Debit Cards Pay Off--and Do It Really Fast

Having shifted consumers from cash to checks to credit cards to teller machines, banks are now poised to tout debit cards--another step toward cashless, paperless, eventually bankless banking.

Like ATM cards, the new debit cards give consumers direct access to their own accounts. Unlike checks, they authorize withdrawals instantly and electronically. Unlike credit cards, which delay payment, they draw on deposited funds rather than a line of credit.

Unlike simple ATM cards, the new debit cards not only withdraw money but transfer it from the consumer’s account to a merchant’s at the point of sale, making “the proprietary ATM card,” says Charlie Pedersen, senior vice president of California First Bank, “an all-purpose card with the convenience of a credit card.” Says Thomas Collins, spokesman for Mobil Oil, which enthusiastically accepts the new cards at many locations, “it’s a genuinely new way of paying for something.”

Such electronic fund transfers cause great excitement among banks: Like the ATM, they’re more “cost-efficient” (i.e., cheaper) than tellers or check processing. They’re also profitable, because there won’t be any “float” between the time a consumer tenders check or credit card for merchandise and actually settles up with the bank that pays the merchant.

Share Networks

There are even electronic networks gearing up to transfer such funds among banks at the point of sale. Visa is trying to perfect such an option for banks that are already members of its vast credit network. Banks are establishing shared ATM networks--for example, the new 80-member Star System in the Western states--so customers of one can get cash from another; these will eventually make “point of sale” transfers as well. Some banks are establishing networks just for point-of-sale transfers--the Interlink system, for one, started by California’s five major banks--although they’ve barely begun marketing debit cards to either consumer or merchant.

Actually, the networks aren’t so premature: Their existence guarantees a large pool of both merchants and consumers on the same shared system, which makes it more attractive to both. “It’s the chicken and the egg problem,” says Janie Nelson, vice president at Security Pacific Bank Card USA. “You gotta have the merchants before the consumer will sign up, and a lot of consumers to interest the merchants.”

Banks think debit transactions are equally advantageous for retailers, reducing paper handling and not only revealing immediately whether the consumer has the money but earmarking it for transfer to the merchant. No credit risks, no bounced checks, just “100% guaranteed payment,” Nelson says.

But retailers may have to upgrade their equipment to include electronic card readers and “PIN pads” (for consumers to punch in personal identification numbers). Moreover, there will probably be processing charges from their bank, as for credit card transactions, and some merchants think the processing is not worth it; Seattle-based Nordstrom stores dropped Visa entirely rather than accept Visa debit cards--a service, said Nordstrom, that replaced checks but at a higher cost to the store. (Rates right now are negotiable while banks try to build the market; merchants could probably even charge them .)

Pilot Programs

Some businesses are eager, however. Mobil Oil, which started pilot programs in 1983, will welcome the debit cards of cooperating banks at 3,600 of its 4,500 company-owned stations by year-end and already accounts for half of all retail debit card transactions in the country. Dealers like the ease of less paper and quicker credit checks and the influx of new customers drawn by “the discount associated with a cash purchase plus the convenience of plastic,” Collins says. Debit cards clearly brought new business, he says, because sales increased while “both credit card purchases and cash purchases remained the same.”

Two Lucky supermarkets in Southern California were equally enthusiastic over their experiment last year with Wells Fargo Bank’s Express Banking cards. The so-called Express Purchase program--which put card scanner, PIN pad and “balance inquiry terminals” at the checkouts--”saves people time,” says Ron Jones, assistant store manager in Orange. “They can do their part of the transaction while the checker’s checking out their groceries, and they don’t have to write a check.” More than half of the Wells Fargo check writers who previously shopped at those stores, Wells Fargo adds, converted to Express Purchase.

But nobody can guarantee consumer reaction. Banks assume they’ll welcome a check replacement good in other cities, with none of the usual wait for check approval. Debit cards, moreover, “should be less expensive than credit cards,” says B of A executive vice president John Mickel, “because we’re not extending credit.”

A prime market, says Mickel, should be people who are “not credit-worthy or those not interested in credit--a large segment of retired people, or the 30% of credit card users who never revolve their accounts but simply use their cards for convenience.” Others should be cash payers and check writers at places like gas stations and supermarkets, where purchases are modest and consumers want to pay and be done with it.

There may also be reluctance. Many consumers want the “float” provided by credit purchases, following a why-pay-now-when-you-can-pay-later philosophy. Others sense some dangers. Indeed, government regulations give them less protection with electronic fund transfers than with credit transactions: They can dispute only accounting errors, not questions of expected quality, and their liability on lost cards could be $500 (not $50). Furthermore, there’s no provision for stopping payment, as with checks.

There’s also instinctive resistance to something new--the same resistance that met ATMs. Even now, less than half of most banks’ customers use ATMs, but the fact that ATM usage has reached that level--however slowly--indicates to bankers that “the acceptance curve (for debit cards) will be faster,” B of A’s Mickel says. After all, “they’ve already had two experiences with plastic.”