MasterCard Internationals agreement to provide switching and settlement services for the Pulse EFT Association, the nations third-largest electronic funds transfer network, will give the card association a substantial foothold in the U.S. online debit market.
The Purchase, N.Y.-based MasterCard will officially take over the switching operations in the third quarter of next year, when the Houston-based Pulses contract expires with J.P. Morgan Chase & Co.
The price of the five-year agreement, announced Thursday, was not disclosed, but it will almost double MasterCards debit volume. It also signals a big return by MasterCard to PIN-based debit in which a customer authorizes a transaction by entering a personal identification number into a keypad in the United States.
The association bought BankMate, a small regional debit network based in St. Louis, in 1994 but sold it in 1997 to the Honor network, which eventually was bought by the EFT leader, Star Systems, which is now owned by Concord EFS.
MasterCard said it expects to process approximately 1.2 billion transactions on the MasterCard Debit Switch this year. With the addition of the Pulse transactions late next year, the switch is expected to process more than 2.2 billion a year.
Most of MasterCards current debit transactions involve offline, or signature-based fund transfers. Banks prefer the signature-based transactions, which generally have higher interchange fees associated with them, but PIN-based debit is gaining popularity as merchants increasingly accept debit cards at the point of sale, in part because of the much lower transaction fees.
Ruth Ann Marshall, the president of North America MasterCard International, said that while the associations credit transactions are still growing, debit is growing much faster, at twice the clip, year over year then credit.
Debit has been used in the past at grocery stores, gas stations, and drug stores, and the average transaction cost was about $40, but were starting to see debit take on more of a life in the small transaction, and dollar amounts below $20 at places like fast food restaurants, vending machines, and even toll booths, she said. We see cash and checks as being the biggest competitors.
Pulse operates in the South and the Midwest. Ms. Marshall said MasterCard is looking to partner with debit networks in other regions and in other countries. Were a global company.
MasterCards PIN-based processing network, called Maestro, is extremely popular in Europe, but in the United States it is generally used only when customers use it outside their home region. For example, if someone used a Chase MasterCard, which has the Maestro and NYCE logos on the back, in California, the transaction would be processed through Maestro, because NYCE does not operate on the West Coast.
Paul Martaus, the president of Martaus & Associates, an electronic payments consulting firm in Mountainhome, Ark., said this move signals another realignment in the industry.
These guys are all looking for a way to preserve their way of life, he said. MasterCard and Pulse are both facing life-threatening competition, and it would be appropriate for this alignment to take place, and Im surprised it hadnt happened earlier.
Both companies stressed that this is purely a vendor relationship. MasterCard says it does not own and does not plan to buy a stake in Pulse, which operates as a member-owned cooperative.
The board [of directors] of Pulse explicitly decided that the organization is not for sale, said Stan Paur, Pulses president and chief executive officer. The decision on MasterCard should be viewed as distinct from the running of Pulse as a business. MasterCard is going to be our business partner for technical aspects of our business.
I think its important not to read into this decision, he continued. Its not an overt marriage between two companies.
Mr. Paur said the deal is simply a change in vendor. Pulse will be the call center, he said. We will establish the rules for the program, well set the fees, well analyze new product offerings, and were going to continue to provide value added services such as research, educational seminars, and lobbying support on EFT issues.
Morgan Chase, which now conducts Pulses switching in Houston, inherited the switching and settlement operations through various acquisitions that date back about 14 years. The contract expires September 2003, when MasterCard is expected to take over.
We have enjoyed a relationship with the Pulse EFT network since its inception 14 years ago, and we expect our relationship to continue, Morgan Chase said in a press statement. However, outsourced debit switch operations is not a core part of Chases retail technology business. We will continue providing switching and settlement services for Pulse through September 2003, fulfilling our contractual obligations.
Visa International also competed for the contract, but MasterCard won out because of its state-of-the-art switch services, Mr. Paur said. One of the big factors was MasterCards redundant operating platforms, which claim to have 99.999% availability, he said.
MasterCard opened a data center and processing facility last year, and it has a data center and a processing facility in New York. Pulse and MasterCard say that, barring natural disasters in both regions, the network should virtually never be down.
Pulses network has occasionally gone down for testing or because of weather problems. For example, it was down for a number of hours in June when Houston was flooded and the processing operation was moved to Dallas.
Pulse has grown significantly in the last year through two significant acquisitions. Early last year, when it bought the Cincinnati-based Money Station, Pulse expanded its primary service area to 22 states stretching from the Canadian border to the Gulf of Mexico. Pulse acquired another 500 financial institutional members last week when it bought Tyme Corp. of Brown Deer, Wis.
The other two major networks First Data Corp.s NYCE, which operates in the Northeast and Midwest, and Star Systems, which operates in most of the country, except the northeast have also been growing through acquisitions.
