After a sluggish start, debit cards have begun to turn the corner of consumer and merchant acceptance, according to an article in the Federal Reserve Bank of Kansas City's Economic Review.

Gordon H. Sellon Jr., assistant vice president and economist at the Federal Reserve Bank, and John P. Caskey, a Swarthmore College economics professor and visiting scholar at the bank, concluded that only "competitive pricing" stands in the way of near-total acceptance of the new payment alternative.

"Debit cards are most likely to gain a significant share of the payments system in specific circumstances where consumers value its convenience and merchants see it as lowering costs or enhancing sales," they wrote in the current issue of the Kansas City Fed quarterly.

From 1990 to 1993, on-line and off-line debit transactions grew at an average annualized rate of 30%, to more than 700 million in 1993, they pointed out. At the same time, the number of on-line terminals tripled.

But consumers were still using debit cards for only a small percentage of transactions, the researchers said.

Growth will depend on marketing, technological change, and pricing adjustments in existing payment services.

The two researchers see the pricing of debit relative to other payment methods as "the biggest hurdle to widespread debit acceptance."

Because the prices of various payment methods are not sufficiently differentiated, consumers have little incentive to choose debit cards over cash, checks, or credit cards, Mr. Sellon and Mr. Caskey said - unless they don't have full access to the other payment methods.

"Existing payment methods cost so little for the consumer to use that it is difficult to establish a lower price for debit without an outright subsidy for its use," they wrote.

And if banks try to charge fees per transaction, consumers may balk. However, if banks established a transaction-based pricing structure for merchants, more may decide to accept on-line and off-line debit, the researchers said.

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