Economic and Policy Issues
As documented in the preceding sections, the ATM and debit card industry is undergoing rapid growth and numerous changes that, aside of the technology and business relationships between the firms involved in transactions, have significant economic and public policy implications.
The present chapter is intended to explore some of the key questions and lay the groundwork for more detailed policy analysis in future research, considering the larger issues rather than specific developments.
Market concentration
As a result of consolidation, many ETF-related markets are highly concentrated, with a small number of firms handling the vast majority of transactions. This phenomenon is largely the result of mergers and acquisitions among firms who hold relatively large shares of the market.
This has been a driving force in the rapid growth of both ATM and debit cards, as significant coordination among organizations is necessary to process transactions: had the industry remained diffuse, with many small players, it would have been more difficult to coordinate their business activities such that the customer could use a single card at virtually any terminal.
From the institutional perspective, consolidation has been aggressively pursued to achieve economies of scale. Generally speaking ,establishing a card-processing network requires a huge capital investment and ongoing expenses that can only be covered by a large number of transactions. A small firm with few customers simply cannot be profitable, and smaller firms have generally collapsed or been assimilated into larger ones.
Perhaps the only element of the industry that does not benefit from economies of scale is the installation and maintenance of end-user equipment: ATM terminals and POS systems. For this reason, only the networks and processing systems have consolidated, whereas the merchant services remain outsourced to many small firms.
There are also significant barriers to entry. In order to gain consumer acceptance, a network operator must make his card as ubiquitous as possible, and it is not acceptable to grow gradually now that there are many firms that are already ubiquitous. Also, the requirement for economies of scale also makes a new provider unable to compete - he must either charge a fee that is unacceptably high to those who would accept his card, or run at a considerable loss until he has achieved significant size.
It is generally accepted that consolidation contributes to consumer welfare: it is best for the consumer to be able to use their card at any ATM or any merchant. However, the public reaction in any instance where a few large firms control an industry is irrational fear: the cooperation among firms that enables the customer to use a card ubiquitously are characterized as collusion among firms, and the similarity in fee structures that arises from similar expenses for providing similar services is misinterpreted as price-fixing.
Also, given the economic barriers to entry, smaller firms generally turn to politics to provide a legislative solution to obstacles that are essentially natural. In order to promote "fair" competition, smaller providers seek to obtain special treatment, at the expense of established and larger firms.
Another effect of consolidation is that it stifles innovation: large firms have considerable investment in existing technologies and business practices, such that changes that benefit the consumer may come at tremendous expense to the provider.
There is also the "bandwagon effect" that requires any change in technology or practices to be adopted by a few firms when it is not profitable to do so, in hopes that other firms will eventually join in so that all may benefit when there is sufficient participation to make such changes profitable. This creates considerable inertia in an industry where firms are interchangeable and must aggressively compete on price.
There is also the tendency of government to seek to exploit profitable firms - monitoring and regulating a few large firms is easier and more profitable than monitoring and regulating a multitude of smaller firms. AS such, legislation of an increasingly arbitrary nature (mandating business practices, fees, and policies) has been increasingly evident as the industry has become more consolidated.
Vertical integration and economies of scope
EFT networks have become increasingly vertically integrated, with firms expanding upward or downward in the channel, and increasing in scope of services to in-source functions that were originally handled buy third-party providers.
Because the majority of the services offered are handled in an automated fashion (by computer systems), the cost to integrate more services is relatively low, and because the volume of transactions are increasing, it is increasingly profitable to expand into other sectors of the industry to recoup the profit of providing other services or reduce the cost of service to become more competitive.
(EN: A number of non-financial reasons are also cited, but they seem highly speculative: the desire to leverage the capabilities of technology, the desire to simply be "bigger," etc. These may be valid, but they seem to be presented as ends-in-themselves, which seems a bit specious.)
There is increasing breadth of services and development of new processing services and payment methods, as providers discover new ways to utilize their existing capabilities: check conversion, person-to-person payments, and online bill payments are three examples. Such innovations largely replace the use of other methods of payment, such as paper checks, which provide greater convenience to the consumer, but greater cost to the banks involved.
In general, the integration of services, both depth and breadth, have largely simplified interactions among businesses and resulted in lower prices to consumers and users in the network.
The drawbacks seem similar to those already cited under the previous issue - chiefly, that growth results in "bigness" that is intimidating to consumers, more easily managed by regulators, etc.
Pricing
In general, switch fees for both ATM and debit card networks has decreased, as a result of economies of scale. However, many use a tiered-fee structure that makes their rate higher for smaller clients, lower for larger ones. As such, the largest institutions pay the lowest per-transaction fees as the fees are discounted according to transaction volume.
