Debit cards charge up retailers

Discount Store News, March 3, 1997 by Richard Halverson

NATIONWIDE DSN REPORT -- When a customer buys $100 worth of goods at Wal-Mart and pays by cash or check, it costs Wal-Mart about 7 cents to 15 cents in cash for handling and check processing expenses.

When a customer buys that same $100 worth of goods and pays with an ATM card, one type of debit card, it costs Wal-Mart a nickel to a dime in transaction fees.

But when that same customer pays with, say, a Visa Check card, another type of debit card, it costs Wal-Mart $1.10 in transaction fees, or about a dollar more.

That extra buck is the rub for Wal-Mart and the entire retailing industry.

For the number of Visa Checks or MasterMoney cards from MasterCard, debit cards are exploding by more than 50% per year, and customers purchased $48 billion worth of goods with both types of debit cards in '96. Visa and MasterCard have convinced 47 million credit card holders that buying merchandise with debit cards--good wherever Visa and MasterCard credit cards are accepted--is a better alternative than carrying around wads of cash or trying to get an out-of-town merchant to take personal checks.

Compared to credit card use, the debit card volume of $48 billion is small compared to credit card usage, but it is equal to about 6% of total U.S. credit card charges of an estimated $800 billion last year. But the credit card industry expects that debit card use will grow rapidly to hundreds of billions of dollars in the next several years.

Powerful growth should propel debit cards into real money makers for Visa and MasterCard, as well as the banks that will issue them in the next few years. They'll be real money losers for retailers.

That success prompted Wal-Mart and The Limited to file a class action, anti-trust lawsuit against the two credit card companies last October, hoping to head them off at the pass.

Their suit gained impetus two weeks ago when the International Mass Retail Association, the National Retail Federation and Sears joined in the suit so that virtually the entire retailing industry now has jumped into the fight.

Twin issues are at stake:

* Both credit card organizations force retailers to accept their debit cards if they accept their credit cards, and plaintiffs argue that this is illegal under the anti-trust law.

* Plaintiffs in the suit charge that debit card fees are too high, considering that the risk that issuing banks face is no more than they face on a nickel or dime ATM debit transaction. Yet their debit card fees are close to what they charge for a far-riskier extension of credit on a credit card purchase.

IMRA and the NRF are seeking an injunction to halt the tie-in practice, said Morrison Cain, lobbyist for IMRA. In addition, retailers are seeking treble damages under anti-trust provisions for their alleged damages.

The suit states that the illegal actions of the two credit card companies cost retailers roughly $500 million in extra fees because of the illegal practices, indicating that they might seek about $1.5 billion in treble damages.

As the industry credit card leader, Visa accounts for 64% of the 47 million debit cards in circulation in '96, including both types of debit cards, the suit states; MasterCard, 12%, and regional ATM cards, the balance of 26%. That compares with about 250 million Visa credit cards alone.

Debit card holders made about 1.2 billion transactions in '96 for dollar volume of $48 billion, the suit stated. Visa Check card use alone has grown 800% over the past five years, it stated.

At minimum rates, retailers pay $1.10 for a $100 purchase if the customer uses a Visa Check card and $1.31 for a MasterMoney transaction.

That compares with 5 cents to 9.5 cents if the customer pays with a regional bank ATM debit card. For a Visa credit card transaction, the minimum is $1.25 per $100, and the minimum MasterCard charge is $1.31.

Plaintiffs in the suit argue that the check card debit fees ought to be the same as ATM fees because banks face no extra risk.

An ATM payment is called on line, meaning that the purchase money is instantly taken, or debited, from the card holders' checking accounts and at the same time credited electronically to the retailer's account.

A check card debit transaction is off line, involving two messages, or steps, but a customer's bank balance also secures that type of transaction. When the customer uses a check card, banks instantly take the amount of the purchase out of the customer's bank account and deposits the money in its own bank balances. But the retailer doesn't get the money for anywhere from one to five days, allowing banks to benefit from the float.

A Visa spokeswoman said banks face some risk from crooked customers who might make a debit card purchase at a retailer and then overdraw their bank balance at an ATM terminal. In that situation banks would take a loss from the overdraft because they have guaranteed payment to Wal-Mart. (That assumes that banks have no recourse at collecting from their customers.)

Plaintiffs contend that there is no risk, so check card debit fees should be equal to ATM fees--not in the same ballpark with credit card fees. In written statements, Visa and MasterCard vow to defend their "honor all cards" rules.