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ST. PETERSBURG, Fla. – Just about one year after the historic debit settlement with retailers, credit unions and other debit issuers face a bright future with the popular cards, according to a VISA executive. Speaking to attendees of Card Services for Credit Unions 2004 annual conference (See pages 32-34 for more coverage), Stacy Pinkerd, senior vice president with the San Francisco-based VISA, reported that one year after the association had agreed to abandon some previous key rules and committed to pay $2 billion to a retailers, the horizon for debit cards remained as bright as ever. “Probably the biggest news out of the settlement [with the retailers] is how little impact it had overall,” Pinkerd told credit union card executives attending the conference. In late April 2003 VISA and MasterCard settled an ongoing lawsuit with Wal-Mart and other retailers over their so-called “honor all cards” rules and the rate of interchange the retailers had to pay for debit transactions in which cardholders validated with their signature rather than a personal identification number. In addition to agreeing to pay retailers for their past interchange and cutting their interchange rates by roughly a third for the balance of 2003, the card associations also agreed to abandon the honor all card rules, a development which appeared to free retailers from being obligated to accept the card association’s debit cards if they accepted the credit cards. But in reality, Pinkerd explained, the associations now have to honor all cards rules. Whereas the previous honor all cards rule said that merchants who accepted VISA credit cards must accept the VISA debit card, under the new rules merchants taking the credit card now have to accept all of VISA’s credit products and merchants taking the debit card now have to accept all VISA’s debit and prepaid products. The other big news has been the loyalty merchants have shown the debit cards. Although WalMart stopped accepting MasterCard’s debit card at its stores as of February 1, virtually none of VISA’s merchants have stopped taking VISA’s debit cards, Pinkerd reported. As of March 31 of this year, Pinkerd reported, only 21 merchants, representing $237,000 in annualized check card volume, have opted out of taking the VISA debit card. “Statistically, the volume they [the departing merchants] represented was 0.0007% of our overall sales volume,” said Pinkerd, adding that there was evidence that some of the 21 had withdrawn from the debit program in error. “We asked some of the merchants and they indicated that they had thought they were indicating that they didn’t have a pin-pad and didn’t want one,” Pinkerd said, “they didn’t mean to withdraw from taking the Checkcard.” Pinkerd reported that VISA has continued to negotiate with the few retailers, including Home Depot, CVS, Best Buy and Toys R Us which had opted out of the settlement of the retailers’ suit and expected there would be a resolution soon. Most significantly, Pinkerd said that VISA’s average debit interchange had risen from 130 basis points in 2003 to 140 basis points now. Pinkerd suggested that VISA’s success in negotiations with merchants owed a lot to the 140 million debit cards that VISA member institutions have issued and the growing volume and popularity of the card. “We have research data that shows that some consumers love their debit cards so much that they say they would switch their financial institution if they were told they couldn’t have one,” Pinkerd said. “That kind of attitude and that many cards are hard to ignore.” What all this means is that there will probably be a role for debit rewards programs in debit card portfolios, whether the reward program comes from VISA, the card processor or the credit unions themselves. In fact, the role of the debit card reward program is liable to increase as card issuers strive to convince consumers to sign a receipt rather than enter a PIN, Pinkerd explained. After the interchange cut brought on by the settlement, there had been fears that debit rewards programs might prove too expensive for the debit programs. But in the face of research which suggested most consumers really didn’t care whether they signed or used their PIN, Pinkerd urged the card executives to educate their cardholders about the benefits of using the VISA debit card. These include the convenience of being able to use the cards worldwide, the security of zero liability, including the fact that financial institutions will usually make good any losses to checking accounts within 24 hours, and the security of VISA’s dispute procedures, as well as any rewards program the card might carry. Pinkerd explained that cardholder education as to the advantages of the debit card were vital to making the cardholder a vital part of the card transaction and motivating them to choose to use their signatures rather than a pin. When it came to competitive challenges on the horizon, Pinkerd noted that First Data’s purchase of Concord and Concord’s STAR network, represented a consolidation of competition and competitive challenge. “The thing about VISA is that you know our network is basically `issuer-centric’,” Pinkerd said, “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 the merchants,” he added. The effects of the consolidation include the familiar battle at the PIN-pad over whether a cardholder will sign the receipt or enter a PIN. But it also includes an increasing number of merchants who are taking VISA debit cards online and routing the transaction through normally PIN based networks, even though they don’t take a PIN. Although merchants have every right to steer consumers away from using the VISA debit card in a way that resembled credit cards, the consumer should be the one that makes the decision, Pinkerd said. VISA had begun hearing from issuers, particularly those with debit card reward programs, who had cardholders who called upset that some recent VISA debit card transactions had been treated as PIN transactions even though the cardholders hadn’t used their PINs, Pinkerd explained. VISA viewed this trend as an emerging competitive challenge and had begun working with merchants to ensure consumer choice, he added. -

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