Appendix: Updates
(EN: A separate publication was released to update the original study - rather than presenting it as a separate work, I have included the updates here.)
The three years since the original version of this study were published had been a time of dramatic developments, in which some trends have persisted, others have reversed and new trends emerged. As such, the authors felt it necessary to publish an update to the original book.
Primarily, the ATM and debit card industries seem to be diverging: the ATM industry has matured and become relatively stagnant, whereas the debit card industry is expanding rapidly with new firms, new products, and new markets.
Developments in the ATM market
It is generally accepted that the ATM industry has reached a saturation point, and the total number of ATMs have declined for the first time since 1983.
Also the number of ATM networks has declined, dropping nearly by half in the past three years. The top regional network continues to be Star, which has declined from a 31% share to 24% while Visa's Plus network, the second largest has grown from 12% to 21%.
There is also considerable consolidation of ATM deployment, which is contrary to the point the authors made a few years ago, with banks deploying more off-site ATM locations and retailers (convenience stores and grocery chains) managing their own on-site ATMs rather than jobbing it out to local providers.
Wholesale pricing has also become standardized, with most major networks charging tiered switch-fee structures based on transaction volume, though interchange fees remain highly variable. The Federal Reserve ceased monitoring retail fees, but evidence suggests that ATM surcharges remain at about the same levels.
ATM usage has also declined among consumers overall: many consumers are using debit cards more frequently, and have less need of cash, or obtain cash at the register, and as such are making less use of ATMs. Whether this is convenience or fee-avoidance is subject to debate, though it is likely both factors come into play.
Developments in the debit card market
During the past few years, the debit card industry has experienced rapid growth, estimated at 19% and 25% annually for offline and online transactions, respectively. For many customers, debit card transactions have significantly displaced cash and check transactions
Offline (signature) transactions has a 3-to-1 lead over online (PIN) transactions in value of transactions, largely because many large merchants process debit transactions offline - in terms of transaction volume, the proportion is 1.6 to 1.
In terms of merchant acceptance, offline transactions are processed in the same manner as credit card transactions, and there is no significant financial advantage to accepting one over the other, though there is some increase in the PIN market share, as providers are marketing to gain greater retailer acceptance.
As with ATM networks, the debit card networks have also consolidated, going from 23 networks in 2002 to only 14 in 2006. No major networks have entered or exited the market, however, second-place Interlink has displaced Star as the largest.
In terms of wholesale pricing, most of the PIN networks have increased their fees, and in some instances it has been dramatic. Pulse, for example, more than doubled its non-supermarket interchange fee. This has largely closed the gap between PIN and signature fees. There is also increasing price discrimination, as merchants who process a larger number of transactions obtain significant discounts on transaction fees.
(EN: The author doesn't connect the dots, but taking the two points together, merchants who process a smaller number of high-value transactions pay higher online fees than those who do a large number of low-value transactions, which explains why a supermarket or fast-food restaurant would have a financial incentive to use online processing whereas a clothing or furniture retailer would not, and may even gain an advantage from remaining offline.)
Regarding retail fees, a 2004 study was conducted that suggested 14% of depository institutions collect a PIN fee, which varies from about 10c to $2, with the average being about 75c, and "a smaller portion" continue to charge for signature debit transactions.
The most pronounced theme in the debit card industry has been rapid growth in all measures: transaction volume (for both PIN and signature transactions), number of cards in circulation, number of transactions per card, and number of POS terminals have all rapidly increased.
Consumer perceptions about debit cards have become increasingly positive, and have substituted debit cards for cash and checks. There has also been a cultural shift, especially among younger consumers, to favor card payments as opposed to cash or checks as their method of preference, which points to sustainability of the method.
More merchants have accepted debit card transactions, largely due to the decreasing cost of equipment, and debit cards can also be used for online transactions.
Banks also seek to encourage customers to use debit card transactions, which are cheaper and easier to process than checks and enable them to improve the amount of cash held in reserve (cash customers withdraw more funds than they need, and any money in their pockets is not in the bank's possession - while it is small amounts individually, the aggregate total of cash in wallets and purses is significant, and just-in-time withdrawal by means of a debit card keeps this money in the bank's coffers for a longer period of time.) Since the difference in fees between PIN and signature transactions has largely equalized, banks have less incentive to favor one over the other.
Networks have also been promoting debit cards, by offering incentives to both consumers and merchants for use of their cards. They are also seeking to better segment their markets, such as Visa's creation of a billing category for quick-service restaurants that reduces the per-transaction cost to make it more attractive to high-volume/low-value merchants. Other networks are specifically targeting merchants in specific channels, such as supporting person-to-person payments (MasterCard's partnership with PayPal) and electronic bill payments for typical household bills (rent, utilities, car payments, etc.)
A second major theme is dramatic increase of network competition in the industry, between regional networks, between regional and national networks, and between PIN and signature debit processors.
Generally, the network is of no concern to retail consumers, and competition is in terms of the pricing and services provided to banks and merchants, with shifts among networks resulting for decisions such as several large issuers (Chase, Bank of America, Wells Fargo, and Wachovia) moving transactions away from Pulse and toward Star and Interlink, which had a dramatic impact on the volume of transactions for these networks.
The lawsuit brought by Walmart, Sears, and other retailers against MasterCard and Visa for their "accept all cards" policies has also had a significant impact on the proportion of PIN versus signature transactions, giving retailers more leverage in choosing the processing method that had the greatest financial benefit to themselves (decreasing the revenue of the processors), depending on whether they estimate the higher fee of PIN transactions justifies receiving payment sooner than they would through the cheaper, but slower, signature networks. Given that fees between the two are converging, this may become a moot point.
