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Getting Into Debit

The number of debit transactions — both online debit, those made with ATM cards and requiring a personal identification number (PIN), and off-line or "signature" debit, those made by cards bearing a MasterCard or Visa logo not requiring a PIN — has increased dramatically over the last few years.

"Over the last five or six years, the average growth rate of online debit has been 45 percent or more per year," noted Mike Caruana, national sales director for point of sale, NYCE Corp., an electronic payments company based in Woodcliff Lake, N.J. "The growth has slowed somewhat, but the rate is still close to 30 percent a year — and I think there will be more growth spurts as more types of retailers adopt debit."

In 1999, debit cards accounted for 32 percent off all debit and credit-card transactions, according to Fred Coblentz, vice president, sales and business development, for PayPoint Electronic Payment Systems, a Los Angeles-based subsidiary of BP plc. The Nilson Report projects that percentage to increase to 50 percent in 2005, 56 percent in 2010.

"In terms of dollar volume, debit cards are gaining on credit cards," Coblentz added. "We project from 2000 to 2010, debit-card dollar volume will climb from $314 billion to $1.6 trillion, while credit-card volume will grow from $754 billion to $1.8 trillion."

A number of consumer and business trends are fueling online and off-line debit use, industry players report. Aging consumers are moving into the "savings" mode, away from credit-card use. Personal debt is growing and bankruptcy rates are up, leaving more consumers who can't or don't want to use credit cards, but like the convenience of plastic.

"My parents' attitude was if I can't afford to buy it with cash, we aren't going to buy it," Joyce Gioia Herman, president of The Herman Group, a firm of management consultants and strategic business futurists, based in Greensboro, N.C. "Baby boomers' attitude was 'If I want it, I'll get it somehow.'

"I see many younger people coming up as being a good market for debit cards, for the convenience of the plastic and as a control. We are seeing younger and younger people end up in debt. Using a debit card is one way to ensure control over your finances because you are limited by what is in your checking account. I'm seeing fewer people write checks than ever before. Also, certain populations unable to get credit will push debit-card use."

At the same time, MasterCard and Visa are looking to increase revenues by heavily promoting their signature debit cards (any retailer accepting MasterCard and Visa for credit transactions must accept their off-line debit cards). Banks are pushing off-line debit transactions because they carry higher interchange fees (fees banks collect from merchants) than online debit transactions. At the same time, many retailers are looking to lower transaction costs by promoting online debit over credit-card transactions. (MasterCard and Visa were contacted for this article. Neither was able to respond by press time.)

Generally speaking — and depending on the transaction amount and third-party processor fees — retailers pay banks and third-party processors the most for credit-card transactions. Off-line debit transactions maybe a bit lower. Online PIN-based debit transactions are least costly.

"On an $18 gasoline purchase, the interchange fee would be about 32 cents for a credit card, 33 cents for an off-line debit card and 13 cents for an online debit card," Coblentz said.

The exact nature of the fee differential depends on the interchange fee, the acquirer and the third-party processor's fees for low-ticket transactions. "It's a difficult task for merchants to compare apples to apples, because sometimes fees are bundled and not clearly identified," Caruana said. "But generally speaking, branded transactions are more expensive than PIN-based debit."

Another consideration: PIN-based debit transactions are more secure than off-line debit or credit-card transactions. "The proliferation of online debit could greatly reduce, if not eliminate, fraud at pay-at-the-pump sites," said Tim Finn, senior vice president, petroleum services, for Concord EFS Inc., a Memphis, Tenn.-based electronic payment firm. "Plus, PIN-based debit actually simplifies the transaction because it takes the subjective component of signature verification by the store employee out of the equation."

Although many c-stores selling major-branded gasoline accept PIN-based debit cards at the pump, the use of PIN-based debit inside the c-store is not commonplace. "Since the c-store industry is made up of thousands of owners and operators, it's an extremely difficult task to reach out to them and educate them on the business case," Caruana said. "Therefore, it is not viewed as an emerging debit market. But I think PIN-based debit can be a great opportunity for the industry."

One stumbling block may be the installation of PIN pads in the store, needed for online debit cards. A retailer should be able to equip each POS device with a PIN pad for less than $100 to $150, Caruana said. Still, with the majority of c-stores equipped to handle credit and at least off-line debit at the pump, few are jumping on the use of debit for merchandise sales.

"For the small retailer with a simple dial-up terminal, it's easy and inexpensive to add a PIN pad and software for online debit-card acceptance," said Paypoint's Coblentz. "It becomes expensive to add a PIN pad and software when you have multiple platforms, as many large c-store retailers do. But the investment is well worth it, because of the lower interchange fees."

Supermarket operators and other merchants of primarily consumable goods have embraced the business case. "They have done very well with debit, because consumers have positioned debit in their minds as an alternative to cash or checks," noted Les Riedl, senior vice president of Speer and Associates, an Atlanta-based consulting firm. "Supermarkets, which have installed PIN pads, found consumers are not interested in using credit cards for something they will eat in the next two days."

The case for smaller transactions is not as strong. Still, Caruana has identified restaurants and fast feeders as fast-emerging debit markets. Indeed, big names like McDonald's and KFC are testing the payment method.

A debit study with a Burger King franchisee approximately five years ago brought mixed results, but shows the potential of debit, Caruana said. "In that test, the success of debit depended on the store manager," said the debit executive, who was involved in the pilot.

