Taking Debit to the Next Step

  Richard G. Lyons Jr.,
  Global Product Group Executive,
  Debit and Prepaid,
  MasterCard International.
  Continued growth in consumer debit card use has the payments industry shifting to provide more products, easier use, greater acceptance and rewards programs tied to the plastic.
  MasterCard International long has been a leader in the debit card market, though the Purchase, N.Y.-based organization has greater market power outside the United States. Maestro, MasterCard's PIN-debit brand, is its debit flagship, stamped on 582.2 million cards worldwide and accepted at about 10 million merchant terminals in 93 countries. The signature-based debit MasterCard is issued primarily in the United States, with 53.4 million cards issued. Domestically, MasterCard has a long struggle ahead, as rival Visa USA dominates signature debit, holding a 79.4% share of purchase transactions as of Sept. 30, 2005.
  MasterCard also offers Cirrus, an ATM-only brand that serves 920 million cards usable at 900,000 ATMs worldwide.
  In January, MasterCard named Richard G. Lyons Jr. as global product group executive, debit and prepaid. Lyons oversees MasterCard's efforts to coordinate its debit brands and to expand MasterCard issuance.
  MasterCard and Lyons cite cash and check as their primary foes. In the United States, that means helping the association's members as they encourage debit card use as an alternative payment method. In Europe, consumers favor debit over credit cards, but they still prefer the pound and the euro.
  In the United States, the major brand competition remains Visa, American Express and Discover Financial Services, issuer of the Discover card. Indeed, both MasterCard and Visa now corral an increasingly restive membership that is all too willing to link with AmEx and Discover.
  MasterCard also is busy with its plans for an initial public offering of stock, scheduled tentatively for the first half of this year. Lyons and MasterCard are not answering IPO-related and other forward-looking questions.
  The following discussion is from an interview with Lyons conducted by C&P Managing Editor Burney Simpson.
  Q. Consumer use of personal identification number (PIN) debit cards is rising, and MasterCard's signature debit product has lagged. How are you building your debit business?
  A. In recent years we've had some catching up to do with our signature-debit product. We're seeing strong momentum with new partnerships made last year with Washington Mutual, Associated Bank of Wisconsin, First Hawaiian, Bank of the West, Associated Chittenden Bank and First Midwest Bank.
  We introduced our Maestro PIN program about 15 years ago, and today it is the leading global brand with more financial institutions, merchants, cards and acceptance locations in the world. In the U.S., we're the best-kept secret in PIN debit. But firms are committing to us and are dropping their participation in other networks. At the end of 2005, Maestro U.S. transaction volume was up 200% from the previous year.
  Q. In Europe, U.S. processors such as First Data Corp. and TSYS are expanding. What does that mean for MasterCard?
  A. The European landscape is changing. Previously there was one domestic network for each country. Now a payments organization needs to offer a pan-European solution. Regulatory authorities are requiring brands and processors to become SEPA (single euro payments area) compliant, so you must support all brands and be capable of cross-border processing. Maestro is pan-European, and we process across the European marketplace. Institutions can choose our card and our processing.
  Q. Does that give Maestro an advantage in Europe over processors such as First Data and its Star network brand?
  A. Maestro is a proven brand name in Europe. Building a brand name can be difficult. There are demands from constituents and customers. There are demands for global interoperability. Relationships with both global institutions and major local institutions are required. You have to deliver a superior global product. We've done that for more than 30 years in Europe and have 240 million cards in European consumers' wallets. We plan a significant Maestro promotion in Europe this year.
  Q. In the U.S., what debit format eventually will dominate, PIN or signature?
  A. The trend suggests that PIN may over time. There are an increasing number of PIN pads at retailers. MasterCard is somewhat neutral on whether consumers enter their PIN or sign at the point of sale. It is up to the cardholder, the issuer and the merchant. Consumers don't care; they just want to complete the purchase and desire simplification. In fact, new payment technologies such as PayPass will continue to influence the consumer at the point of sale as they literally can 'tap and go.' Moving forward, you'll see some PayPass, some signature and some PIN. Cash and check payments now account for 44% of monthly consumer payments, while credit and debit account for over 50%. That suggests a wholesale replacement is taking shape in consumer payment preferences.
