PIN Debit: Not So Sharp

  Signature-based debit card growth rates have made an unexpected upturn while growth in PIN-based transactions has dropped considerably. Both situations can have major implications for the rapidly changing point-of-sale debit scene.
  The latest round in the battle between debit card issuers and merchants over whether consumers use their signatures or personal identification numbers when initiating purchases goes to the issuers, as PIN-based point-of-sale debit growth has slowed dramatically.
  In fact, new data from CCM sister publication ATM&Debit News suggest that PIN-based, or so-called online, debit purchases are growing at virtually the same rate as signature-based, or offline, debit transactions, whose growth rate has taken a sudden upturn. And that's good for issuers, who earn more acquirer-paid interchange revenue from offline debit purchases. But it's not so good for retailers and other merchants, to whom merchant acquirers pass the expense.
  In March, the nation's PIN-based POS debit networks switched a combined 495.3 million purchases, up 21% from 410.5 million in March 2002. Comparatively, U.S. consumers and businesses during the first six months of this year initiated 4.6 billion offline debit purchases, up 21% from 3.8 billion during the same period last year.
  Signature-debit volume also rose 21% during the first quarter of this year. The mid-year offline debit increase is up slightly from the 20% growth in signature-debit volume during the first six months of 2002.
  The nation's POS debit networks reported a 39% rise in combined purchase volume between March 2002 and March 2001. ATM&Debit News has reduced by nearly 3% the March 2002 POS debit total to reflect new information discovered from a revised survey form this year.
  The new form asked electronic funds transfer networks to break out for both March 2002 and March 2003 their pure, in-network volume from shared gateway transactions, thereby reducing potential duplication. A gateway transaction is one in which the network that initiates a transaction has only the role of routing the sale to another network.
  As a result, the networks now say they switched a combined 410.5 million PIN-based purchases in March 2002, not the 421.7 million reported last year.
  Market factors, though, also are having an effect on volume. While many merchants encourage PIN use, issuer efforts to promote the use of signatures, may be taking hold. Such efforts include reward programs that pertain solely to offline debit purchases and the assessment of fees when cardholders use their PINs to initiate purchases.
  "Many issuers are doing pricing incentives to encourage signature use," says Susan Zawodniak, executive vice president at the Montvale, N.J-based NYCE network, whose POS debit volume grew almost 27% in March. "And consumers are savvy about that."
  The reduction in overall POS debit growth also can be attributed to a dramatic drop in the growth of PIN purchases switched by Maitland, Fla.-based Star, the nation's leading network. Star switches nearly 60% of the nation's PIN-based POS debit transactions.
  Star says it switched 277.9 million purchases in March, up 18% from 235.2 million in March 2002. That is down from the 33% transaction growth Star reported between March 2001 and March 2002.
  Nikki Waters, executive vice president, says Star anticipated a lower POS debit growth rate.
  "With the significant volume processed by Star compared to all other networks, the larger the base volume, the lower the percentage of change year over year," she says.
  Effects Unknown
  The latest ATM&Debit News figures cover the period just before Visa USA and MasterCard International this spring settled the huge class-action lawsuit brought against them by retailers led by Wal-Mart Stores Inc. Under the settlements, the associations lowered signature-based debit interchange by about a third for the last five months of 2003, and they will adjust interchange again for 2004. The settlements also include payments of $3 billion from the card associations to the retailers, and the scrapping of association rules requiring merchants to accept offline debit cards if they take credit cards ("The Retailers' Home Run," July).
  Meanwhile, many of major EFT networks are raising PIN-based debit interchange, narrowing the formerly wide spread between online and offline interchange. The impact of the Visa/MasterCard settlements and the rising cost of online debit are certain to affect the growth rates of both forms, but to what degree may not be known until well into 2004.
  ATM&Debit News published results of the POS survey as well as numerous other charts and related information about the U.S. debit scene last month in its latest EFT Data Book.