However, this suit did not settle all disputes - as of June 2006, there are at least 50 lawsuits pending against card associations by various collections of merchants and consumer advocacy groups, largely over the complex structures and rules that apply to processing and interchange fees. It is difficult to predict what the outcome might be, or even if the resolution will resolve the ongoing disputes between networks and merchants.
Complicating the issue is that the ACH industry is seeking to compete in the debit space, using their network instead of the EFT network to process debit card payments. Due to differences in business practices, ACH merchants can enable retailers to become card-issues, which is appealing to retailers who would then be able to recoup some of the cost of accepting debit cards, either pocketing the profits or offering incentives to customers.
This remains in the planning stage and a pilot program has yet to be launched, though it is also noted that this has been done in some instances - e.g., Bighamton Giant Markets has had an ACH payment card program since 1989, and is seeking to make its payment card usable at other merchants, and "e-check" programs online have leveraged the ACH network to accept online payments.
Data and security fraud
Data security and fraud continue to plague the industry, with recurring breaches of both card and PIN data. 2005 was identified as the worst year for breaches of data security, and fraud has become a major expense for card issuers.
However, during the same year, a study also found that the incidence of fraud is relatively low: the author cites roughly a 20% decrease in the number of victims of identity fraud, and even in instances where security is breached and customer identities are obtained, only 0.1% are used.
Countermeasures are under development: the UK adoption of chip cards has been shown to decrease PIN fraud (though there was an increase in card-not-present transactions), and the industry within the US has made significant investment in improving and gaining compliance to data security standards.
The greatest threat, however, is not the technical and law enforcement elements, but the impact that high-profile incidents have of customers' willingness to use debit cards. The perception that debit cards are less secure than credit cards is one factor that retards consumer adoption, and the fact that consumer advisors are publicizing this notion us believed to have discouraged many consumers from using them.
The competitive landscape
It "seems likely" there will be further shakeout in the ATM industry. More retail transactions are conducted without the use of cash, and ATM locations are overbuilt - hence there are more locations competing for fewer transactions.
Banks continue to cling to the ATM as a delivery channel, but the author considers this to be "tenuous cause" for optimism. While banks are seeking to use the ATM as a delivery channel for other financial services, consumers continue to regard them merely as cash dispensers and seldom use them for any other purpose.
One function that has attracted some attention recently is the depository function of ATMs, converting check payments to electronic transactions by scanning checks at the ATM - but because the use of checks is also declining, it is unlikely this will be seen as a reason for many customers to return to the ATM. (EN: not to mention that check scanning can now be done with a mobile phone camera, which is far more convenient for customers.)
On the other hand, the use of debit cards is likely to persist and increase - as the two are at odds with one another: the ATM enables the customer to obtain cash to tender at the register, the debit card enables to customer to pay directly without the need to handle cash. According to one estimate, 63% of retail transactions are still made with cash, so there is considerable room for growth.
A primary obstacle is the continued contention between merchants and card issuers. There remains considerable dispute over the fees for transaction processing, and merchant groups have repeatedly turned to the judicial system, complicating efforts to work cooperatively.
Another obstacle has been the rivalry between PIN and signature debit/ (EN: The author makes much ado about this, but to consumers, there is not much differentiation - most cards can be used in both ways, the only difference being that consumers cannot obtain "cash back" from some merchants, and a slight lag in seeing transactions posted. This is entirely a matter of merchants choosing the most economic method given their transaction volume.)
Finally, the "wild card" is the attempt for ACH to gain market share from ETF - though they face an uphill battle, there is a great deal of effort in developing ACH products for retail transactions, which could pose a risk to traditional debit networks if the ACH alternative is more appealing to merchants.
Policy Considerations
In the retail market, the US system is considered to be in the midst of a fundamental transformation from paper-based payment to electronic-based transactions. For a legislative perspective, the issues are generally in three areas: safety, efficiency, and accessibility. Also, the payment card industry is largely self-regulated, with merchants, processors, and networks each seeking to reduce their liabilities through their business practices and choice of suppliers.
Consumers are generally shielded from risk by zero-liability provisions for signature and minimal-liability provisions for PIN debit transactions, so the risk falls largely to the merchant, processor, or network for unauthorized transactions. The fact that they have thus far been able to absorb losses, even to the extent of experimenting with less secure methods of payment (accepting payment without PIN, without a signature, and without a physical card) suggests that security is not an issue where legislators must provide protection for the public.
Efficiency within the industry has arisen largely as a result of concentration: with fewer companies in the industry, and significant coordination among them, cooperation that expedites transaction processing has been greatly facilitated. While the notion of collusion still raises some concerns, it is generally accepted that the improvement in security and cost that has resulted from concentration outweigh the detriments of non-competitive supply, and that legislation to facilitate competition would have a greater detrimental effect on the consumer.
Access issues remain, with advocates for the low-income "bankless" consumer and the small merchant that must bear a higher per-transaction cost demanding legislative remedies. But again, competition among firms to gain merchants and cardholders leads industry players to minimize cost to grow their customer base rather than seeking to increase profits by raising prices. Likely the solution to this problem is a matter of innovation and efficiency improvements rather than legislative interference in the market.
Ultimately, the youth of the industry must be considered: the debit card and ATM industry is still relatively new, and is in constant motion. Simply stated, legislation depends on stability, whereas the debit and ATM industry is in constant motion, and it may be quite some time before the industry has settled into a routine that is constant and long-lived enough for legislators to effectively regulate.