Debit Takes Off
In 1975, Business Week magazine announced that "electronic banking is sweeping the country" - however, the announcement was premature: the debit card struggled for its first twenty years, and didn't begin to take flight until the mid-1990s.
Awkward Growth, Complexity, and Confusion
Before there were debit cards, there were ATM cards, which debuted in Philadelphia, spread to other major cities within five years, and became widespread by the middle of the 1980's.
Each bank had its own ATM system at first; regional networks came later; and national networks eventually emerged (including Cirrus and Plus, operated by MasterCard and Visa, respectively), though consolidation was slowed by the variety of systems and networks in use.
As the use of ATM cards spread, some regional networks attempted to get merchants in their areas to adopt them as payment methods, using a point-of-sale debit transaction. This caught on slowly.
The difference between an ATM and a debit card is that an ATM card is a bank instrument that withdraws (or transfers) money between bank accounts, whereas a debit card , though used as an ATM card, could also be used to process a payment to a merchant who does not have an account at the same bank.
Visa and MasterCard had introduced gift cards (Visa Check and Master Money) that functioned as prepaid credit cards, neither of which caught on. However, they leveraged the same brands and added two others (Visa's Interlink and MasterCard's Maestro).
Because of differences in technology, the transactions were handled in a number of different ways depending on whether merchants accept credit cards and/or have PIN pads installed at the point of sale. The author goes into painstaking detail, but it's largely moot except to explain the slow adoption rate an the obstacles that had to be overcome.
However, there were a number of factors that caused debit card use to increase during the mid-1990's:
- Most customers already have an ATM card - They do not need to apply for a debit card, and the bank need not issue them a separate card
- Most supermarkets (80% by 1998) accepted debit cards, which encouraged customers to use them and other retailers to adopt thme
- Most POS terminal (cash register) manufacturers built in PIN pad technology as a standard feature
- Banks were encouraged to join debit card networks because they would earn an interchange fee on transactions (whereas ATM fees were provided as a convenience to customers with no revenue for the bank)
- Both Visa and MasterCard engaged in aggressive advertising and promotion campaigns to encourage the adoption of debit cards by customers, creating pull through the supply chain
- Advances in technology made transactions faster, cheaper, and more convenient for consumers, merchants, and banks alike.
The Rise of ATMs
The earliest bank machines were called "automated tellers" or "customer bank communications terminals" (CBCTs) and were intended as a cost-cutting technology for banks (replacing live tellers for straightforward deposit and withdrawal transactions) - but consumers found the speed, ease-of-use, and 24/7 access to be a great convenience.
As a result, the technology took off. By 1977, there were more thjan 6,000 ATMs installed, growing to over 20,000 by 1981, then 80,000 by 1990, and nearly 200,000 by 1998 - by which time, there were more than 220,000,000 ATM cards in the hands of consumers.
The interconnection between ATM networks also began early. In 1980, only 16% were connected, which drew to 94% by 1990 (and virtually 100% by 1996). In addition to making their ATM cards more convenient to their own customers, banks were able to earn a revenue from "foreign" cards being used in their own machines.
From a regulatory perspective, legislators paved the way for interstate ATM networks, and the supreme court ruled that an ATM did not constitute a bank branch for purposes of state taxation, removing significant barriers to the growth of ATM networks.
The Growth of PIN Pad Merchants
Before the rise of payment cards, Americans conducted a great deal of business by check (over 24 billion were written in 1971), so the use of debit cards was an evolution on that practice, with significant advances for merchants (more reliable than paper checks and easier to process) and consumers (more secure and convenient) alike.
However, the obstacle was that merchants had to adopt PIN pad technology at each point-of-sale to process such transactions. In the early 1980's, regional networks began to experiment with PIN pad technology at grocery stores, which welcomed them as a method of reducing their check-processing costs.
While this was successful on a local scale, the differences in technology among banks and ATM networks made it difficult to implement on a larger scale, and standardization happened slowly. However, when standards emerged, the companies the developed cash registers quickly implemented this new technology, and adoption spread quickly.
By 1984, only 2,200 pads had been installed nationwide, but this exploded in the 1990's, with half a million in use by 1996, and nearly 2 million in 1998.
Trial and Error
It took a number of years for Visa and MasterCard to execute plans to marry their networks, such that the multitude of retailers who accept their credit cards could also accept debit cards.
Their earliest attempts, Visa's Entree in 1975 and MasterCard's Signet in 1978, were rejected by merchants and customers alike. At the time, this was an entirely separate card (an individual would have an ATM card, a credit card, and a debit card), and even credit cards had not been widely accepted.
The cards were re-introduced in the 1980's (though MasterCard re-branded Signet as MasterCard II), but many merchants would not accept them: they were accustomed to paying no commission on ATM card transactions (though in some cases, there was a flat per-transaction fee), whereas they would pay a merchant discount on branded debit cards.
There were various legal maneuvers: a few merchants unsuccessfully attempted to sue the card associations, and MasterCard and Visa were prevented by the DoJ from forming a joint venture.
In the 1990's Visa launched an aggressive campaign that enabled merchants to avoid the cost of installing PIN pads. They also launched a marketing campaign to change the perception of debit cards, positioning it as being more like a check than a credit card ("The card that works like a check" campaign), with the advantage of being more widely accepted and not requiring a photo ID (as was the case with most checks at the time). Visa also worked on the banks, stressing the cost-savings of outsourcing their ATM card operations to them.
As a result, the number of debit cards grew rapidly (from 7.6 million in 1991 to 58 million in 1997) as did the volume of debit card transactions ($5.9 billion to $58 billion). Once ground had been broken, MasterCard followed suit, but naturally lagged behind.
The Future of Debit Cards
At the time the book was written, there remained some debate about the future of debit cards. EN: It's largely been secured, in that most merchants will accept either, and most debit cards are rigged to be processed as credit card transactions)
Merchant Resistance
A variety of merchants banded together in late 1996 and brought suit to challenge the "honor all cards" policy, which Visa used to strong-arm them into accepting debit cards as well as credit cards.
At the time the book was written, the case was still pending - but I did a little follow-up research and found that the case was settled in 2003: merchants won the right to accept credit cards and reject debit cards on the grounds that the terms of the agreement are materially different. To encourage their continued acceptance, the associations reduced commissions on debit card transactions, rebranded their debit cards under their primary brands to make debit and credit cards indistinguishable, and underwrote the risk of NSF transactions (fundamentally, a debit card was same as a credit card insofar as merchants were concerned, but the transaction was processed differently).
Network Consolidation
Through the 1990's, the EFT networks expanded and became interconnected. The author goes into painstaking detail about mergers and joint ventures, but the bottom line is that the "regional" networks have largely consolidated. There are only a few companies that are exclusive to a specific geographic area, and most banks subscribe to multiple networks.
EN: The concept of networks has largely disappeared - while it was once necessary to compare the placard of logos at an ATM or POS location with the logos on one's card to determine whether you could use the card at that location, interconnection is ubiquitous, such that most ATM cards and terminals do not bear logos anymore - and you can use your card at virtually all ATMs and merchants.
One final follow-on research fact: in 2002, Visa announced that debit card transactions had surpassed credit card transactions, so the question of the viability of debit cards is now moot.