Some debit card networks are modifying their interchange policies for low-cost transactions to address merchant concerns about pricing. Will others follow?
Consumer comfort with using debit cards for a wide range of transactions continues to rise, Visa USA and MasterCard International report. But the fastest-growing growth sector for debit-small-ticket purchases-is far from reaching its potential.
"At the end of the day, the vast majority of (small-ticket) transactions are still conducted with cash," notes Les Riedl, president of the Atlanta-based Speer & Associates consultancy.
To capture more of those transactions, at least one domestic PIN-debit network, Greenwood Village, Colo.-based First Data Corp.'s Star, is changing its interchange-rate structure. The network in May will move to a per-ticket-value approach from a monthly transaction volume-based structure in a bid to make PIN debit more attractive to quick-service restaurants, or QSRs, many of whose customers spend no more than $10 per visit, says Beth Lynn, First Data senior vice president of network administration.
"Our goal is to promote and expand PIN debit," Lynn says. Star's move also makes PIN-debit a better value for its member issuers by increasing their interchange revenue stream in a retail segment where they currently get little revenue, she notes.
Star's QSR interchange rate is a flat 12.5 cents per transaction, regardless of ticket value. On May 1, Star's QSR interchange will become 1.25% of a sale plus 2 cents. The total amount payable would be capped at 45 cents.
That means a $5 sale at a QSR would cost the acquirer 8.25 cents in interchange, or about 4 cents less than under the current Star rate, while a sale exceeding $8 would cost a QSR acquirer more in interchange.
Though Visa USA has a low-ticket category for signature debit, its Interlink PIN-debit network does not have a QSR category and uses a tiered interchange structure, with nonsupermarket merchants paying a top rate of 45 cents per transaction. Robert Towne, Visa vice president of acceptance economics, says Visa has no plans for Interlink to match Star's changes.
Speer's Riedl, however, believes other networks will follow Star's purchase-value-based example to capture more transactions from cash-oriented businesses. "You have to create special categories with these," he says.
In a breakdown of 2004 transaction types, Visa says the use of debit cards at QSRs is growing much faster than other payment sectors. Funds spent with Visa-branded cards at QSRs last year increased 67% from 2003, to $10.8 billion, according to Visa. Dollar volume for what the association describes as "small tickets" grew by 25.3% last year, to $6.5 billion, from 2003's total.
While QSRs are a high-growth transaction sector for Visa, the volumes within such cash-oriented businesses could be much larger, Visa chief executive Carl Pascarella said in a statement on Visa's 2004 results. "There remains a huge opportunity for growth in 2005 and beyond, with $19 trillion of transactions still being made with cash and checks," he said.
QSRs are a $138 billion market, and payment cards account for only about 10% of QSR payments, according to Visa.
Visa expects to capture far more of what currently are cash transactions, says Ginny Traub, Visa vice president of consumer debit. Traub notes that the debit infrastructure at QSRs is just now being built. Three years ago, less than 10% of QSRs accepted Visa payment cards. Now, more than 54% accept them, says Traub.
Visa, as have other major debit networks, several years ago adopted a special interchange category for QSRs. This category reduces the signature-debit interchange on sales of less than $15 that merchant acquirers pay issuers of signature-based debit cards.
MasterCard's gross dollar value for its signature-debit program in 2004 increased 18.7% from 2003, to $277.2 billion, of which $149.2 billion was in the U.S. That compares with a 12.1% increase in 2004's fourth quarter from the same period a year earlier for both credit and signature debit, MasterCard says. MasterCard did not release 2004 data for its PIN-based Maestro and Cirrus networks and declined to comment on its 2004 results.
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