STRATEGIC PARTNERS
Will widespread acceptance of debit cause consumers to abandon the ATM? Industry experts have differing views on the debit impact. by Caroline Wilson, contributing writer
March 11, 2002
Many ATM industry experts and analysts are talking about the debit threat and its possible impact on the future of the ATM industry. Yet so far, no measurable data is showing the extent of that impact.
For ATM owners and operators who wonder whether they should start worrying, there is no easy answer.
As the debit industry comes of age, it's logical to assume that wide debit acceptance coupled with the increasing trend of cash back at POS terminals will lead to erosion of the ATM market, either through lower transaction volume or lower dollar amount withdrawals.
ATM transaction growth has generally slowed or is falling, but that trend cannot be tied specifically or solely to the debit threat, according to Kurt Helwig, executive director of the Electronic Funds Transfer Association.
Helwig and other experts agree that the ATM market will reach a saturation point. That point could come sooner rather than later if debit contributes to declining ATM transaction volume. "The question is when, but certainly debit is a factor," he said.
The impact of debit on ATM owners and operators will vary, Helwig said. For banks or regional networks operated by banks, which get fees from several different sources, the impact may not be significant. But for ISOs and operators whose only source of income is the surcharge, declining ATM transactions could spell trouble.
Less cash, more convenience
Debit usage has two major potential effects on the ATM industry. First, as consumers use their debit cards in more locations, they may feel less need to carry cash. According to Faulkner & Gray's Debit Card Directory, online debit cards were used for 1.8 billion POS transactions as of midyear 1998, a 25 percent increase over midyear 1997.
Also, the increasing availability of cash back at a debit point of sale could make consumers less likely to use ATMs. "The trend is an increasing use of debit across the board," Helwig noted.
Cash back is growing, as a response to surcharging, with some consumers bypassing the ATM altogether. "Most consumers, when they realize they can get cash without paying a fee, they'll take advantage of it," said Stan Paur, president and CEO of the Houston-based Pulse EFT network.
Mainstream stores -- from supermarkets to convenience stores to drug stores -- are offering the cash back option at the point of sale. "Merchants offer it as a service, and it's also an excellent way for them to get rid of their cash on hand. And they offer it for free to the consumer," Paur said.
Of 108,000 merchant locations that accept Pulse debit cards, about 81,000 offer cash back. Pulse promotes the cash-back option by distributing brochures with titles like "Ask Your Merchant About Cash Back " and "Get Cash Back the Pulse Way" to some of its member financial institutions, who then pass them on to customers.
A Dove Associates study, conducted in conjunction with the American Bankers Association, highlights the effectiveness of the brochures as a marketing tool. Asked how they initially discovered they could use debit cards to make purchases, 49 percent of offline cardholders and 33 percent of online cardholders mentioned bank statement stuffers.
Some retailers, like Kroger, Walgreen and Wal-Mart Stores, promote cash back by posting signs reminding customers of the option or having cashiers ask customers if they want cash back. A significant number of cardholders in the Dove Associates study cited prompting by a store clerk as a factor in debit usage.
According to Paur, "Certainly debit is affecting ATM usage. However, precise numbers do not exist. As consumers can get cash back at merchant locations without paying a fee, it obviates the need for the ATM in many cases."
For Pulse, which processes both ATM and POS transactions and does not own any ATMs, the effects are somewhat transparent. "But for ATM vendors and owners, these types of trends are things you must be aware of," Paur said.
Problems in debit land
Federal investigators are looking at offline debit cards as part of a class-action antitrust lawsuit filed against Visa and MasterCard. Several major retailers are challenging an "honor all cards" rule that requires them to accept Visa and MasterCard debit cards if they accept credit cards.
Visa and MasterCard set the interchange fees that dictate what retailers have to pay their card-issuing banks. Debit cards are less expensive to retailers than credit cards but more expensive than regional ATM cards. While a $40 sale made with an offline debit card would require an interchange fee of 48 cents, the same sale made with a regional ATM card would cost between three and 10 cents, depending on the network.
Visa announced an increase in interchange fees for both offline and online transactions, beginning April 1. Following Visa's action, MasterCard and the Honor and MAC regional networks have all announced plans for fee increases.
Some industry observers worry that offline debit transactions don't offer enough security. When cardholders make offline transactions at stores without PIN pads, their signature may be the only verification. And unlike checks, a photo ID is usually not required for offline debit transactions.
Despite these concerns, offline cards are driving growth of the debit market. According to the Congressional Budget Office, the number of online debit cards fell by 20 percent while the number of offline cards more than tripled between 1993 and 1997.
Visa is finding few takers for its new debit card, known as check card II. The card can be used online with a PIN or offline with a signature. Both online and offline transactions are switched through Visa's network, removing regional networks from the process. Visa rules prohibit card issuers from putting logos of regional ATM networks on the cards.
So far, only two community banks -- Saratoga National of Saratoga, Calif., and Pioneer Trust of Salem, Ore. -- have agreed to issue it. David Petro of the Independent Bankers Association of America thinks the card will attract more community banks, because they can drop membership in regional networks while maintaining national ATM coverage.
Larger banks that remain more loyal to the networks probably won't issue the card.
The blame game
Surcharging has become the scapegoat of the ATM industry. Whenever a problem arises, blame it on the surcharge. Yet the assumption that consumers will turn to debit usage to avoid ATM surcharging may be a false one.
"We've seen explosive growth in POS without any effect on ATM surcharges," according to Paur. That indicates that ATM owners and operators are not eliminating surcharges in response to rapid POS/debit growth.
Ed Bourgeois, president of Automated Technology Machines Inc. of New Orleans, is less positive. "We believe that ultimately, surcharge revenue on ATM transactions will come down, partly as a result of the debit threat. We need to develop alternative sources of revenue," he said.
Helwig said consumers are modifying their ATM habits because of surcharging. "People may take out more cash per single ATM transaction, for example, rather than going to the ATM many times for smaller amounts of cash."
Can we all just get along?
Industry analysts say that so far, despite the obvious assumptions one can make about the debit market's effect on ATM use, it is not clear that debit is eroding the ATM market. "People either love it and use it all the time or they hate it," Bourgeois said.
That may be one reason why debit hasn't overtaken the ATM yet. Consumer habits die hard, and many consumers -- who finally have gotten used to using an ATM card -- see little need for adjusting to debit.
Some argue, too, that debit transactions are mostly replacing checks rather than cash or credit. "In general, it [debit] is another payment medium just like cash, checks or credit," Bourgeois said. "It's coming into its own, just as the ATM did over a 25 year period. However, debit is not taking nearly as long. It's pretty much established now."
ATM owners continue to deploy machines at a rapid pace. Bourgeois, for one, is enthusiastic. "Total ATM transaction volumes are continuing to increase; we are continuing to deploy and we have the capital to grow. We're very selective about where we deploy, and we are continuing to deploy about 20-30 new units per month," he said.
Clearly, the ATM industry stands on guard, poised to take on the debit challenge. For now, the two worlds are coexisting nicely; ATM deployment continues and new debit products are rolled out.
But for the future, "It [debit] is a concern. It will ultimately take away certain needs for cash," Bourgeois said. "Clearly, it's something we as an industry have to be aware of and take into consideration in our strategic planning."
