The fastest-growing part of the consumer card business is also its most contentious.

Just as Microsoft Corp. has been fighting an antitrust battle with the U.S. government even as demand for its products continues to soar, banks and their credit card associations are trying to keep legal distractions from getting in the way of rampant growth in debit cards.

By all measures, debit is on the back burner - and extraneous problems seem to be as well. Criticism of the potential fraud problems posed by debit cards has been largely silenced by consumer protection policies; two antitrust lawsuits are mired in procedural matters; and trial dates remain far in the future.

Debit cards have gotten into the wallets of about 60% of U.S. checking account customers, according to The Nilson Report, an industry newsletter. Transaction volumes surged in 1998 with both the off-line and on-line varieties of debit cards.

Now that most of the public is aware of debit cards and how they differ from credit cards, bankers have the luxury of focusing resources and attention on increasing usage.

"Debit is becoming a legitimate force in the payment system," said David Robertson, president of The Nilson Report, based in Oxnard, Calif. "This is a march toward marginalizing paper payments."

According to Nilson, transaction volume for off-line debit cards grew 49% in 1998, to $111 billion. The number of cards in force rose 24%, to 100 million.

Off-line debit cards - such as the Visa check card and its MasterCard equivalent - are the ones generating the controversy. Merchants object to the fees they must pay to accept the cards, and regional electronic funds transfer networks - most of them bank-owned like the international card associations - do not like the prospect of having some of their transactions siphoned off.

To complicate matters, Visa introduced check card 2 in late 1998, a product that can work either off- or on-line. It has been picked up by only a handful of community banks, though Visa U.S.A. expects larger banks to begin issuing after they get past year-2000 computing priorities.

On-line debit volume is rising more slowly than off-line. Sales climbed 37% in 1998, to $1.9 billion, Nilson said. Transaction volume through the automated teller machine networks rose 33%, to $64.97 billion.

Major banks have shared in the debit wealth, and as in other aspects of the banking industry, mergers have made the biggest even bigger. The two companies that formed Bank of America Corp. - the old BankAmerica Corp. and NationsBank Corp. - had been No. 1 and No. 2 in debit cards and accounted for roughly a quarter of the total. Other merger partners holding noticeable market shares were Wells Fargo & Co. and Norwest Corp., and Bank One Corp. and First Chicago NBD Corp.

Executives at top debit card banks said in interviews that a major focus in the last year was encouraging cardholders to use debit instead of cash and checks.

At PNC Bank Corp. of Pittsburgh, for example, 75% of checking account customers have a debit card, but only 45% actively use them, said Martin Hurbi, vice president and manager of the debit card department.

"It's always difficult to get someone to do something that they didn't understand before," Mr. Hurbi said. "Our challenge is to get them to experience the use of the card through a promotion, and once they experience that, they tend to use the card."

For several years, PNC has been issuing Visa check cards to every checking account customer who wants one. The bank is the seventh-largest debit card issuer, according to The Nilson Report.

Debit card marketers say they have learned lessons from earlier missteps.

Some banks caught flak for sending out debit cards unsolicited; many recipients mistook the products for credit cards, losing track of the balances in their checking accounts. Consumer advocates raised a ruckus over the seemingly limitless potential for loss on a lost or stolen card tied to a deposit account. Visa and MasterCard were quick to cap consumer liability at $50, and many banks said they would absorb losses suffered in those situations.

Through local and national advertising, the banks and card associations have been working to allay fears about security and other matters. Education programs from banks and consumer groups have taught people how to use the card and how to budget with it. Promotional arrangements among banks and retailers have helped stimulate card use.

Chase Manhattan Corp., the ninth-largest debit issuer, recently introduced one of the first cobranded debit cards with Continental Airlines. A cousin of the Chase-Continental credit card, it was announced in April and has been well-advertised. The MasterCard card has a $30 annual fee and gives customers one frequent flier mile for every $2 spent.

"The debit card has become the face of our checking account," said Beth Hirschhorn, senior vice president of new product development at Chase. "If you offer a checking account without a debit card now, it's almost like offering a checking account without a checkbook."

Ms. Hirschhorn said all Chase customers can receive a debit card, and the New York bank has issued three million of them.

Bank One created two Visa check card affinity products last year, with the Arizona Diamondbacks baseball team - it plays its home games in Bank One Ballpark in Phoenix - and Louisiana State University in Baton Rouge.

