The Dawn Of The Debit Card. Well, Maybe

It's one of those products that has been on the verge of taking off for, oh, about 15 years. But now, some bankers insist, the debit card's time has come at last.

For every one of those 15 years, prospective issuers have carried torches for debit. It offers something for everyone, they say: Consumers who don't like to carry cash, find checks a hassle, or are leery of credit can use debit cards to transfer money directly from their bank accounts to merchants. Merchants can get instant payment. And banks can get fees from consumers and merchants.

There are just a few nagging problems: Many consumers aren't aware that debit cards exist, or, if they are, don't understand them. Many merchants don't want to join debit programs, because they say the transaction and other fees they must pay banks are too high. Until more merchants sign on, consumers who like debit cards probably won't see much reason to pay fees for them. Even some bankers are skeptical, wondering whether debit cards will ever be profitable.

PEER PRESSURE. But now, industry experts say, these negative equations are changing. A big catalyst is the major marketing push by bankcard giants Visa USA Inc. and MasterCard International Inc. The two associations recently launched competing nationwide debit programs and are busy trying to sign up banks. "One of the problems with the debit card industry before was that it was very regionalized and sporadic," says Richard Mitchell, associate editor with newsletter Bank Network News. "Large retailers weren't too happy because they couldn't go across the whole country and have continuity across stores." Now, retailers are beginning to feel they must start accepting debit cards or risk losing market share to competitors who do.

Debit cards have been offered, often with little or no fanfare, since the mid-1970s. Regional efforts have boosted debit-card use on the West Coast, where some large supermarket chains, gas stations, and fast-food restaurants accept the cards. But the first effort to launch a nationwide debit program, a joint venture by Visa and MasterCard, became the target of an antitrust suit and was dropped in 1990. The same state attorneys general who filed the earlier suit are still wary of the bankcard associations' separate programs. Although they are a step in the right direction, the officials say, relatively high merchant fees don't seem particularly competitive and may be inhibiting the development of debit cards.

Banks offer two types of debit cards: "on-line" debit, which can directly access consumers' bank accounts, and "off-line," which can't. Off-line is more established. That's because merchants don't need special equipment and can simply run debit cards through the same systems they use for credit cards. But off-line cards offer more risk to banks, because accounts aren't always checked electronically for sufficient funds at the time of purchase. That means banks must limit off-line cards to their best customers. Because off-line cards don't require a big investment by merchants, Visa and MasterCard initially promoted off-line programs. Visa's off-line program has 10.5 million cardholders while MasterCard's similar program has some 2 million cardholders.

Newer on-line cards require a special terminal with a keypad similar to those on automatic teller machines. The system checks bank accounts for sufficient funds and electronically authorizes the movement of money from the cardholder's to the merchant's bank account. Because there is no risk of overdrawing consumer accounts with on-line cards, banks can offer the cards to all their customers. Still, notes Joel Friedman, a partner with Andersen Consulting Co., "Cardholders can't use it in very many places, and the technology investment is still beyond the reach of most of those merchants." Another drawback: Consumers using on-line cards lose the two- to three-day float that they get by using a check or an off-line debit card.

ATM FACTOR. In the on-line debit derby, Visa's Interlink network has a big head start over MasterCard's Maestro program. In 1991, Visa acquired an existing network started by some California banks in 1983. Last year, it processed more than 100 million transactions from 12.5 million cardholders. That's a big pickup from previous years, but it's still a small portion of the 300 billion total payment transactions to merchants last year. MasterCard's program, which it started from scratch, has just 450,000 cardholders and processed its first on-line debit transaction in August. So far, of the nation's more than 11,000 banks, Interlink has signed up 347 financial institutions, mostly banks. Maestro says 256 banks and credit unions have signed up.

Believers say the widespread use of ATMs is one reason why debit's day may finally have come. "Today we have roughly 200 million ATM cards in the country that didn't even exist five years ago," says Friedman. "It indicates a willingness of a large portion of the public to use plastic to access their checking account routinely." Advocates of debit say the cards may catch on because debt-burdened consumers are shying away from credit.

There's no doubt that momentum is building for debit cards. "Most banks realize that sooner or later they'll be offering a debit card," says Anne Moore, president of Tampa-based Synergistics Research Corp. "In the '70s, it was 'will we or won't we?' Now, it's a question of when." But while competition may spur more banks to offer debit cards and more merchants to accept them, there's still no guarantee that large numbers of consumers will want them. They're well fortified with cash, checks, ATM cards, and handfuls of credit cards. Can they really be cajoled into shelling out for a new kind of plastic?

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