PIN-Debit Growth Continues

  But Will it Blossom Into the Leading Form of Debit?
  PIN debit, the older yet smaller sibling to signature debit, continues to reach out to new merchant segments as retailers look to reduce their costs and risks associated with payment card acceptance. Yet despite continued expectations of double-digit growth for years to come, PIN debit is unlikely to rule the payments landscape any time soon.
  Still, PIN debit is poised to consume a bigger share of the payments pie. While generally acknowledging that cash and checks will not go away altogether, most experts believe PIN debit will continue to chip away at such types of transactions while also taking a bite out of the share of payments now done with credit cards.
  "We see a real opportunity for all forms of debit to continue to thrive," says David Schneider, executive vice president of corporate development at Pulse, the electronic funds transfer network owned by Discover Financial Services. Pulse, the third-largest PIN-based point-of-sale debit network, switched an estimated 85.6 million Pulse-network purchases in March, up 43.6% from 59.6 million the previous March, according to ATM&Debit News, a Cards&Payments sister publication.
  PIN-debit growth, though fueled in large part by merchants encouraging consumers to use their PINs instead of signatures at checkout, is almost on automatic pilot. Industry experts expect PIN-debit payments to grow annually at double-digit rates over the next several years. So, too, will the growth in signature-debit transactions.
  "PIN debit is growing at a healthy pace, but it's growing because it's an inherently strong product, not because it's being pushed by the industry," says Tony Hayes, vice president of Boston-based Dove Consulting, a division of Hitachi Corp.
  Most observers agree that there is no real industrywide marketing effort to encourage PIN-debit card usage. Les E. Riedl, president and chief operating officer of Speer & Associates Inc., an Atlanta-based financial consulting firm, points out that the early marketing campaigns introducing debit cards to Americans have by now succeeded in creating a mature consumer market. In fact, he says, consumers are so comfortable using their debit cards at retail outlets that the lone marketing emphasis soon will be on encouraging the use of PIN-debit for new products and in areas such as recurring online payments.
  Signature debit in 2004 accounted for 63.4% of the overall U.S. debit market share, leaving PIN debit with a 36.6% share, according to the 2006 edition of the ATM&Debit News EFT Data Book. In 2003, PIN debit represented 35.1% of all U.S. debit card purchases and in 2002, 34.5%.
  Signature debit, whose sole sponsors domestically are Visa USA and MasterCard International, has such a large market share compared with PIN debit because most issuers prefer the way it generates more acquirer-paid interchange revenue. Moreover, Visa and MasterCard have spent millions promoting signature debit, while relatively little has been spent to promote PIN-debit usage.
  First Data Corp., which owns the Star EFT network and is one of the world's largest issuers and merchant processors, says about 25% of its merchant customers accept PIN debit purchases.
  As such, PIN debit has substantially more opportunity to grow. Indeed, some industry observers expect PIN debit to continue to grow faster than signature debit and eventually eclipse signature as the most common form of debit payment in the United States. The reasons: Consumers prefer PIN debit, and so do merchants.
  'Normal Evolution'
  Research conducted for First Data's Star network in 2004 and released in July found that consumers with debit cards prefer paying with PIN versus a signature by a 47% to 30% margin. The nationwide survey also validated one of the reasons merchants are so enamored with debit payments in general and view them as beneficial for their businesses: They encourage consumers to spend more. Participating cardholders estimated that when they pay with a debit card, they spend 32% more than they do with cash and 24% more than when paying by check.
  Such data compels PIN-debit transactions to continue to rise. "It's a normal evolution," says Riedl. "In the next three to five years PIN debit will pull up even with signature and then pull ahead."
  Other observers are not so sure. They view PIN debit as perhaps picking up just 1% or 2% market share annually from signature debit, as has occurred the past few years.
  "It's been remarkably constant," observes Hayes. "On the one hand, you have banks promoting signature. On the other, merchants are promoting PIN. So there are pulls on both ends. It's a tug of war with both sides holding the same rope, so the rope doesn't move."
  Even though interchange rates vary, and high-volume retailers often pay lower rates, the gap between the signature and PIN-debit interchange fees has narrowed in recent years. While the fee previously averaged about 60 cents per signature-debit purchase and 20 cents for a PIN-debit sale, according to Riedl, the differential has narrowed to about 15 cents to 20 cents per transaction. Still, especially for such high-volume merchants as Wal-Mart Stores Inc. and Target Corp., those few cents can translate into tens of millions of dollars or more over the course of a year.
  That is why some retail merchants, including Wal-Mart, have set their payment terminals to automatically prompt debit card users to enter their PINs instead of signatures. When a card is swiped at their terminals, a message appears advising, "Please enter your PIN." Many customers just automatically comply.
