Janet Pruitt, Interlink senior vice president. Pruitt says that by year's end, 18 million out of Interlink's estimated 30 million cards will be outside the West Coast.
Maestro and Interlink have one advantage many networks do not: Maestro and Interlink transactions generate interchange fees, the percentage of a card purchase that a card issuer receives in return for bearing the risk of the transaction. Only now are regional networks instituting surcharges and interchange fees for their debit programs, in hopes of giving banks an incentive to issue debit cards.
The wild card in debit is off-line cards - ATM cards with a Visa or MasterCard logo and that also generate interchange fees. Since an off-line transaction is not deducted from a consumer's bank account immediately, the card-issuing bank gets reimbursed for bearing risk, as it does with a credit card purchase.
Since there's incentive to issue off-line cards, many card issuers are pushing the Visa check card and MasterMoney cards. Visa reported a 34% increase in the number of Visa check cardholders at the end of the third quarter of 1994, to 17.8 million cardholders. MasterCard, which got a later start in off-line debit than Visa, estimates it will have 6 million MasterMoney cards in circulation by year-end, compared to 3.8 million a year ago.
The other big advantage of off-line cards is that the infrastructure is already in place to accept them. Any merchant taking MasterCard or Visa credit cards must accept MasterMoney and Visa Check cards; the transaction is switched through Visa's or MasterCard's network, as with any credit card purchase. Also, on-line cards require a personal identification number, as does an ATM transaction. But merchants don't have to buy a personal identification pad for off-line cards, which work just like a credit card transaction.
How on-line cards will fare against off-line cards determine the fate of networks in POS debit. Off-line cards represent Visa and MasterCard transactions. EFT network executives, however, hope that off-line's popularity will drive on-line transactions, as consumers get used to paying for purchases with an ATM card. Differences between on-line and off-line will blur and eventually disappear as on-line cards become the norm.Largest POS Debit Networks
1. Interlink 18,800,0002. Explore 5,500,0003. MAC 3,900,0004. Jeanie 3,487,0005. Most 3,040,0006. Honor 2,707,8247. Cactus 1,954,6298. Pulse 1,617,8829. The Exchange 1,459,26910. NYCE 1,114,29711. Yankee 24 662,60012. X-Press 24 557,27313. Cash Station 470,00014. Tyme 463,20015. Magic Line 410,00016. Shazam 399,28217. BankMate 344,93818. Instant Teller 300,00019. Money Station 278,28520. MPACT 175,000
Note: Figures are for June, 1994.
And ultimately, consumers are not concerned with off-line versus on-line or Interlink versus a regional network, says Tom Bass, president of The Exchange, an EFT network based in Washington State. "I don't think people really think of it as, 'Is it Exchange or is it Visa?'" Bass says. "(The customer's) perception of how this mark is flying around is a lot less relevant than the marketing guys think it is."
One or the Other
Much of Visa's and MasterCard's energies are being poured into convincing banks to choose Interlink or Maestro. MasterCard has made a point of bundling its debit products, packaging its Maestro, MasterMoney and Cirrus programs in one package. "Banks are beginning to wrap a lot of services around the deposit account," says Maestro's Kranzley. "(There's interest) on banks to package as many services that will represent the bank relationship."
In December, MasterCard's board voted to permit Maestro issuer duality, allowing a bank to issue both Maestro and Interlink. But since Interlink doesn't allow duality, MasterCard's gesture was merely symbolic. Credit card loyalties run deep, and heavy MasterCard credit card issuers tend to favor Maestro, and vice versa. Chemical, issuer of the Shell MasterCard and one of MasterCard's largest U.S. issuers, recently announced it would participate in the Maestro program, as well as MasterCard's MasterMoney off-line debit program.
"Banks are all over the lot," says consultant Carmody. "The allegiances from an issuing standpoint between Interlink and Maestro are along traditional lines of whether they are a Visa or MasterCard bank."
Banks have the same type of allegiances to ATM networks - even more so, because banks own the vast majority of them. But such networks are following the path of banks as a whole, with large networks buying up smaller ones. Such network consolidation will scramble the debit picture further. The main effect of consolidation, say industry observers, is that network consolidation gives each network wider coverage. Network X buying out network Z gives network X point-of-sale debit terminals in areas where it had none before.
Cardholders, of course, gain the same wider coverage. They can make on-line debit purchases at merchants farther from their homes. And ultimately, say observers, that means fewer transactions for the national networks. It's unlikely that the national networks are going to get shut out entirely. But there have been noises that Visa and MasterCard may be worried. In November, MasterCard surprised the banking industry by buying the BankMate network in Missouri. MasterCard says it bought BankMate to extend its expertise from the Cirrus/Maestro networks, but some saw it as MasterCard protecting itself.
Although BankMate is small, it could be the first of more network purchases; Visa has been rumored as a strong candidate to buy The Exchange network. Industry observers say such moves could be a matter of Visa and MasterCard making sure they have a piece of the action.
"Clearly there's going to be fewer regional networks," says NBD's Raphael. "They're going to lose what was a Maestro/Interlink transaction. The more (networks) consolidate regionally, that's less food for MasterCard and Visa."