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On-line Off-line
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A Usage It
may seem hard to believe, but some consumers still aren’t quite sure
what a debit card is and where they can use it. In fact, a survey
conducted by Star Systems found that 56% of respondents will not use their
debit card if they don’t see a sign with logos matching those on their
card. Even so, on-line POS debits are expected to be the fastest growing
electronic funds transactions, according to a study by Dove Consulting.
The study found that on-line debit volume will increase 17% annually. More
often than not, if a consumer has a checking account, they have a debit
card. According to the Faulkner & Gray Debit Card Conference, 58% of
the 172 million people with checking accounts have a debit card, but that
is only 37% of the 273 million total U.S. population. What this means is
that every day the number of debit card transactions increases, and with
that, the fees that Visa and MasterCard earn for those transactions. It
also means that debit has a huge market left to penetrate. That
opportunity could translate to millions of dollars in transaction fees. On-line,
Off-line—What’s the Difference? When
we say “on-line debit” we are not referring to online in the sense of
Web shopping. We’re talking on-line in the sense that funds are verified
and transferred at the time of purchase. For example, if a merchant asks
“Debit or credit?” what they are actually asking is “On-line or
off-line?” On-line
is when a consumer chooses “debit” and enters a PIN. Off-line is when
the consumer chooses “credit” and signs the receipt. But, the reality
is that the consumer is rarely asked how they wish the transaction to be
processed. When was the last time a cashier asked you which way you prefer
the transaction be routed? Usually it is set up to be processed one
way—off-line. Why? Because off-line means more money for Visa and
MasterCard. How much money? Well, let’s put it this way: If Wal-Mart
moved all of its customers from off-line to on-line, they could save more
than $1 million annually. On-line On-line
debit cards perform just as ATM cards do. The transaction is an immediate
electronic transfer of money from the consumer’s account to the
merchant’s account. Funds availability is confirmed at the time the card
is used and the actual deduction from the account is made that day. When
using a PIN, the success of the transaction is dependent on funds the
cardholder’s bank says are available, at the time of inquiry. Off-line Off-line
debit transactions resemble credit card transactions. The merchant’s
terminal reads the card, recognizes it as a debit card rather than a
credit card, and creates a debit against the account. But, here’s where
the difference occurs: Instead of moving the money immediately (posting to
the account), the transaction is stored, to be processed later, usually in
2 to 3 days. Due to the delay, an off-line debit card is often referred to
as a “check” card. When
it comes to off-line debit, usage is increasing. In fact, last year alone
4.1 billion POS transactions using off-line Visa Check Cards and
MasterCard MasterMoney Cards were initiated. That is up 41% from the 2.9
billion purchases in 1998. Remember, off-line means a higher fee to the
merchant, which costs the consumer more in the long run. To counteract
this, some retailers are encouraging consumers to use on-line debit. Time
will tell if they are successful. Fees Debit
cards mean money to banks, especially off-line debit cards. As we’ve
mentioned in previous articles, a $50 transaction processed on-line would
cost the merchant $.20. Processed off-line it can jump as high as $.73.
Also, some banks charge their customers for the cards. Some retailers are
unhappy, and lawsuits have resulted. In
January Visa USA, Inc., and MasterCard International, Inc., were sued by a
San Francisco man who accused the companies of antitrust violations. The
companies are accused of forcing retail stores, restaurants, gas stations,
and other businesses to accept Visa and MasterCard debit cards as a
condition of being allowed to accept their credit cards. The suit says
that credit card companies charge businesses “unreasonably high
charges’’ for handling purchases using the Visa Check and MasterMoney
debit cards, and the costs are passed on to customers. Visa
and MasterCard are also the target of a 1996 antitrust suit brought by
Wal-Mart Stores Inc., Sears, Roebuck & Co., Safeway Inc., and other
retailers, which has now been certified for all merchants in a class
action. And, we can’t forget the antitrust suit by the Justice
Department. In
off-line debit, when a signature is used rather than a PIN, the merchant
pays a higher fee, because Visa and MasterCard feel there is a higher risk
associated with signature-based transactions than PIN-based transactions.
This may seem backward to you. But, it seems that Visa and MasterCard feel
that the likelihood of someone stealing your card and duplicating your
signature is higher than someone stealing your card and your Pin number.
As we report in the enclosed GSQ, 30% of people write down their PIN and keep it with their card, so
it’s not uncommon for a thief to find a PIN. And many cardholders still
use their birthday or 1234. So, it seems that a PIN transaction should
have at least as high, or higher risk than an off-line transaction. If
it is true that signature-based transactions have higher risk, it would
seem that card associations are not enforcing the verification of
signatures against the one on the card. How many times have you received
your card back before evening signing the slip? Future Debit’s
rapid growth, and yet untapped market, translates to a lot of money for
Visa and MasterCard and their banks. Debra A. Janssen, president and CEO
of eFunds Corp., predicts that within five years 19% of all POS
transactions will be initiated with debit cards. If these transactions are
processed on-line, issuers will make millions. If they are processed
off-line, they will make millions more, if, and only if, consumers
continue to use debit. If off-line debit fees continue to soar, and
merchants are unsuccessful in converting off-line debit users to on-line
debit, off-line could cannibalize the market. If Visa and Mastercard are
not the victors in the suits and if merchants decline to offer debit, this
gold mine could turn into a lump of coal. But
then again, that’s a lot of ifs.
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