There is some controversy over price discrimination in favor of larger clients, however, this is entirely rational as a result of economies of scale - those firms that conduct more transactions have a greater impact on the per-transaction allocation of fixed expenses. If networks did not offer "bulk discounts" to larger clients, they would likely lose them to others that would.
In debit card networks, interchange fees are paid by acquirers (merchants) to card issues. Other forms of interchange fees have gradually disappeared in favor of this model. Also, the model has become a flat-fee for service, plus a per-transaction fee that is based on sale value, making them similar to the credit card model.
The user of this method of pricing is likewise controversial, as the cost of the provider is on a flat cost - i.e., the cost to process a transaction is the same whether the amount in question is $5 or $500 - such that pricing cannot be justified on a cost basis. It is argued that historical reasons for the percent-of-value model (to achieve economies of scale, to appeal to more customers and merchants, to compensate for risk of fraud, etc.) are no longer applicable as the industry has reached maturity, but firms cling to traditional ways of doing business.
Ultimately, pricing will be a perennial conflict, as all vendors seek to justify making the greatest profit possible, while all customers, both consumers and businesses, seek to pay the least possible for the service or convenience they receive.
And as usual, government is called in to mediate the debate, with regulations in favor of one side or the other, and it is especially appealing to antitrust legislators, as most companies charge similar fees to the end users (merchants and customers) as a result of similar costs - two banks on the same regional network, or two merchants using the same processing service, pay and charge fees in nearly identical amounts.
In terms of retail pricing, surcharges and PIN fees to customers have long been a source of consumer frustration. While legislation is periodically considered to address retail pricing, it has largely been subject to a more compelling authority: consumer choice. Customers to switch banks to avoid fees, or modify their behavior to reduce fees (e.g., making fewer, larger ATM withdrawals or switching to credit cards to a void PIN fees for debit card use).
The current trend in the industry is to minimize or eliminate direct costs to consumers, waiving or rebating ATM fees and debit card PIN charges to appease customers (while recovering the cost by other means, such as increased merchandize prices for all customers, or decreased interest paid on consumer accounts.)
(EN: The author neglects to mention the periodic debate over cost absorption. The notion that the price to all customers is increased to cover the operating costs of transactions for one specific method of payment - i.e., cash customers object to being overcharged to subsidize costs for service debit card customers. This arises periodically and has not historically gained much steam.)
Access
The controversy over access is likewise based on economies of scale: smaller customers that cannot afford the fixed costs of membership in multiple networks pay more in switching fees than larger institutions whose volume of business enables them to join multiple regional networks to minimize cost.
There is some mention of "exclusionary membership rules," in which a network would decline to provide access to a given financial institution or processing service for reasons other that their ability to pay for service (e.g., physical location), but these have been virtually eliminated.
In the present day, virtually all card holders can utilize their cards at virtually any ATM location or card-accepting merchant. However, there is still some debate over merchants who wish to choose which cards to honor (refusing debit cards, or refusing a specific type of debit card due to higher cost) and issuers who wish to require merchants to honor all cards they issue, which was only recently settled (in favor of the merchants).
Another are of conflict over access is in providing service to "un-banked" customers - specifically, the low-income customer or welfare recipient who does not have a bank account at all and cannot avail himself to payment cards, or for whom the customer surcharges represent a hardship. However, this has largely been addressed by employers and state institutions that have borne the cost of providing payment cards to such individuals.
Innovation in payment technology has also periodically been portrayed as exclusive: generally, emerging payment methods are accessible to only a small group of customers before going to wider release, though in some instances, the inability to participate in experimental programs has been a source of consumer frustration.
Risk
Risk in the EFT industry is generally focused on two elements: payment fraud and operational risk.
Most cases of payment fraud fall into two categories: an individual who offers payment where no funds exists (analogous to "bad checks") and attempting to present payment on an account that belongs to another person (such as a thief using a stolen credit card).
Identity theft, which falls into the second category, is a relatively new crime that is trending upward: the criminal obtains personal information about an account holder and obtains payment cards with the other person's identity, which he then attempts to use as much as possible until the fraud is discovered.
For ATM and debit cards, the requirement of a PIN has been generally effective in reducing the amount of fraud, as have various technical methods to make forging a card more difficult for the criminal. As technology continues to progress, some opportunities for fraud are eliminated, but as additional applications are introduced, new opportunities arise.
Operational risk, meanwhile, occurs within the business side: a human error, software problem, or malfunction will lead to financial exposure of the issuing bank. Some of these are the natural consequence of doing business, others are caused by failure to follow procedures, and still others are introduced by hackers attempting to hijack or disrupt systems.
Ultimately, the same measures taken to address payment risk will also be helpful in reducing operational risk: reliable authentication of transactions and monitoring to better identify and investigate unusual and possibly erroneous transactions.