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Archive for Monday, May 27, 2002

Debit or credit?

Companies using rewards to influence use of cards

May 27, 2002

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Millions of shoppers have adopted a new answer when the cashier asks, "Will that be cash or credit?" They're reaching for their wallets and pulling out a debit card instead.

As fans see it, debit cards are more convenient than cash or check, and they can't mount up big debts like credit cards.

Now there's another reason to swipe a debit card. A growing number of institutions are offering rewards previously associated only with credit cards: frequent-flier miles, merchant discounts and rebates.

There's an unexpected twist, however. Consumers must choose between two types of debit transactions: one consummated with a "personal identification number" or PIN, the other with a signature. In some cases, the choice can trigger fees instead of rewards.

This carrot-and-stick campaign is partly designed to influence how consumers act at checkout stands. The result could determine the outcome of a multibillion-dollar tussle between merchants and financial institutions. The winners could dictate how Americans will use the popular debit card for years to come.

Getting consumers hooked

Despite their growing use, debit cards are still commonly confused with ATM cards. They look similar. But a debit card is a higher-powered ATM card bearing a Visa or MasterCard logo. It can be used at any retailer that accepts Visa or MasterCard, not just stores tied into ATM networks.

Many shoppers don't realize their debit cards can be used two ways, however. Logical consumers who punch the "ATM/Debit" button and enter a PIN can trigger fees of as much as $1.50 a transaction. But those who hit the "Credit" button and sign a receipt as they would with a credit card can pocket the rewards.

"It's counterintuitive," said Richard K. Crone, a vice president with Dove Consulting in San Carlos, Calif. "If you want your points, you have to press the right keys."

The idea of doling out rewards or levying fees for using debit cards at the checkout stand is relatively new. For years, the banking industry was focused on simply getting debit cards into their customers' hands and explaining how they were different from the basic bank ATM card.

"It has moved into another phase," said Jerry Sargent, vice president of debit strategy for MasterCard International in New York. "Now it's, 'Let's get them used more often."'

Consumers are using debit cards for one out of every four purchases, according to Dove Consulting. That's second only to cash, which accounts for one of every three purchases.

During the next five years, debit-card spending is likely to grow "in the high 20 percent range," predicted David Robertson, president of the Nilson Report, an industry newsletter in Oxnard, Calif.



Here's a rundown on the different kinds of plastic you might pack in your wallet:

ATM card: You can use this basic banking card to withdraw cash from ATMs and to shop at retailers tied into an ATM network. Purchases are immediately deducted from your account in an "online" transaction that typically requires your PIN or "personal identification number."Debit card: It's a souped-up ATM card bearing a Visa or MasterCard logo. You can use it at the ATM machine, retailers tied into an ATM network, plus any retailer that accepts Visa or MasterCard. Purchases can be completed "online" with a PIN, or "offline" with a signature. Either way, the money is deducted automatically from your account.Credit card: You're billed for purchases and get a month to pay. If you don't pay the full balance, your balance becomes a loan charging rates that commonly range from 12 percent to 20 percent.

One way to goose along consumers is to reward them for good behavior. Many banks periodically have dangled cash "bounties," kicking back $1 for customers who make one debit purchase and $5 for swiping three times.

"If we can get you to use it three times, you're locked," Crone said. "You love it. You'll go through the line and never pull out your checkbook."

Issuers dole out rewards

But the industry apparently has decided bounties aren't enough, not when competition for customers is intensifying and billions of dollars hang in the balance depending on how customers punch the buttons at the debit-card terminal.

Borrowing from the textbook on credit-card marketing, debit issuers are offering all sorts of goodies, namely:

Frequent-flier miles. Three years after JP Morgan Chase rolled out the first frequent-flier debit card, other banks suddenly have followed suit. Last fall, Bank of America took to the air with three debit cards affiliated with Alaska Airlines, America West and US Airways. In January, Citibank unveiled an American Airlines card.

Merchandise and discounts. Modernizing the old-fashioned green-stamp fad, Charter One Bank doles out points for debit-card purchases. Customers can trade in their points for pens, travel discounts and flatbed scanners in the bank's MegaRewards catalog. Similarly, Citibank passes out coupons from retailers such as Blockbuster, Pizza Hut and CDNow.

Sweepstakes. Visa and MasterCard are bankrolling promotions for all their debit-card customers. MasterCard is a few weeks into its first national sweepstakes, a spring season giveaway with a sport utility vehicle as the grand prize. And Visa has launched a two-month sweepstakes that will give three winners $100 a day for a year, or $36,500.

Such perks are blurring the line between the debit card and the credit card, but there's one fundamental difference. Credit-card rewards are richer.

Debit-card rewards "are not as juicy as on the credit-card side in most cases, but the fact that you can get something back is a pretty good proposition for consumers," said Robert B. McKinley, who tracks industry trends as head of CardWeb.com in Frederick, Md. "It's money you would spend anyway, and you can get something back."

Watch out for fees

The surprising thing is, consumers can get stung reaching into the cookie jar, consumer advocates warn. A small but growing number of banks charge fees when customers swipe their debit card.

Many banks in New York charge from 25 cents to $1.50 for debit transactions, according to a survey last month by the New York Public Interest Research Group. Regional banks charged the top fee, but national institutions such as Charter One, Chase and Fleet charge $1, 50 cents and 25 cents, respectively.

"Customers really need to know the policies of their bank," said Susan Craine, a consumer advocate with the New York Public Interest Research Group in Manhattan. "Some banks charge if you sign, some charge if you type in a PIN. It's not a universal thing. You might be getting charged and not even know it."

Why are banks dinging consumers with fees when they're trying to promote debit cards?

Banks want you to swipe your debit card for a number of reasons, but two stand out. First, there's no check to process or bounce, because the sale won't go through unless you have enough in your account. Second, hitting "Credit" and signing a receipt for the purchase routes the payment through Visa and MasterCard's "offline" networks. Banks take a cut of 1 percent to 4 percent of the sale through a merchant fee.

"When you write a check, it costs your bank money," said Robertson at the Nilson Report. "When you use your debit card, your bank makes money. It's a no-brainer. ... It's money on the table."

For obvious reasons, that merchant fee rankles merchants. Retailing giants including Wal-Mart, Safeway, Sears, the Limited and Circuit City are suing Visa and MasterCard in a 3-year-old case.

In the meantime, retailers are trying to condition consumers to punch the "ATM/Debit" button and key in a PIN. That routes the transaction through less expensive ATM networks.

Although costs vary depending on the type of retailer grocers pay a lower merchant fee, for instance a $100 debit purchase could cost a merchant 15 to 25 cents for a PIN purchase. A signature-based transaction could gobble about $1.90, McKinley said.

Said Les Riedl, a financial services consultant with Speer & Associates in Atlanta: "What's good for the merchant is not necessarily good for the bank."

Now it's up to consumers to decide where their interests lie.

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