The payments system is going through a period of rapid change. Paper checks are increasingly giving way to electronic forms of payment, which themselves are being transformed as new products, new players, and new industry structures arise.
Some of the most dramatic changes are being seen in the automated teller machine (ATM) and debit card industry.
Installation of ATMs has been particularly rapid in recent years. ATM growth was 9.3 percent per year from 1983 to 1995 but accelerated to an annual pace of 15.5 percent from 1996 to 2002. Much of the acceleration is due to placing ATMs in locations other than bank offices.
These off-premise ATMs accounted for only 26 percent of total U.S. ATMs in 1994, but now account for 60 percent. On the debit card side of the industry, growth has been extremely rapid in point-of-sale (POS) debit card transactions. With an annual growth rate of 32 percent from 1995 to 2002, POS debit is the fastest growing type of payment in the United States. Today it accounts for nearly 12 percent of all retail noncash payments, a fivefold increase in just five years.1 Growth has been sharp in both online (PIN-based) and offline (signaturebased) debit. From 1995 to 2002, annual growth of online debit was 29 percent, while offline debit grew at 36 percent. The ATM/debit card infrastructure also has undergone significant change, including consolidation, nonbank ownership, and increased transaction processing located at nonbank (third-party) processors.
Consolidation of ATM and debit card networks began in the mid-1980s and continues today. One result is that in 2002 the top three regional networks (Star, NYCE, and Pulse) had a 70 percent market share in switch volume, while the top three networks in 1995 had a market share of just 39 percent.2 The recently proposed merger of First Data Corporation and Concord EFS, and its potential for combining their network subsidiaries NYCE and Star, would represent a further step toward consolidation. Along with consolidation has come a significant change in the ownership structure of networks. In 1985, banks or bank associations owned all of the top 10 regional networks, while in 2002 nonbank organizations owned five of the top 1 10.3 Acquisition of networks by nonbank companies that provide payment processing services, such as Concord EFS and First Data Corporation, reflects the growing importance of third-party processors in network ownership, driven by the desire of these organizations to expand the scope of their operations.
Further, there has been horizontal integration among third-party payments providers, as organizations such as Concord EFS and First Data acquire smaller payments processors and organizations such as E*Trade and eFunds expand their ownership of ATMs or the ATMs they service through merger and acquisition. The proposed First Data Corporation/Concord EFS combination underscores the quest for scale and scope among payments processors. A number of changes also surround pricing structures and strategies. More than 88 percent of ATMs add surcharges to users whose access cards are not associated with that ATM’s owner, a practice virtually unheard of 10 years ago.
Despite their prevalence, some ATM users continue to object to surcharges and a few jurisdictions have tried to prohibit them.4 Also controversial is the recent increase in the use of online-debit fees (PIN fees) by some financial institutions to redirect their cardholders from online to offline debit. Indeed, the differential pricing of transactions fees for offline and online debit was a key issue behind the conflict between merchants and card-issuing banks that was epitomized by the Wal-Mart “honor-all-cards” lawsuit. A settlement between the parties of the lawsuit, reached in April 2003, will likely have wide-ranging impacts on the industry.5 Another pricing issue has arisen due to volume discounts introduced by some networks, a practice that might be disadvantageous to smaller users.
Finally, changes have gone beyond the traditional ways of using ATM and POS debit. There has been substantial innovative activity generating new products and services that use the ATM/debit card infrastructure. Applications are being developed that allow debit cards to be used to make payments on the Internet and to convert paper checks into electronic payments at the point of sale. Another initiative would use ATM and debit card networks to enable person-to-person (P2P) payments on the Internet.
Issues and implications
Associated with these changes are numerous economic and public policy issues. These issues include market concentration, vertical integration and economies of scope, pricing, access, and risk. Market concentration. Consolidation has occurred at many stages of processing ATM and debit transactions. To some extent, this reflects advantages of size brought on by network effects and economies of scale.
The results could be beneficial because the value of payments networks to consumers could increase and prices could be reduced. However, there is also a risk that increased size of providers could result in excessive market power for some firms in the industry, which could cause prices to rise. A number of issues deserve attention. For example, could further consolidation cause long-term harm by reducing innovation? Is the tension between a desire for efficiency and a desire for competition a cause for concern in the ATM and debit card industry? 2 A Guide to the ATM and Debit Card Industry Vertical integration and economies of scope. Some recent developments in the ATM and debit card industry involve expanding the scope of services offered, such as payments processors acquiring networks and networks providing additional payment services.
This expansion represents a search for the appropriate scope of operations in payments processing. In addition, it has brought nonbank ownership to significant parts of the industry. Several important questions arise. What are the implications of these combinations? Will they be successful in realizing expected advantages? With banks decreasingly represented in the industry, should there be concern regarding who is responsible for ensuring that payments are processed efficiently and safely?
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