Visa's new debit card, a highly touted innovation that has become a bone of contention in pending antitrust litigation, has proven spectacularly unpopular.

Most banks refuse to touch the latest version of the Visa check card, officially introduced last October and known as Visa check 2, or VC2. None of the large banks represented on Visa U.S.A.'s board of directors, which had to approve the product launch, has agreed to issue it.

Recriminations about costs and adverse competitive implications started shortly after Visa unveiled its VC2 plan last May. The product landed with a thud uncharacteristic of the biggest and most successful of card organizations.

Large merchants do not want to accept it. Two retail chains have gone so far as to lobby their banks against issuing it.

The regional automated teller machine networks, which tend to be bank- owned associations like Visa, loathe VC2 because the card works only on Visa's Plus network.

Now that the Justice Department is boring down on debit services as part of its antitrust case against Visa and MasterCard, taking up where a Federal Trade Commission inquiry into VC2 and related issues left off, there seems little hope for turning around the situation soon.

But Visa U.S.A. officials vow to press on with the card and the selling of its combination of on-line and off-line options.

VC2 can be used at any Visa-accepting point of sale - either electronically, with personal identification numbers, or in credit-card- like signature mode. It thus bridges the gap between previously separate debit approaches, known within Visa as Interlink and Visa check.

Only two community banks-Saratoga National of Saratoga, Calif., and Pioneer Trust of Salem, Ore.-have signed on to issue VC2.

Larger banks may be recoiling because of the federal antitrust suit and its uncertain outcome. But business issues may also be interfering.

"So many people are focused on Y2K and what they have to do with that, there is not a compelling enough reason to reissue their plastics to move into the new check card arena," said Donna Embry, senior vice president of Vital Processing Services in Tempe, Ariz., a merchant processing company jointly owned by Visa U.S.A. and Total System Services Inc.

The VC2 is "not something you can automatically embrace, like the off- line check card," Ms. Embry said. It was easy for a bank to embrace that, she said, "because it had interchange income."

Meanwhile, with Visa rules prohibiting VC2 issuers from putting the logos of regional ATM networks on the cards, bankers loyal to those networks are likely to keep up their resistance.

Paul Frank, senior vice president of Mellon Bank Corp. and division head of Mellon Network Services, said "there is nothing driving a sense of urgency to make a decision" on VC2.

"Without that sense of urgency-some compelling reason that says, 'I need to do it now,' the fact of the matter is it won't take off. It probably won't happen until some of the major issuers get on board."

Mr. Frank said the requirement that VC2 issuers rely exclusively on Visa's network seems onerous and forces a choice that most banks would prefer to delay.

He said that as a result of consolidation and geographical expansion, major banks are trying to rationalize or streamline their ownership interests in multiple payments ventures.

"There are some hard decisions to be made," Mr. Frank said, "in large part also driven by the economic value of those investments."

A Visa executive said the association understands the sensitivities and is taking a longer-term perspective for getting VC2 to catch on.

"There are a number of provocative issues the banks have to address with this product," said Tony McEwen, Visa U.S.A. executive vice president for deposit and cash access products. "It's not a decision that anyone takes lightly."

"We think Visa's role is to lead the industry to the point in 2001 when 10% of all consumer payments will be made with debit cards," Mr. McEwen said. "We feel pretty confident about the progress."

Though expectations run high that the debit card boom of recent years will continue, some industry experts do not see VC2 to be part of it.

Visa "didn't correctly calculate their market for this," said James Shanahan, a partner in the Newark, Del. office of Business Dynamics Consulting Inc. "They really need to listen to their customers-meaning the banks-and really understand what it is they are looking for."

Anita Boomstein, a lawyer at Hughes, Hubbard & Reed in New York - whose clients include credit card issuers-said the problem has more to do with the product's perceived value than with the Justice Department.

