Ebook A Guide to the ATM and Debit Card Industry
The U.S. payments system is going through a period of rapid change. Paper checks are increasingly giving way to electronic forms of payment, which themselves are being transformed as new products, new players, and new industry structures arise. Some of the most dramatic changes are being seen in the automated teller machine (ATM) and debit card industry.
Installation of ATMs has been particularly rapid in recent years. ATM growth was 9.3 percent per year from 1983 to 1995 but accelerated to an annual pace of 15.5 percent from 1996 to 2002. Much of the acceleration is due to placing ATMs in locations other than bank offices. These off-premise ATMs accounted for only 26 percent of total U.S. ATMs in 1994, but now account for 60 percent.
On the debit card side of the industry, growth has been extremely rapid in point 0f sale (POS) debit card transactions. With an annual growth rate of 32 percent from 1995 to 2002, POS debit is the fastest growing type of payment in the U.S. Today it accounts for nearly 12 percent of all retail non cash payments, a fivefold increase in just five years. Growth has been sharp in both online (PIN-based) and offline (signature-based) debit. From 1995 to 2002, annual growth of online debit was 29 percent, while offline debit grew at 36 percent.
The ATM/debit card infrastructure has also undergone significant change, including consolidation, non bank ownership, and increased transaction processing located at non bank (third-party) processors. Consolidation of ATM and debit card networks began in the mid-1980s and continues today. One result is that the top three regional networks (Star, NYCE, and Pulse) now have a 70 percent market share in switch volume, while the top three networks in 1995 had a market share of just 39 percent. Along with consolidation has come a significant change in the ownership structure of networks. In 1985, banks or bank associations owned all of the top ten regional networks, while today non bank organizations own five of the top 10. Acquisition of networks by non bank companies that provide payment processing services, such as Concord EFS and First Data Corporation, reflects the growing importance of third-party processors in network ownership, driven by the desire of these organizations to expand the scope of their operations. Further, there has been horizontal integration among third-party payments providers, as organizations such as Concord EFS and First Data acquire smaller payments processors and organizations such as E*Trade and eFunds expand their ownership of ATMs or the ATMs they service through merger and acquisition.
A number of changes also surround pricing structures and strategies. Over 88 percent of ATMs add surcharges to users whose access card is not associated with that ATM’s owner, a practice virtually unheard of 10 years ago. Despite their prevalence, some ATM users continue to object to surcharges and a few jurisdictions have tried to prohibit them. Also controversial is the recent increase in the use of online-debit fees (PIN fees) by some financial institutions to redirect their cardholders from online to offline debit. Indeed, the differential pricing of transactions fees for offline and online debit is the key issue behind a conflict between merchants and card-issuing banks that is epitomized by the Wal-Mart “honor all cards” lawsuit, whose outcome could have awide ranging impact on the industry. Another pricing issue has arisen due to volume discounts introduced by some networks, a practice that might disadvantage smaller users.
Finally, changes have gone beyond the traditional ways of using ATM and POS debit. There has been substantial innovative activity generating new products and services that use the ATM/debit card infrastructure. Applications are being developed that allow debit cards to be used to make payments on the Internet and to convert paper checks into electronic payments at the point of sale. Another initiative would use ATM and debit card networks to enable person-to-person (P2P) payments on the Internet.
CONTENTS
1 INTRODUCTION
- 1.1 RECENT CHANGES IN THE ATM AND DEBIT CARD INDUSTRY
1.2 ISSUES AND IMPLICATIONS
1.3 SCOPE AND ORGANIZATION
2 OVERVIEW OF THE ATM AND DEBIT CARD INDUSTRY
- 2.1 GENERAL DESCRIPTION OF ATM AND DEBIT CARD TRANSACTIONS
2.2 INDUSTRY INFRASTRUCTURE
2.2.1 EFT networks
2.2.2 Offline debit card networks
2.2.3 Third-party service providers
2.2.3.1 Third-party processors
2.2.3.2 Independent sales organizations (ISOs)
2.2.4 Summary
2.3 BRIEF HISTORY OF THE INDUSTRY
2.3.1 Box 1: ATM and debit card timeline
3 ATM
- 3.1 INTRODUCTION
3.2 TRANSACTION VOLUME, TERMINAL GROWTH, AND TERMINAL FUNCTIONALITY
3.3 INDUSTRY STRUCTURE
3.3.1 Number and size of shared ATM networks
3.3.2 Concentration
3.3.3 Top ATM networks
3.3.4 ATM terminal coverage
3.3.5 Ownership structure
3.3.6 Scope and consolidation of third-party service providers
3.4 INDUSTRY PRICING
3.4.1 Retail ATM fees
3.4.2 Wholesale ATM fees
3.5 ATM AUTHORIZATION, FEE, AND SETTLEMENT ROUTING ARRANGEMENTS
3.5.1 Four categories of ATM transactions
3.5.2 Routing arrangements for a network on-us ATM transaction
4 DEBIT CARD
- 4.1 INTRODUCTION
4.2 TRANSACTION VOLUME, DEBIT CARD ISSUANCE, AND TERMINAL GROWTH
4.3 INDUSTRY STRUCTURE
4.3.1 Number and size of online debit card networks
4.3.2 Concentration
4.3.3 Top online debit card networks
4.3.4 Online debit card coverage
4.3.5 Ownership and third-party providers
4.3.6 Three competitive battlegrounds
4.4 INDUSTRY PRICING
4.4.1 Retail debit card fees
4.4.2 Wholesale debit card fees
4.5 EMERGING PAYMENTS
4.6 DEBIT CARD AUTHORIZATION, FEE, AND SETTLEMENT ROUTING ARRANGEMENTS
4.6.1 Four categories of online debit card transactions
4.6.2 Routing arrangements for a network on-us online debit card transaction
4.6.3 Offline debit card transactions
4.6.4 Routing arrangements for an offline debit card transaction
5 ECONOMIC AND POLICY ISSUES
- 5.1 INTRODUCTION
5.2 MARKET CONCENTRATION
5.2.1 Recap of developments
5.2.2 Contributing factors
5.2.3 Potential implications
5.3 VERTICAL INTEGRATION AND ECONOMIES OF SCOPE
5.3.1 Change in network ownership
5.3.1.1 Recap of developments
5.3.1.2 Contributing factors
5.3.1.3 Potential implications
5.3.2 New processing services and payments methods
5.3.2.1 Recap of developments
5.3.2.2 Contributing factors
5.3.2.3 Potential implications
5.4 PRICING
5.4.1 Wholesale prices
5.4.1.1 Recap of developments
5.4.1.2 Contributing factors
5.4.1.3 Potential implications
5.4.2 Retail prices
5.4.2.1 Recap of developments
5.4.2.2 Contributing factors
5.4.2.3 Potential implications
5.5 ACCESS
5.6 RISK
6 FUTURE RESEARCH2
TABLES, CHARTS, AND FIGURES
APPENDICES
- Appendix A. Timeline of regional EFT networks
Appendix B. Schematic diagrams of ATM and debit card routing arrangements
REFERENCES
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