Magazine article American Banker

Plastic Card Industry Faces a Forked Road: User Security and New Services Will Steer Course of Electronic Funds Transfers

Magazine article American Banker

Plastic Card Industry Faces a Forked Road: User Security and New Services Will Steer Course of Electronic Funds Transfers

Article excerpt

In 15 years, you may be able to use one plastic card to get cash from your local automated teller machine, to charge a fancy dinner in Paris, to buy groceries at the supermarket, to check your stock portfolio from a home terminal, and to fill up your car's gas tank.

On the other hand, at the start of the next century your wallet may still bulge with numerous plastic cards--oil company cards, department store credit cards, a supermarket check-cashing card, Visa and MasterCard cards, an American Express card, and a debit card from your local bank.

Realistically, the transaction card's role will be somewhere between those two extremes at the turn of the century. The plastic card is now in a state of transition, and where it is headed nobody knows for sure.

The nature of the card of the future will depend primarily on two factors: how new technologies are used to improve the card and which services are linked to the card by banks or other potential issuers like brokerage firms, diversified financial services companies, or retailers such as Sears Roebuck.

The credit card has been a great success for the banking industry. Some 130 million Visa and MasterCard cards, mostly credit cards as opposed to debit cards, have been issued in the United States.

But proprietary debit cards -- those issued by banks mainly for access to their automated teller machines -- have grown rapidly in recent years. There are now anywhere from 75-100 million of these cards, according to industry estimates. Debit vs. Credit

Debit cards are linked to a deposit account and when used, they deduct, or debit, funds from the account. Credit cards, on the other hand, draw against a revolving line of credit that a bank has issued to a customer.

Credit cards achieved their widespread consumer acceptance by giving customers a convenient way to buy goods from merchants. But now banks are developing point-of-sale systems that let customers buy merchandise with the same debit cards they use at teller machines.

Some bankers think there is room for both cards in the future since they perform different functions. Others believe the transaction card of the future will continue both features on one piece of plastic.

"In principle, there's no reason why a full-function debit-credit card couldn't be created over time," said Richard S. Braddock, group executive of the consumer banking and travel and entertainment group at Citibank. But he added, "The trends of how the two are going to come together in the marketplace aren't that clear."

As envisioned by a number of experts, a debit-credit card would allow customers to decide at the time of purchase which function to use.

But there are questions that must be resolved. For example, what kind of fees will merchants pay?

Merchants have historically paid banks a discount fee, amounting to a few percentage points of sales ticket, for credit card transactions. But merchants generally resist this price scheme for debit cards and insist on a flat transaction fee. And most debit card-based point-of-sale programs are using transaction rather than discount fees.

Merchants say that debit card transactions should be priced lower because they are cheaper than credit cards for banks to handle. Debit cards, the argument goes, are less susceptible to fraud and do not require banks to extend credit. And since debit cards are the functional equivalent of cash, and checks, retailers argue, they should not be priced as high as credit card transactions.

And the economics vary from one industry to another. What department stores can afford to pay may be too expensive for supermarkets, which operate in the face of very slim profit margins. "That's really where the problem lies today," said Alex W. "Pete" Hart, executive vice president at First Interstate Bancorp of Los Angeles. "It's the economic equation that needs to be resolved today. …

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