Edward L. Farrell III is a card-carrying American. The 37-year-old Montclair (N.J.) resident and father of two maxes out merchant-reward programs using whatever plastic he can. A bank auditor, Farrell uses his ShopRite card to earn grocery discounts and rewards at Continental Airlines Inc. (CAL ). He reloads his Starbucks Corp. (SBUX ). cash card with his Chase Manhattan Bank (JPM ) debit card -- which deducts the expense from his bank account -- to accumulate even more miles. His one conundrum: how to keep his coffee intake under control now that he can waltz into any Starbucks, "swipe and leave," he says. "I'm trying to limit it to once a day."
These days, just about any expense can be paid for with some type of card. Live in a $5,000-a-month luxury rental in Manhattan? Charge it automatically to your credit card each month. Stepping into a McDonald's (MCD ) for a Happy Meal? A swipe of your debit card covers the $1.99 charge.
Slackening growth and fierce competition, especially for customers who carry big balances, have banks and credit-card companies scrambling into untapped markets for plastic. Visa, MasterCard, and American Express (AXP ) want customers to make regular payments -- such as for rent, gym memberships, utilities, and day-care center fees -- with a card instead of a check. And they want consumers to pull out their debit cards instead of small bills at convenience stores, gas stations, and theaters.
All eyes are on the debit card. Even though there are twice as many credit cards as debit cards, debit cards will generate 16.5 billion transactions (excluding ATM withdrawals) in 2003, a 22% jump over last year and the first time debit will outpace credit transactions. Credit cards will grow 8%, the first year of single-digit growth in two decades. By 2007, debit-card purchases could top $1 trillion, forecasts The Nilson Report, a payments industry newsletter. And the amount spent on debit cards will increase 130%, vs. 49% for credit cards. Indeed, debit use is growing so fast at Visa, where it accounts for more than half the transactions, vs. 7% a decade ago, that it no longer calls itself a credit-card company but a "payments company."
Why the fast growth in debit-card business? Consumers save time, feel more secure carrying fewer dollars, and track their spending better. Lost or stolen cards are quickly replaced by the bank. Merchants avoid credit risk and the costs of late payments, postage, employee theft, and check-clearing fees. More important, customers -- who are costlier to acquire than to retain -- are more loyal. In some markets, cable giant Cox Communications Inc. (COX ). persuaded up to 20% of its 6.3 million subscribers to pay with plastic and found that renewals jumped. "There was no need for any other incentive programs," says Warren Jones, director of competitive strategy and customer retention at Cox.
The stage is set for some fierce debit-card competition ahead. This summer, Visa U.S.A. and MasterCard International settled a class action filed by a group of national merchants led by Wal-Mart Stores Inc. (WMT ) over steep transaction fees. As part of the settlement, lucrative debit-transaction fees have been cut by a third already and after January will be subject to market forces. So the race is on to find new customers and markets to generate income.
Fast food is fertile ground. McDonald's is piloting swipe-and-pay machines in cities such as Chicago and Dallas. Pizza Hut and KFC are also testing the system. In all, according to credit-card executives, the quick-service food market is valued at a lucrative $130 billion a year or more. Says Fred P. Gore, MasterCard senior vice-president: "We're pretty much talking to everyone in the top 40 to 50 chains in the U.S."
As for paying regular household bills, plastic is rapidly moving in to replace paper checks. There's no mystery why: The market for recurring payments, such as rent and insurance, totals $800 billion a year and is expected to reach $1.1 trillion by 2005. For the first time, electronic payments will outnumber the roughly 40 billion checks written for such expenses this year, says the Federal Reserve, which forecasts a 9% decline in checks processed next year. Even American Express, traditionally focused on corporate travel and entertainment outlays, is targeting such everyday expenses: Last year, two-thirds of its charge volume was generated to pay dentists, cable, and other similar services -- a flip-flop of the business that has been its standard since 1958.
Cash cards that are loaded up with electronic dollars by banks or merchants are also flourishing. Already, some 6.2 million prepaid cards are in circulation, and that number is expected to grow to nearly 40 million by 2007, says the Pelorus Group. By yearend, the prepaid market will hit $71.5 billion, according to The Nilson Report, up 31% since last year. By 2007, Americans will be walking around with $349 billion worth of cash cards in their pockets. That could be in the form of a Bloomingdale's or Toys 'R' Us (TOY ) cash card, instead of a gift certificate. Employers are expected to hand out these cash cards as employee bonuses or even pay. And even traditional traveler's checks have seen their day: In November, American Express launched the TravelFunds Card, which acts as a worldwide ATM card, but with a preset balance. All aspire to the success of Starbucks' reloadable cash cards: 20 million customers have signed up for one since 2001, and they now account for 20% of the Seattle company's sales.
THE FRAPPUCCINO DIVIDEND
Convenience is nice, but instant rewards are a new lure for customers. There's no quicker way to earn a plane ticket to Hawaii than to collect a frequent-flier mile for each dollar of your rent. Visa is accepted at 1,000 rental properties nationwide and American Express has recruited landlords in San Francisco, New York, and Chicago. In July, Related Rentals, one of the nation's largest privately owned real estate companies, agreed to let New York City tenants in 4,500 units put the monthly rent on their American Express cards. Renters earn all kinds of goodies: free flights, golf lessons, or Broadway tickets. Landlords are sold, too. Says David Wine of Related: "Renewal rates will be higher and collections more efficient."
In the brave new world of plastic, cash cards, credit cards, and debit cards are beginning to meld into one. For instance, the Starbucks Card Duetto Visa issued by Bank One Corp. (ONE ), which made its debut in October, doubles as both a credit and a prepaid cash card. Cardholders earn a penny for each dollar they charge. Those pennies add up, and can be redeemed on demand for a cup of Starbucks coffee or other merchandise. Looks like with cash, you can finally leave home without it.
By Mara Der Hovanesian in New York