ST. PETERSBURG, Fla. - Just about one year after the historicdebit settlement with retailers, credit unions and other debitissuers face a bright future with the popular cards, according to aVISA executive. Speaking to attendees of Card Services for CreditUnions 2004 annual conference (See pages 32-34 for more coverage),Stacy Pinkerd, senior vice president with the San Francisco-basedVISA, reported that one year after the association had agreed toabandon some previous key rules and committed to pay $2 billion toa retailers, the horizon for debit cards remained as bright asever. "Probably the biggest news out of the settlement [with theretailers] is how little impact it had overall," Pinkerd toldcredit union card executives attending the conference. In lateApril 2003 VISA and MasterCard settled an ongoing lawsuit withWal-Mart and other retailers over their so-called "honor all cards"rules and the rate of interchange the retailers had to pay fordebit transactions in which cardholders validated with theirsignature rather than a personal identification number. In additionto agreeing to pay retailers for their past interchange and cuttingtheir interchange rates by roughly a third for the balance of 2003,the card associations also agreed to abandon the honor all cardrules, a development which appeared to free retailers from beingobligated to accept the card association's debit cards if theyaccepted the credit cards. But in reality, Pinkerd explained, theassociations now have to honor all cards rules. Whereas theprevious honor all cards rule said that merchants who accepted VISAcredit cards must accept the VISA debit card, under the new rulesmerchants taking the credit card now have to accept all of VISA'scredit products and merchants taking the debit card now have toaccept all VISA's debit and prepaid products. The other big newshas been the loyalty merchants have shown the debit cards. AlthoughWalMart stopped accepting MasterCard's debit card at its stores asof February 1, virtually none of VISA's merchants have stoppedtaking VISA's debit cards, Pinkerd reported. As of March 31 of thisyear, Pinkerd reported, only 21 merchants, representing $237,000 inannualized check card volume, have opted out of taking the VISAdebit card. "Statistically, the volume they [the departingmerchants] represented was 0.0007% of our overall sales volume,"said Pinkerd, adding that there was evidence that some of the 21had withdrawn from the debit program in error. "We asked some ofthe merchants and they indicated that they had thought they wereindicating that they didn't have a pin-pad and didn't want one,"Pinkerd said, "they didn't mean to withdraw from taking theCheckcard." Pinkerd reported that VISA has continued to negotiatewith the few retailers, including Home Depot, CVS, Best Buy andToys R Us which had opted out of the settlement of the retailers'suit and expected there would be a resolution soon. Mostsignificantly, Pinkerd said that VISA's average debit interchangehad risen from 130 basis points in 2003 to 140 basis points now.Pinkerd suggested that VISA's success in negotiations withmerchants owed a lot to the 140 million debit cards that VISAmember institutions have issued and the growing volume andpopularity of the card. "We have research data that shows that someconsumers love their debit cards so much that they say they wouldswitch their financial institution if they were told they couldn'thave one," Pinkerd said. "That kind of attitude and that many cardsare hard to ignore." What all this means is that there willprobably be a role for debit rewards programs in debit cardportfolios, whether the reward program comes from VISA, the cardprocessor or the credit unions themselves. In fact, the role of thedebit card reward program is liable to increase as card issuersstrive to convince consumers to sign a receipt rather than enter aPIN, Pinkerd explained. After the interchange cut brought on by thesettlement, there had been fears that debit rewards programs mightprove too expensive for the debit programs. But in the face ofresearch which suggested most consumers really didn't care whetherthey signed or used their PIN, Pinkerd urged the card executives toeducate their cardholders about the benefits of using the VISAdebit card. These include the convenience of being able to use thecards worldwide, the security of zero liability, including the factthat financial institutions will usually make good any losses tochecking accounts within 24 hours, and the security of VISA'sdispute procedures, as well as any rewards program the card mightcarry. Pinkerd explained that cardholder education as to theadvantages of the debit card were vital to making the cardholder avital part of the card transaction and motivating them to choose touse their signatures rather than a pin. When it came to competitivechallenges on the horizon, Pinkerd noted that First Data's purchaseof Concord and Concord's STAR network, represented a consolidationof competition and competitive challenge. "The thing about VISA isthat you know our network is basically `issuer-centric'," Pinkerdsaid, "we are looking out for the interests of our issuers.Networks not owned by financial institutions tend to be`merchant-centric,' they look out for the interests of themerchants," he added. The effects of the consolidation include thefamiliar battle at the PIN-pad over whether a cardholder will signthe receipt or enter a PIN. But it also includes an increasingnumber of merchants who are taking VISA debit cards online androuting the transaction through normally PIN based networks, eventhough they don't take a PIN. Although merchants have every rightto steer consumers away from using the VISA debit card in a waythat resembled credit cards, the consumer should be the one thatmakes the decision, Pinkerd said. VISA had begun hearing fromissuers, particularly those with debit card reward programs, whohad cardholders who called upset that some recent VISA debit cardtransactions had been treated as PIN transactions even though thecardholders hadn't used their PINs, Pinkerd explained. VISA viewedthis trend as an emerging competitive challenge and had begunworking with merchants to ensure consumer choice, he added. -

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