In the most successful test store, offering customers the debit option helped increase the average ticket from $3.29, the equivalent of the lower-cost value meal, to almost $6.50. "People were buying more, because they didn't need the cash on hand," Caruana said. "If you could walk into any fast feeder without any money in your pocket but your ATM card, and buy whatever you wanted and walk out with $20 [cash back] in your pocket, how convenient would that be?

"It absolutely boggles my mind when I see supermarket shoppers get cash out of an ATM when they could just as easily use a debit card at the checkout and get cash back. I think it is habit — nothing more than that."

The cash-back option has been very successful as a way to spur debit-card transactions, noted Riedl. "In some cases, though, it has been too successful. Many supermarket chains have had to order additional cash to cover the cash-back function, they've reduced the amount of money customers can get back. One chain limits it to $25 now. But to increase the benefits to the debit customer, cash-back should be looked at."

Debit in C-Stores

While not as popular in the United States for smaller purchases, debit is making inroads in the c-store industry. At Wawa Inc., which offers no-surcharge ATM service, debit-card acceptance is a recent addition. With a long history of accepting only cash at the stores, the chain now accepts credit or debit cards at 60 of its 514 stores, according to Anne Marie Murray, treasurer of the Wawa, Pa.-based chain. The retailer accepts debit cards at all of its 54 gasoline outlets, plus six non-gas stores.

"It is primarily in the gas stores, because we believed to make buying gas convenient for our customers, we'd have to accept payment at the pump," said Murray. "We accept credit and debit at the pump and inside at those stores."

With debit and credit only going into new stores, Wawa executives have not been able to ascertain debit's impact on average sales or volume. This year, the chain plans to test acceptance of credit and debit cards in a group of existing non-gas stores. "We want to see what that does for us in terms of sales, profitability and the average transaction — and see if we can offset the cost of implementing it," Murray said. "If the test is successful and we roll credit and debit out to all the stores, we would probably do more marketing toward acceptance of debit, since it is less expensive than credit-card transactions.

"At our non-gas stores, our average transactions are rather small compared to other types of retailers offering debit. But we need to determine if this is a method our customers want to use for payment — and does the cost-benefit analysis show it is worth pursuing?"

At the stores that do accept debit cards, Wawa does not offer cash back. "For security reasons, we keep minimum cash levels in our registers," Murray noted. "However, customers have the opportunity to obtain cash at our no-surcharge ATMs."

Exxon Mobil Corp., with 16,000 retail sites in the United States, has seen debit usage at its sites grow approximately 10 percent per year. Right now, approximately 80 percent of all debit-card sales take place at the gas pump, with no employee involvement.

Although "the lowest fees charged by debit-card networks are less than the lowest fees charged by credit-card networks," the company's Speedpass program, which allows customers to use a radio-frequency identification transponder to pay for purchases, supports only off-line, not online, debit transactions now. "But Speedpass is especially convenient for the customer who chooses to use cash, but doesn't want to go inside and stand in line to pay," said Jeanne J. Miller, a spokesperson for the Irving, Texas-based oil company.

Interestingly, half of all Visa transactions made at ExxonMobil sites are Visa Check Card debit transactions. To promote the use of debit, the major oil company displays debit-card decals at the pump and on the windows of each store. Where permitted by law, ExxonMobil stores may offer cash back up to $50, at the discretion of the operator. The company had no data measuring the affect cash back has on in-store ATMs.

"A debit card is ideal for use in gas stations and convenience stores — places where you make many small purchases per month," said Paypoint's Coblentz. "Using a debit card allows you to pay for small items without depleting the cash in your pocket."

One hurdle to jump when accepting PIN-based and off-line debit is store associate training. Confusion can ensue when ATM cards that are also branded signature cards are presented for payment. Should they be processed as an online debit, requiring the customer to enter a PIN, or an off-line debit, which usually carries a higher transaction fee?

"This is definitely a problem," Riedl said. "How does the consumer want to use the card, and how should it be charged? If I were a merchant with a PIN pad, I'd want bank cards with the signature logo processed as a PIN debit, because I get 'good' funds and it is a cheaper transaction. But to make that happen, I'm counting on the sales clerk to understand what the options are and explain them to the customer."

Some retailers, he said, participate in promotions with regional networks, buying radio or newspaper ads espousing the use of the PIN pad whenever a debit card is used, he noted. "If asked for it, most consumers are happy to enter their PIN. They already expect the money to be taken from their checking account and are indifferent to the use of the PIN."

Most grocery stores accepting debit are equipped with self-service swipe-and-PIN-pad devices. Customers swipe their own card, then select the type of transaction they are making.

"In our stores, the cashier does the swiping, because our swipe is built into our keyboard," said Wawa's Murray. "But we are in the process of implementing new PIN pads that will allow customers to swipe their own cards and enter their PINs.

"We train the associates that there is a difference with the signature check cards, but when they are in a hurry, they often put the transaction through as a signature card and not a PIN-based card. That's a challenge I expect we will continue to have, but we will address it through training."

New card-swipe systems read the numbers on a card that identify the bank associated with it, then determine whether the card is a credit card, check card and/or ATM card. "Since virtually every check card is also an ATM card, they can be used with a PIN," Riedl explained. "Some retailers, like Wal-Mart, have built into the system a prompt that automatically comes back and says 'Please enter your PIN.' If the customer doesn't know his PIN, the system has an override capability. That way, a PIN debit transaction is the first choice."

"In the c-store industry, where there is a very low or even no margin on some purchases, the difference between the customer using a credit card, an off-line debit or a PIN-based debit can mean making a profit on the transaction or not."
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