Wednesday was a milestone in payment systems competition: the expiration of an antitrust decree regulating the debit point of sale market.
In effect since 1990, the decree arose out of a lawsuit by 13 states that put an end to Entree, a joint venture of MasterCard and Visa.
A rare example of antitrust enforcement in the payment systems area, the decree raises two questions: Was it successful, and what does it mean for future payment systems competition?
The point of sale form of payment system was relatively uncommon in the United States until the mid-1990s. POS debit offers the promise of replacing many transactions done by cash or check, which dwarf the number of credit card transactions. POS debit thus offered greater efficiency and lower cost for both merchants and issuers.
POS is very well developed in Europe and Japan-a contrast with the situation in the United States. Since the 1970s, scholars and banking analysts have predicted the emergence of large-scale systems in this country.
They were wrong-a fact that was particularly puzzling because in many respects POS offers significant advantages over other payment types. For the consumer who does not want to carry cash or checks, debit is a convenient and safe alternative (though some people may regret the loss of float). For the merchant, a fully implemented POS system promises a reduction in the costs associated with check processing and making bank deposits, plus faster funds availability and fewer bad checks.
Financial institutions gain because of smaller check volumes, lower transaction costs, and a wider range of services for customers.
There were no significant technological barriers to POS in the 1980s. Automated teller machine and credit card networks had the necessary computer systems and access to consumer accounts. Many regional ATM networks considered entering into POS at that time.
Yet there were only a handful of networks in the 1980s, for a number of reasons. Although merchants may have desired POS, only the banks were in a position to form networks and issue cards.
Yet the incentives of the banks were mixed. They feared in part that POS would cannibalize their lucrative credit card programs. And there was much controversy over who would bear the costs-merchants and bankers saw each other as the real beneficiary of POS and therefore tried to place the pricing burden on each other.
The prospects for POS appeared to change in 1987 when Visa and MasterCard announced the creation of their Entree debit venture. Visa had earlier acquired Interlink of California, the only significant regional POS network. At about the same time, MasterCard and Visa had gained controlling interests in the two national ATM networks, Cirrus and Plus, respectively.
In Washington, the Justice Department reviewed the unprecedented joint venture but declined to challenge it.
Thirteen state attorneys general were less sanguine and brought suit in 1989, charging that MasterCard and Visa had violated the antitrust laws through the formation of Entree, their acquisitions of interests in Cirrus and Plus, and Visa's acquisition of Interlink.
The states claimed these actions would retard the development of POS debit. If POS prospered, the associations may have reasoned, consumers might begin using POS as an alternative to the relatively high-cost credit card systems. POS cards, unlike credit cards, typically did not charge annual fees.
Entree, the states alleged, was a combination of the five most likely entrants into the POS market. And MasterCard and Visa were accused of agreeing not to introduce their own separate POS systems to compete with Entree.
The states maintained that such a large national network would inhibit entry by the smaller, regional ATM networks. The states also challenged provisions in the Entree agreement that limited membership to banks, thereby excluding the likes of Sears/Discover and American Express.
The antitrust authorities sought divestiture of Cirrus by MasterCard, and of Plus and Interlink by Visa, as well as an injunction against the implementation of Entree.
When the suit, State of New York v. Visa, was filed, Entree had yet to clear a POS transaction and had signed relatively few merchants. Within a year, Visa and MasterCard settled and agreed to abandon Entree.
Visa kept Interlink, and both card associations were permitted to keep their interests in the ATM networks.
The most interesting aspect of the decree was the anti-duality provisions that compelled Visa and MasterCard to keep bank memberships in their new POS services separate. (Duality was permitted on the merchant- acquiring side).
From the states' perspective, duality was the source of much competitive mischief in the credit card arena. Duality was seen as dampening MasterCard and Visa's drive to compete-except in establishing a united front to stifle or delay innovation from nonbanks such as Discover, American Express, or AT&T.
Under the decree, MasterCard and Visa set different courses. Visa used Interlink as its brand, attempting to build from its base in California. MasterCard created a competing on-line debit brand-Maestro-and established alliances with regional ATM networks. Both have experienced moderate growth, having signed up hundreds of merchants and bank issuers.
By the mid-1990s the states had appeared generally correct in their assessment that two exclusive networks could succeed (and that network competition was important). Without the specter of a dominant national network, almost 25 regional POS networks-primarily an extension of ATM networks such as Pulse, Star, and NYCE-formed and became leaders in POS development.
Interlink and Maestro have been worthy competitors. The anti-duality rules promoted vigorous competition in product development, promotion, and pricing. The competition has been more significant than in the credit card market where duality prevails.
The two systems compete vigorously to sign banks. Interchange and other fees are far less than those on credit cards.
Of particular significance, Interlink initially charged a "transaction service fee" of 2 cents per transaction conducted by an Interlink cardholder at an Interlink terminal, even if the transaction was actually processed through a regional network. When Maestro entered without such a bypass fee, Interlink eliminated its fee.
In 1994, Maestro asked the states for permission to eliminate its anti- duality rule, allowing banks to issue both cards. The states demurred, saying both networks appeared to be thriving in terms of transaction volumes and merchant participation.
Moreover, competition from nonbank participants like Discover or American Express was unlikely because debit card services are necessarily linked to a demand deposit account.
Most important was the states' concern that debit duality "would bring to an end the aggressive intersystem competition between the two bank card associations" in the POS market.
But the competitive landscape of POS has changed radically over the past two years. Starting in the mid-1990s, Visa and MasterCard began to focus their POS attention on an older type of POS-off-line debit.
Off-line debits are handled like credit card transactions and are sent through the credit card system. On-line cards offer greater security for the consumer and bank:
On-line cards subtract funds from deposit accounts on the same day; off-line debits can take three days to complete.
Off-line cards require the consumer to sign a transaction receipt; on- line cards require the consumer to enter a personal identification number.
The national off-line debit products are known as Visa check and MasterMoney. (It is interesting to note that each of these, like Maestro and Interlink, is exclusive).
They have existed for over a decade, but only in the last two years have both associations invested heavily in them. These programs have accordingly taken off like gangbusters. (Visa check has used Bugs Bunny and Bob Dole as spokesmen, a sign that the products are entering the mainstream).
Cards and transactions have more than doubled within a few years, and off-line transactions now exceed on-line debits (1.6 billion to 1.1 billion). The off-line growth has been so remarkable that some network executives and commentators have predicted the extinction of on-line debit.
On-line cards permit the consumer to secure cash as part of the transaction; off-line cards do not. MasterCard and Visa require all merchants that accept their credit cards to accept their off-line debit cards-a tying arrangement that is currently the subject of a retailers' antitrust suit.
For consumers, off-line debit has raised concerns about security and fraud, stemming from the lack of a PIN requirement. In several reported cases, thieves have emptied cardholders' checking accounts with lost or stolen off-line cards. The U.S. Public Interest Research Group has called off-line debit a "sloppy bank product" and "completely unsafe." There have been calls for greater regulatory protections.
But most divisive issue between merchants and banks is about pricing.