Visa and MasterCard are promoting signature-based debit cards while merchants are opposing them by pushing PIN debit.
At least one analyst believes that the momentum in that battle is about to shift in favor of signature.
The analyst, Craig Peckham, of Jefferies & Co., estimates that banks earn four times more revenue on signature debit than on PIN transactions and said that they often lose money on PIN-approved deals. Citing a survey of 250 banks his firm conducted, he said that that 20% of debit card issuers had incentive programs or penalty policies that encourage signature debit.
Whether those programs can by themselves determine the outcome of the battle is an open question. But Mr. Peckham believes them to be important enough to warrant a significant rollback in his growth expectations for the PIN side of the business.
The processing company whose fortunes ride on PIN-based cards says it is not alarmed.
"The consumer prefers by a wide margin the use of PIN at the point of sale," said Ronald V. Congemi, the senior vice president and president of network services at Concord EFS Inc. The Memphis firm has put itself at the center of the tug-of-war between signature and debit by buying up the Star, MAC, and Cash Station networks and rolling them into one.
Some experts say PIN debit is a doomed product. They point to the dominance of signature transactions and the marketing muscle banks and card associations put behind them. (One bank is running a sweepstakes that urges cardholders to "Skip the PIN and win!")
Others see it the opposite way, agreeing with Mr. Congemi that the PIN debit system is faster and more secure and that is perceived as such by consumers.
Also, PIN debit transactions are growing slightly faster. According to The Nilson Report signature debit transactions represented 68% of the market last year and volume rose 26%, to 6.69 billion. PIN, which has 32% of the market, rose 29%, to 3.91 billion.
In dollar volume, the growth was the same: signature rose 26%, to $263.77 billion, and PIN 26%, to $150.28 billion.
As debit card use continues to surge, the stakes grow higher for all constituencies: not only Concord but also the banks. Banks earn more money from signature debit transactions than from PIN and the merchants, which pay far more per transaction for signature. Mr. Congemi said banks make 28 cents per transaction from signature debit versus 10 cents from PIN.
Both sides of the debate agree that all predictions may be thrown off by the outcome of the Wal-Mart class action against Visa and MasterCard over debit card fees. Since merchants are suing over signature debit prices and the right to refuse signature debit, the courtroom, not the market, may be the ultimate arbiter.
No matter how events play out, Mr. Congemi said in an interview Friday that overall growth in the debit market will work to his company's advantage. Supporters of signature debit are taking "more overt actions" than before to promote their cause. But fewer than a third of the nation's 4.7 million merchants today have the card readers to accept PIN debit, so there are opportunities to sign up retailers, he said.
"There's no question which transaction is more secure, there's no question which transaction is faster," he said. "This is a pricing issue. We're really arguing about price."
A handful of banks have begun to surcharge customers when they use PIN debit.
But Mr. Congemi said: "Institutions that attempt to take that too far by steering them to another product probably will not be too successful. Consumers tends to talk with their feet."
These arguments were not enough to sway Mr. Peckham cut his rating of Concord last week to "hold" from "buy."
"The overall debit opportunity remains quite favorable," Mr. Peckham wrote in a research note to investors. But "among public companies, Concord EFS is the closest thing to a pure play on PIN-debit and therefore will feel the most direct impact from this change in market dynamics."
Because of those incentives, Mr. Peckham reduced his projections on Concord's sustainable future growth rate to 20%, below the 30% consensus outlook.
Mr. Congemi cited his own company's research to counter that banks do make profits on PIN debit, to the tune of 10 cents per transaction. "And you know they are not making that on checks," he said.
"I can guarantee you it is not a money-losing proposition," Mr. Congemi said. "With our interchange rates, there is not a single institution that is losing money on our transactions."
Theodore Iacobuzio, the director of the consumer credit practice at the Needham, Mass., consulting firm TowerGroup, predicted that there will be more PIN than signature debit transactions within five years.
"The value proposition is simply too strong for retailers," he wrote in a debit card study released last week.
But immense uncertainty surrounds the debit market, Mr. Iacobuzio said in an interview. "The Wal-Mart case could tear up this whole thing."
Concord is by far the dominant processor in the PIN-debit market, with a 61% share of transactions, Mr. Iacobuzio said. But three other networks have at least 10% share. And since there are few independent networks remaining that could be acquired - 5% of the total market, he said - "there's not a lot of places for them to grow."
Nor will signature debit diminish, because smaller merchants may be unwilling to bear the expense of installing additional equipment. Plus, some businesses, like restaurants, more naturally lend themselves to signature transactions.
"All things being equal, we're kind of at an impasse," Mr. Iacobuzio said, "but all things are not equal, because the judges are looking at it."
Concord shares closed Friday at $31.14, down 4% on the week.
