DEBIT CARDS

Debit Cards

Like the ATM side of the industry, the debit card side also has seen important changes, especially in transaction volume and industry structure. After a long period in which debit transactions grew slowly, debit transaction volume began to grow very rapidly in the mid-1990s. Paralleling developments in the ATM industry, the number of online debit networks has declined and industry concentration has increased.
Perhaps the most dramatic development in the industry has been the race between online and offline debit.
Important underlying elements in this competition are the fee structures associated with debit card payments and rules that compel merchants to accept offline debit cards. This chapter reviews these changes. The chapter also reviews authorization, fee, and settlement arrangements for debit transactions. In addition, emerging products that use debit cards for making payments are surveyed.

 
Although debit cards were in use during the 1980s, transaction volume was negligible (Chart 10). In the early 1990s, growth was sufficient to make debit card volume more noticeable, but by 1995 it still represented only 2 percent of retail noncash payments. Strong growth in more recent years, however, pushed the percentage to 11.6 percent in 2000. As seen in Chart 10, online and offline debit transactions showed similar growth patterns from 1990 to 1995, and by 1995 each had roughly the same number of transactions. However, after 1995, the growth of offline transactions outpaced online, so that by 2000 the number of offline transactions was 63 percent higher than online transactions. As a consequence, online debit’s share of total debit transactions has fallen (Chart 11). Online debit represented about 60 percent of debit transactions in the early 1990s, but in the last few years its share has been closer to 40 percent. Online debit’s share has increased the last couple of years as volume growth has accelerated, but it is too soon to tell whether this trend will persist.

He number of cards in circulation that have a debit function (either online or offline) has also grown, rising from 130 million in 1985 to 287 million in 2002 (Chart 12). However, until well into the 1990s, few consumers were using the debit function of their cards: There were less than 10 annual debit transactions per card in circulation until 1996 (Chart 12). Since then, annual debit transactions per card have risen to nearly 50. It is clear that the late 1990s witnessed a major change in how consumers use their debit cards. Debit cards have been used more extensively in recent years for a number of possible reasons. It is relatively easy to add a debit function to an ATM card, and because the base of ATM cardholders was well-established in the 1980s, it was not difficult for banks to establish a similar base of debit cardholders. 

Aggressive marketing on the part of banks helped familiarize debit cardholders with the instrument, as did the emergence of Visa and MasterCard’s offline debit products, which opened up their credit card infrastructures to debit cardholders.71 In addition, the number of online debit card readers grew sharply—from 40,000 in 1988 to 3.5 million in 2002—yielding an almost 35 percent annual growth rate . Merchants have had at least three clear incentives to install online debit card readers. First, debit cards offer consumers a payment choice that many of them now prefer. Second, processing an online debit transaction is less costly to merchants than an offline debit card, credit card, or check transaction.72 And third, the risk of fraud is lower with online debit than other methods of payment.