  Q. PIN debit traditionally has brought in lower interchange revenues for your members than signature debit and credit. How does that affect your efforts?
  A. Debit is replacing cash and checks. It's growing so quickly that revenues are seeing greater organic growth. There's growth in new segments-drug stores, quick service, movie theaters and coffee shops. Interchange may shift due to changes in use, PIN vs. signature, but growth in the debit category is phenomenal. We ask during consumer surveys, 'Why don't you have a debit card?' Usually this elicits the same response-they were never offered one. When consumers open an account, we need to make a debit card part of that experience. Banks need to shift from asking 'What color of checks do you want?' to ensuring the consumer gets a debit card. Cash and checks are a cost center while debit provides a revenue stream.
  Q. Why should a consumer buy a MasterCard prepaid gift card instead of a store brand gift card?
  A. That's almost an apple-and-oranges comparison. The two are very different, though there's some element of competition between the two products. Prepaid is one of our global priority areas of focus this year. The benefit of the MasterCard card is that it can be used wherever MasterCard is accepted, it can be used for many applications, such as government, healthcare and travel, and it can be reloaded. The MasterCard card has greater fraud and risk management capabilities.
  Q. How is the PayPass contactless product going?
  A. At year-end 2005, there were approximately 5 million PayPass cards issued. PayPass was accepted at 25,000 U.S. merchant locations, including at McDonald's, CVS drug stores and other major merchants. This has moved quickly from a good idea to a significant part of the business. It's being issued by Citibank, KeyBank, Chase and MBNA Corp. That's an awfully good start.
  Q. Payment via cell phone is shaping up to make an impact this year. What is MasterCard doing?
  A. There were two pilots in 2003, 2004. Motorola, Nokia and other vendors are continuing tests. We're seeing a proliferation of acceptance locations this year. This looks like a banner year for cards, fobs and phones. One thing we're starting to see is unattended payments. For example, contactless is being used for parking meters in Europe this year. That application could be imported to the U.S. One of our big advantages is that we are a global organization. We see different technologies and can leverage them cross-border. We look at technologies and determine how can we take any debit application across the globe and make it local.
  Q. Can introducing PayPass in the U.S. lead to the introduction of chip cards and Europe's EMV standards?
  A. The U.S. has an established infrastructure built around the magnetic strip. PayPass is a crack in the door that will allow further innovations. New technology provides a whole new realm of possibilities.
  Q. How can MasterCard differentiate itself and succeed against such formidable competitors as American Express, Visa, Discover and the processing networks?
  A. We want to turn more cash and checks into debit transactions and simplify the POS process and convert cash and check purchases to debit and credit. For instance, women have been higher users of debit. That said, we want to continue to drive spending among women and also work on men who still carry around cash. How can we turn them around? We need to simplify our products. That's why some consumers continue to use cash and checks. Everyone knows how they work. PayPass is a perfect example of a product that simplifies the process.
  Q. How do you serve your smaller members when the largest issuers run about 90% of the credit card issuing business?
  A. We are customer focused and are interested in financial institutions of all shapes and sizes. Our global key account group works with the largest institutions. We also have regional key accounts and national accounts. We provide the right amount of attention for the size and value of their program. And we have relationships with processors like Jack Henry and Fiserv and others. We have strong direct relationships with the institutions and indirect ones through processors.
  Q. Where will MasterCard be five years from now?
  A. MasterCard has never been better positioned to capitalize on debit payments. In five years we will still face cash and checks. MasterCard has a global view of the payments business but with a local twist. We see new opportunities with innovative payment technologies, such as PayPass, stored value, smart cards and Internet payments. And the ATM is still a source of value to consumers and financial institutions.
  Richard (Rick) G. Lyons Jr., MasterCard International's global product group executive, debit and prepaid, has been involved in technology-based, customer-focused payment initiatives for more than 20 years. Before joining MasterCard in 2002, Lyons led Internet and payment-systems strategy for Comerica Inc., a Detroit-based financial institution. Lyons also was a key executive at Most, then the nation's fifth-largest electronic funds transfer network. He currently is a board member of the Electronic Funds Transfer Association. Lyons majored in business administration at Marywood College and in management at the University of Maryland. He also is a graduate of The Wharton School's Executive Development Program.
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