"The banks just don't see any profit incentives to push this thing heavily," she said. "It's a point of sale debit card-how much are people going to use it? Where are the banks going to get money out of it?"

Visa characterizes VC2 as a convenient addition to the payments mix.

"We believe that the check card 2 is yet another option available to consumers and to members," said Kelly Presta, a spokesman for San Francisco-based Visa. "We think it's good for competition and consumers."

On-line debit or deposit-access cards-which have been around since the 1970s, at least in the form of ATM cards-are going mainstream. As of midyear 1998, the cards were being used for 1.8 billion point of sale transactions annually, 25% more than at midyear 1997, according to Faulkner & Gray's Debit Card Directory.

Antitrust investigators at the FTC became interested in debit cards after a group of the nation's largest retailers, such as Wal-Mart Stores and Sears, Roebuck and Co., filed a class action against Visa and MasterCard.

They are challenging the "honor all cards" rule, which equires stores to take those brands of debit cards as well as credit cards. MasterCard and Visa debit cards are slightly less expensive to merchants than credit cards, but more expensive than regional ATM cards.

The retailers' lawsuit is pending in U.S. District Court for the Eastern District of New York in Brooklyn, a subway ride from the Manhattan courtroom for the state's Southern District where the Justice case was filed.

The retailers are angry about debit card fee structures and consider VC2 just the latest indignity.

The card associations set interbank interchange fees that influence what merchants have to pay their card-processing banks. A $40 sale on an off- line debit card (not VC2) would have an interchange fee of 48 cents. VC2 would lower that to 32 cents, but if the consumer used a regional ATM card, it would range between three and 10 cents, depending on the network.

Kroger Co. and Publix Super Markets, two of the biggest grocery chains, have sent letters to their banks urging them not to issue VC2.

"What banks are trying to do through Visa is dramatically increase what they get," said David Phillips, chief financial officer at Publix, in Lakeland, Fla. "They just decided to make a lot more money on this transaction. From our perspective, things work quite well with the regional networks."

Some banks have no intention of issuing check card 2.

Gary M. Jewell, senior vice president of Carrollton Bank of Baltimore, said, "I think everybody understands you cannot throw your regional networks out the door.

"I cannot afford to go out and say, 'Hey guys, take a hike,'" said Mr. Jewell, whose bank has joined 21 regional networks as part of its merchant processing strategy.

Mr. McEwen of Visa said the signing of the two community banks was "a pleasant surprise."

Elizabeth Steinberg, branch manager at Pioneer Trust in Oregon, said customers constantly call to say they want to use debit at the point of sale. She characterized the Visa product as a lower-cost alternative to joining an ATM network and paying gateway fees on cardholder transactions in other regions.

"We're piggybacking our debit card program to our ATM program," Ms. Steinberg said. "It's a tie-in with the whole customer service relationship."

David Petro, executive vice president of IBAA Bancard Inc., the Independent Bankers Association of America's card affiliate, said VC2 gives community banks without network affiliations "a competitive option" that reduces brand confusion.

VC2 may be found in very few wallets, but is nonetheless having an impact on industry pricing. The national interchange rates have given regional networks some latitude to raise fees. Two majors, Honor Technologies Inc. and MAC, have said they will increase interchange rates this year.

"It is hard to take issue with a (price) change that generates several hundred million dollars in fee income for the financial industry," said Stan Paur, president and chief executive officer of Pulse EFT Association of Houston.

"But it is also hard not to believe that such increases are likely to compel merchants to develop alternative payment systems-and more important, to cause the government to begin regulating these fees."

Visa has announced the second interchange increase in as many years. Beginning April 1, interchange on a $40 off-line transaction would rise by 12 cents, to 60 cents.

Visa's on-line point of sale network, Interlink, will raise its 10-cent fee for a supermarket transaction to 15 cents.

MasterCard International of Purchase, N.Y., is also about to raise interchange rates. MasterCard has said it does not intend to come out with a product analogous to VC2.

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