Is the Debit Card Revolution Finally Here?

Federal Reserve Bank of Kansas City - Economic Review, Fourth Quarter 1994 by Caskey, John P, Sellon, Gordon H Jr

As ATM systems evolved, however, compatibility and standardization problems diminished. A key development was the growth of shared ATM networks. In the early 1980s, banks began to form and join shared networks as they realized that their customers would prefer an ATM card that could be used to obtain cash at a wide range of locations. While only about half of ATM terminals were shared in the mid-1980s, almost all ATM machines belonged to a regional network by 1993.

These networks facilitated the launching of on-line debit cards since they had already electronically linked large numbers of banks in a region, set interbank settlement procedures, and led the banks to issue ATM cards with compatible standards. It was a natural step for these regional ATM networks to promote the use of the ATM card for point-of-sale payments. [4] In areas where one large regional ATM network dominated, merchants could install a terminal capable of reading almost all of the ATM cards carried by their customers and linked to a network connecting the vast majority banks in the region. Thus, it is not surprising that the on-line debit card has enjoyed the most success in California and Pennsylvania and some surrounding states. In these geographic areas, there were large, well-established, shared ATM networks by the mid 1980s, making it easier to coordinate the introduction of the debit card.

Future impact of network externalities

Network effects are likely to be even less of an impediment to debit card acceptance in the future. These barriers are being further reduced by mergers between regional ATM networks and by the consolidation of the banking industry. [5] As ATM networks combine, greater coordination on technical issues is possible since one network's technical specifications are typically chosen as the new network standard. A similar process occurs when banks merge. As a result, merchants may be more likely to adopt debit as a payment alternative in the future to the extent that increased standardization lowers costs and increases likely consumer usage.

An additional factor that may have an important effect in lowering network externalities is a greater government role in electronic payments. Network externalities are most difficult to overcome when there are a large number of decision-makers whose interests must be coordinated to guarantee the success of a new product. In this situation, a dominant player can provide leadership that improves coordination and speeds up product adoption. Over the past few years, some state governments have provided low-income households with debit cards linked to deposit accounts. The governments then use these accounts to distribute financial assistance electronically. More recently, the federal government has expressed interest in developing a national electronic benefits transfer (EBT) program in an effort to reduce costs and curtail fraud in existing transfer programs. Extensive government involvement in the distribution of benefits through debit cards could spur debit card growth in two ways. Government involvement could increase industry standardization and provide subsidies or other incentives for merchants to install debit card readers.