  Retailers also attempt to encourage PIN payments by placing signs near cash registers urging PIN usage and stressing its relative security as a means of payment, according to Riedl. ExxonMobil Corp. recently initiated a limited pilot that offers customers $1 for using PIN debit, he says.
  Another report from First Data, released Nov. 14, found that PIN debit purchases also cost issuers less on average than signature-debit transaction-11.6 cents versus 22 cents. The study found that fraud costs associated with signature debit are four times higher than those of PIN-debit programs.
  The results of the "POS Debit Issuer Cost Study" suggest financial institutions should encourage activation and usage of both PIN and signature debit products "to help support consumer preferences and maximize revenue," First Data says.
  'Happy Either Way'
  While banks, merchants, EFT networks and transaction processors might take partisan views in the PIN-versus-signature debate, two important players in the industry claim publicly that they take no position: Visa and MasterCard.
  Yet their promotional support for signature over PIN seems to say otherwise.
  "Unlike with signature debit, where you have Visa and MasterCard developing and coordinating campaigns to promote signature, the same thing is not true for PIN debit," says Hayes. "Nobody is coordinating a campaign to promote PIN debit. The banks are not and the networks are not."
  The only ones really pushing for PIN debit, Hayes suggests, are the merchant processors such as First Data Merchant Services, Vital and First National Bank of Omaha.
  Both card organizations support branded signature-debit products, Visa check card and debit MasterCard, but they also offer issuers PIN-based POS debit programs as well, Interlink and Maestro, respectively.
  "We're happy to see payments either way," insists Laura Kelly, MasterCard's senior vice president for global debit strategy and business administration. "We want to see debit replace cash and checks. I believe the consumer is going to make the decision. I'm not sure there's anything we can do to determine if they use signature or PIN."
  Visa concurs. "Both types of debit will continue to grow," says Stacey Pinkerd, senior vice president at Visa. "There's a place for both of them, and consumer choice is very important. What we're trying to do is see that we provide the opportunities for all the transactions that are done."
  Yet, Pinkerd concedes, "There's no question that PIN has grown to a large extent at the expense of the Visa business."
  Paper to Plastic
  Visa acknowledges that its focus in marketing is the Visa check card. "In terms of marketing, Visa actively promotes the Visa check card, which allows cardholders to authenticate themselves with a signature or a PIN," says Pinkerd. "The PIN capability is something a growing number of merchants are supporting, and as new merchants deploy PIN pads, we believe it is the cardholder's choice in terms of how they want to authenticate themselves."
  Even PIN-debit networks will say that their primary objective is to help bring about the switch from paper to electronic payments, regardless of the method. Tom Gandre, senior vice president of product management for First Data Debit Resources, operator of the Star network, says Star's campaign to add PIN-capable terminals to as many retail outlets as possible is intended to boost debit transactions, not solely PIN payments. First Data processes both PIN- and signature-debit payments.
  "We're really about electrifying payments," Gandre says. "We're doing our best to see that consumers have a choice. Both signature and PIN have a role to play. The combination of the two is the best solution if you're a financial institution."
  Dove's Hayes sees three principal factors contributing to PIN debit's still unrealized growth potential. First, more merchants are installing PIN pads, so there are increasing venues, he says. Second, the merchants with PIN pads are promoting the use of PIN debit. And third, surveys show that consumers prefer using PIN to signature debit.
  Pulse's Schneider also sees several trends impelling growth in the PIN-debit market. One is a demographic change in the United States in which younger consumers entering are less wedded than their elders to paper-based check and cash payments and are more at ease making card-based transactions. Also, he says, PIN debit has succeeded in penetrating both large and small retail outlets.
  Congress' passage in 2003 of legislation known as Check 21, Schneider points out, has eased the way for merchants and banks to convert check usage to electronic transactions. The legislation lifted some legal impediments and made the processing of electronic transactions quicker and more efficient for banks.
  "To the extent that Check 21 accelerates the current trend of lower check usage by consumers, this would support the growth of PIN-debit purchases," Schneider suggests. He also agrees with Hayes that perhaps the most powerful driver of PIN-debit growth is that it is preferred by consumers, who particularly like PIN's efficiency and believe it is a more secure payment method than signature.
  "There is clearly a segment of the consumer base that likes debit," says Schneider. "For some folks, it's even a budget tool. They prefer to spend in a real-time way so they're not surprised at the end of the month."
  Consumer preference for PIN debit is just one finding in recent industry research that could influence the way card issuers, networks and merchants design their marketing and business strategies.
  MasterCard research found women favor debit payments over cash by a 33% to 29% margin, while men prefer paying by cash over debit, 44% to 30%. The research did not make a distinction between PIN and signature. Based on those findings, MasterCard says it plans to target some of its debit card advertising specifically to women in 2006, although it does not say if any of those ad dollars will go to touting Maestro.
