Despite PIN-Debit Growth, Wal-Mart Still is Not Satisfied

  The nation's largest retailer is making headway in promoting the use of PIN debit over more costly forms of payment. But Wal-Mart Stores Inc. still is unhappy with the U.S. interchange system.
  Bentonville, Ark.-based Wal-Mart says PIN-debit purchases in its stores are growing by about 17% annually. PIN-debit volume is 6% higher than credit card volume and is second only to cash in the way customers initiate payment.
  A Wal-Mart report also suggests that prompting customers to enter PINs is helping reduce signature-debit volume. PIN debit now accounts for 22% of Wal-Mart's in-store payments, while signature debit has the lowest transaction volume of any payment type and its use is not growing in Wal-Mart stores, the company says.
  PIN debit carries much lower interchange rates, especially for high-volume retailers, than do credit or signature debit. Merchant acquirers pay interchange to card issuers and pass the expense on to their retailer customers.
  Some observers hail Wal-Mart as the retailer that successfully challenged Visa USA's and MasterCard International's policies that required merchants to accept the brands' signature-debit cards if they accepted their credit cards. The class-action lawsuit led by Wal-Mart succeeded in gaining the option to accept signature-debit cards, which the merchants believed imposed unnecessarily high interchange rates. The litigation resulted in temporarily lowering signature-debit rates, but only for high-volume merchants.
  Even so, Denis Bouchard, Wal-Mart director of payment systems, told participants at a Federal Reserve Bank of Chicago conference in May that the 2003 settlement did not change the retailer's view that interchange is unacceptably high.
  Another national retailer, Seattle-based Starbucks Co., complained about PIN-debit interchange. PIN-debit use is growing at Starbucks, but the low-ticket values at its coffee shops make it an unwanted payment option, says Richard Lautch, Starbucks vice president and treasurer. A $3 Starbucks purchase equates to a high, 3.3% payment fee, he says.
  Bouchard admits the growing use of PIN-debit cards drives out some costs for Wal-Mart. But he says there are fears that PIN-debit interchange will rise until it matches signature-debit rates.
  The largest electronic funds transfer networks, which set PIN-debit interchange, are competing to offer the most revenue to debit card issuers, Bouchard says. "They all tell the same story. If I don't raise my rates, I will lose customers," he says.
  Wal-Mart gets a substantial rate discount because of tiered rate structures that all major EFT networks have adopted.
  Bouchard's remarks seem to foreshadow new merchant attacks on the interchange system. "It's not a matter of if, but when," says a Visa executive, referring to another lawsuit over interchange.
  Paul Tomasofsky, president of Montvale, N.J.-based Two Sparrows Consulting, is skeptical that merchants would opt to create their own payment system to counter rising interchange expenses. "Payments are not something [merchants] always want to be in," he says. "Payments are a cost of selling."
  MasterCard's general counsel, Noah Hanft, recently criticized retailer groups for suggesting that interchange amounts to a "hidden tax" on customers. Interchange, Hanft argues, is reasonably priced for a product that guarantees payments to merchants and prevents payment fraud.
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