In the age of the Internet, it has become easier than ever for merchants to accept payments at the point-of-sale. Indeed, the proliferation of new point-of-sale technologies may prove detrimental to banks' debit card revenues.
Essentially, merchants have been steering their customers to lower-cost payments networks, and these are not necessarily bank-owned or bank-controlled. Whether by steering customers to PIN-based debit, creating loyalty programs that move customers' transactions onto the ACH network, or even by moving recurring transactions from debit to ACH, merchants have been aggressively slashing their payments-related costs - at the expense of consumers' banks.
The battle at the checkout line is perhaps the most visible. PIN-based (online) debit transactions incur interchange rates approximately 80 basis points lower than those for signature-based (offline) debit transactions. "Every time your customer presents either their Visa check card or MasterCard debit card to that merchant, and that merchant prompts the customer to use a PIN, that cost you about 100 basis points in 2003 [prior to the Walmart settlement]," says A.N. (Tony) McEwen, executive vice president, Visa U.S.A. (San Francisco, Calif.). "Still today, it's costing you -- at the new rate -- about 80 basis points."
In other words, for each $100 received at the point-of-sale via debit instruments, it's worth about $0.80 to the merchant if it can entice a customer to enter a PIN instead of sign for a transaction. That's a lot of money in a low-margin, high-volume business such as groceries. "The merchant gets a lower cost, [and] the networks get a new switch fee that they didn't get when those were either Visa or MasterCard transactions," says McEwen. "The money comes out of nobody else's pocket but the issuer's."
Employee training is part of the steering effort. Furthermore, both Walmart and Publix, among others, have adopted card terminals where the use of signature is technically possible but rather user-unfriendly. "It's very difficult to get that terminal to allow you to sign for the transaction," says McEwen. "In some cases, you actually have to push the 'cancel' button on the terminal to get it to go past the 'enter your PIN number' screen, to allow you to sign for the transaction."
But even PIN-based debit networks are being bypassed by systems that clear transactions through the ACH (Automated Clearing House) network. One example is Safeway's SmartCheck loyalty card. "The consumers are asked to give their account numbers and routing-transit numbers off of a canceled check," says McEwen. "As a result, those transactions that were on your debit cards before are now being converted to an ACH every time that customer goes into a Safeway and uses their [SmartCheck] card."
"It generates no revenue for you," adds McEwen. "It's an expense item coming through an originator to your institution."
Walmart has been rolling out a similar ACH-based loyalty/payments card, and there are also multi-merchant programs in the works.