  Holding Back
  Visa says that, despite the considerable market gains achieved by all debit forms, 55% of all consumer payments still are made by cash or check. Visa believes that the combination of both signature and PIN debit eventually will outgrow credit card use.
  Another evolving area for growth of PIN-debit transactions is automatic payment of recurring bills.
  Star, for instance, reports that it is putting together a PIN-debit recurring bill payment pilot. And, like Pulse, Star supports a PINless debit bill-payment service that enables approved categories of billers to accept debit payments by phone or over the Internet without the actual use of a PIN.
  Pulse sees growth potential for such a payments system, says Schneider, but it is proceeding carefully to assure that security and privacy controls will be airtight.
  Visa, however, does not allow Interlink payments for recurring bills, preferring that consumers carry out such transactions using signature debit. "Visa actively supports automatic payment of recurring bills through the Visa system," says Pinkerd. "The Interlink network is a card-swiped, face-to-face, PIN-always network. As such, the Interlink network does not support transaction types that do not include a PIN. And in most bill-payment environments, which are non-face-to-face, there is no way to facilitate PIN-based transactions."
  Yet with Star and other PIN-debit networks hoping to tap into the recurring bill market, check and credit card payments for such transactions are expected to diminish (see story, page 10)
  One indication of the growth of PIN-debit card transactions is the new markets they are beginning to penetrate. Foremost are fast-food restaurant chains, such as McDonald's, Wendy's and Subway, where customers like the speed with which PIN-debit payments can take place.
  Debit transactions could be enhanced at quick-service restaurants such as McDonald's with the advent of contactless cards, according to MasterCard's Kelly.
  But it is uncertain if PIN-debit will have a role to play in the contactless system. "Since speed and convenience are the primary focus of this new technology," Visa's Pinkerd says, "our current plans for contactless do not include PIN prompting, cash back or other steps that might slow down the transaction. At some point in the future, Visa may opt to add PIN authentication and cash-back functionality to its contactless platform, but this remains to be seen."
  Star and other PIN-debit networks are gaining acceptance at movie theaters, parking garages and video-rental outlets, as well as at doctors' offices, labs and pharmacies, sports stadiums, mom-and-pop stores, and colleges and universities.
  Smaller merchants are the toughest sell because many have yet to be convinced that the purchase of a PIN-debit terminal will increase sales or reduce costs enough to justify the expense. "Mom-and-pops have to pay $100 or so for a PIN pad or terminal," says Riedl. "If they do only a couple hundred transactions a month, it's iffy for them. But the next time they have to buy a terminal, it will be PIN. So each year there are more PIN pads."
  Merchants are not the only beneficiaries of the boom in PIN debit transactions. The four major networks, including Star, Pulse, Interlink and Metavante Corp.'s NYCE, account for 90% of all PIN transactions, according to the EFT Data Book. Much of their market share gain, however, resulted from mergers with other networks.
  Competing Interests
  Market consolidation has presented the networks with additional competitive pressures. Pulse's Schneider says the key to a network's success is facilitating the often-competing interests of the different players involved, including the merchant's preference for PIN and the banks' tilt toward signature debit.
  "You have to balance various constituencies," Schneider explains. "It's a challenge we have always recognized as critical to success. We believe the process requires you to recognize these different constituencies and be sensitive to what they're concerned about. We want to be as fair and balanced as possible. It's in everyone's interest to move toward payments that are more efficient. If we do that effectively, we all win."
  Loyalty programs are likely to become commonplace and help boost PIN-debit purchase activity. Some banks, such as J.P. Morgan Chase & Co., provide reward points for both signature and PIN-debit transactions, and more U.S. card issuers are gearing up to initiate similar types of loyalty programs.
  Schneider says the PIN-debit networks also are eyeing, but currently underutilizing, such technologies as contactless payments, biometrics, radio frequency (RFID), and the methods for facilitating recurring payments.
  "If you can find the right technology solution and value proposition, they can be avenues for debit," he says. "The hurdle for growth in acceptance of these products lies at the point of sale, rather than at the network level. All of these technologies require merchants to purchase new point-of-sale equipment capable of reading different sorts of devices."
  Function Limitations
  It might be some time, Schneider acknowledges, before there is sufficient consumer demand for such technologies to gain widespread usage, although he eventually expects acceptance to evolve.
  A First Data spokesperson adds, "Certainly, we will examine these new technologies to determine if they complement our strategy of providing secure electronic payment options for consumers, merchants and financial institutions alike."
  Yet Schneider and other industry experts believe PIN debit might not work for all payments because of technological or operational limitations. For instance, Schneider asks, is it worth it to accept debit payment in a soda vending machine, or is it feasible for consumers to pay their downpayment on a new home with a debit card? "You have to evaluate the risk versus the potential benefit," he advises.
  Consumers and merchants apparently have weighed the risks and benefits, and they prefer PIN debit. The question is whether card issuers eventually will view the debit card market similarly.
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