For years Pulse EFT Association argued that its status as a bank-owned PIN debit network made it more attuned to banks' needs than networks that had to answer to shareholders.
That argument has been untenable since January of last year, when Morgan Stanley's Discover Financial Services LLC bought the Houston network. Now, Pulse's president, David Schneider, is emphasizing another difference between his network and others: It is not owned by a company that also does merchant processing, so it avoids pricing conflicts of interest between banks and merchants.
"Fundamentally, what the network has to decide is who pays what to whom," Mr. Schneider said in an interview last month.
Marshall & Ilsley Corp.'s Metavante Corp. own the PIN debit networks NYCE, First Data Corp. owns Star, and Fiserv Inc. owns Accel/Exchange. At these companies, one unit contracts with banks for debit network services, while another contracts with merchants to process transactions at the point of sale.
Mr. Schneider did not use his rivals' names, but he said such a setup creates an inherent tension when it comes to setting interchange levels.
"When you are in the business of providing merchant processing, and you have to deal with merchants, many of those issues that merchants are concerned about create problems from a network perspective, when you're trying to also manage the interests of financial institutions in the role of issuing cards, and viewing these products as sources of revenue," he said.
First Data, Fiserv, and Metavante would not discuss Mr. Schneider's remarks.
Of course, Discover is known as the most merchant-friendly of the four major credit card networks, because its fees are the lowest. But Mr. Schneider said Discover keeps Pulse on a long leash.
"We certainly look for ways to work collaboratively with Discover to bring new products to the market," Mr. Schneider said. "But at the same time, Discover made a commitment at the time they acquired Pulse that we would remain independent."
For most of its 25 years Pulse, which caters to small and midsize institutions, focused on its home state of Texas. But in the last few years competition in the debit market has been fierce, and the notion of a regional network has pretty much been laid to rest with networks bidding for banks' business anywhere they might be.
For example, Pulse, now has bank issuers in the Southeast (BankAtlantic Bancorp Inc. in Fort Lauderdale, Fla.), the Northeast (Fulton Financial Corp. in Lancaster, Pa.), and the West (Silver State Bank in Las Vegas and Oak Valley Community Bank of Oakdale, Calif.).
Also, even though there are still thousands of small and midsize institutions, consolidation in the banking industry has left a handful of megabanks in control of millions of cardholders. Mr. Schneider said he expects that consolidation to taper off, for regulatory and other reasons. "There's only so much you can buy."
Pulse works with some large banking companies, such as U.S. Bancorp, JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co.
Tim Sloane, the director for debit advisory services at Mercator Advisory Group Inc. of Waltham, Mass., said that though PIN debit is still growing rapidly, the networks need to figure out how to participate in emerging markets like Internet payments.
He also noted that Visa U.S.A. and MasterCard Inc. have been siphoning off some low-value PIN debit transactions with innovations such as signatureless transactions and contactless cards.
"Today those markets are small, but they're growing fast," he said. "I think Pulse, like all the other EFT network operators, need to figure out how they're going to take PIN debit and extend it into these new environments. They don't have to do it today or this year, but they have to do it pretty soon."
Mr. Schneider said he did not see contactless transactions as a threat to PIN debit, because the terminal captures the same information whether through a swipe or a wave. In fact, Pulse has developed standards for contactless PIN debit, and it has talked with banks about contactless technology.
"We believed that the same fundamental drivers that make PIN debit attractive in a card swipe environment are also going to be present in a contactless environment," he said.
Signatureless transactions, where no authentication is needed for purchases under $25, is a "business decision" on the merchant's part to help speed customers through the checkout lines, Mr. Schneider said. But this likely would not be a major competitive advantage, "because keying in your PIN doesn't take a lot of time."
He agreed that PIN debit has not penetrated the Internet, even though Pulse and the other EFT networks have various options, but he said that moving PIN debit to the Internet requires care, because of the fraud risk.
"I think a lot of people would argue that it would have been a little more helpful if more thought had been given to the rollout of card acceptance into the Internet in the first place," he said.
"Not really thinking hard about those security issues, and just pushing for acceptance, which drives transaction volume … resulted in a lot of unhappy consumers, a lot of unhappy merchants, a lot of fraud losses that ended up being eaten by issuers and merchants."
Worse, online fraud "has frankly created concerns about consumers' overall feelings and confidence of the payment system," Mr. Schneider said. "We're definitely interested in avoiding the mistakes that we think have been made in the past, in terms of extending payments into the Internet, and we're going to do it the right way."