Marsha Huber, senior vice president and manager in the electronic delivery department at Bank One, said she considers the debit market "mature," and is now focused on increasing transaction volumes and adding bells and whistles.

"Banks such as ours that have been out there for a while are moving from an educational strategy to a usage strategy," Ms. Huber said. "We're trying to communicate to our customers not what (debit) is, but how it can make your life more convenient."

The Chicago-based banking company's debit card collection increased by only 100,000 between May 1998 and May 1999, to 4.2 million, but transaction volume through the first five months this year was ahead 14%.

Bank One, which added 1.3 million debit cards and 900,000 automated teller machine cards through the First Chicago NBD acquisition last October, said it had been touting the convenience of using a debit card, now that nearly all of its checking account customers have one.

Other top issuers said they might consider cobranded debit cards but were concerned about raising the costs of a product generally used for small purchases.

"The financial model for debit is very different from credit, and the question is, can you strike the right type of deal with a cobrand partner where it makes sense?" said Edward Kadletz, senior vice president for debit and ATM card businesses at Wells Fargo & Co.

Wells Fargo said its main communication challenge was convincing consumers that if there is fraud with their card, then their checking accounts will be credited.

Educational efforts for debit cards are competing for resources with what often seem to be more pressing efforts - such as combining the debit card holdings of merging institutions and reissuing some cards under new names.

Bank of America is nearly finished with this and has made promoting card usage its top priority. Cassandra McKinney, senior vice president of debit card business management, said customers tended to use on-line debit cards at grocery stores and gas stations, but do not think to use them at restaurants or retail stores, where they are more accustomed to using credit cards.

As off-line debit becomes more prevalent, Ms. McKinney said, "you'll continue to see a shift in the mix" toward those cards, which are similar to credit cards in that they require a signature for authorization and a delay in clearing time. On-line transactions occur quickly and customer authentication is by way of personal identification number.

Bankers say they are neutral on the off-line versus on-line question, or whether transactions flow through regional networks or MasterCard and Visa. Larger banks' loyalties - or dues payments or service fees - go to all those organizations.

The class action filed by Wal-Mart Stores Inc. and other large retailers to challenge Visa's and MasterCard's debit card policies is working its way slowly through U.S. District Court for the Southern District of New York. The Justice Department's antitrust trial against the national bank card associations, which will likely include a debit component, is scheduled to begin next February in U.S. District Court for the Eastern District of New York.

In 1998, 66% of debit card transactions were on Visa's and MasterCard's off-line products, according to The Nilson Report. Visa says one out of every four of its transactions is debit.

"As long as Visa and MasterCard debit cards offer the attractive interchange rates that they do, no big bank in the country is going to walk away and leave that money on the table," Mr. Robertson said.

A 1998 study of the debit market by the research firm BAIGlobal Inc. in Tarrytown, N.Y., found that consumers were still confused by association- branded cards that were other than credit.

Lorraine E. Fischer, senior vice president of debit card products at First Union Corp. in Charlotte, N.C., said a Visa logo on the front of the card reduces confusion over acceptance at retail locations. "When our customers are face to face with merchants, they want that comfort level that it will work when they start the purchase," she said.

The face of debit cards may change further. Visa recently decided to let banks petition for permission to move the Visa logo to the back, at least on a trial basis. Some banks, including Chase, say they will experiment; First Union is one that is not interested.

Merchants are usually charged a flat fee for an on-line debit transaction, and a percentage of the sale amount for an off-line payment. According to Visa, a $40 transaction with an off-line debit card would cost a merchant 47 to 50 cents; the same transaction with Visa check 2 would cost 25 to 27 cents. With an on-line card routed through the regional networks, the cost would be about 10 cents.

Some merchants, like Wal-Mart, train their clerks to process the transaction on-line and automatically ask the customer to key in their personal identification number, according to Steven Karp, senior consultant at First Annapolis Consulting in Linthicum, Md.

"The current economics of the debit market have put people at odds with each other," Mr. Karp said.

Industry experts say both forms of debit will have a place in the market, even if off-line cards are currently looming larger. Both attack the common enemies of cash and checks, and the war is far from over.

"There will be a place for checks for a long time," said Ms. Fischer of First Union. "With debit cards and on-line bill payment, we do see a reduction in the number of checks being used by customers, but they're definitely still being used." n

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