PDFA Guide to the ATM and Debit Card Industry
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Fumiko Hayashi, Richard Sullivan, and Stuart E. Weiner Payments System Research Department FEDERAL RESERVE BANK OF KANSAS CITY Kansas City, Missouri, USA 2003 Copyright ©2003 Federal Reserve Bank of Kansas City. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced in any form or by any means without the prior written permission of the author, nor be otherwise circulated in any form of binding or cover other than that in which it is published. ISBN: 0-9744809-0-8 Payments System Research Federal Reserve Bank of Kansas City 925 Grand Blvd. Kansas City, MO 64198, USA This book can be obtained in electronic form from the Federal Reserve Bank of Kansas City’s Web site, located at http://www.kc.frb.org, under Publications & Education Resources. The views expressed in this book are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Kansas City or the Federal Reserve System. Foreword The U.S. payments system has entered a period of dramatic change. Consumers, busi- nesses, and governments alike are all moving away from paper checks and toward electronic forms of payment. Technological advances and competitive forces are funda- mentally altering the payments landscape, with important implications for efficiency, safety, and access. One of the most rapidly changing parts of the payments system is the ATM and debit card industry. Recent developments include the sharp growth in point-of-sale debit card transactions, the intense competition between online and offline debit, and new pricing structures and strategies. There also has been a heavy consolidation of regional EFT networks and third-party service providers, and a growing importance in the nonbank ownership of networks. The Wal-Mart–Visa/MasterCard “honor-all-cards” settlement and the proposed First Data–Concord EFS merger are just two examples of the dynamic forces at work in this industry. Associated with the numerous changes in the industry are some key economic and public policy issues. For example, has market consolidation to date been beneficial? What should one think about the trend toward vertical integration and nonbank ownership? Are changing pricing structures having an impact on network access? How is the risk profile of the payments industry changing? As the nation’s central bank, the Federal Reserve plays an important role in ensuring the smooth functioning of the payments system. This book has been written with this mission in mind. The book provides a much-needed overview of the ATM and debit card industry and begins the process of identifying and analyzing some of the more important public policy issues. It is intended for a broad audience: policymakers, industry partici- pants, academics, and the general public. I hope that readers find it useful and insightful. Thomas M. Hoenig President and Chief Executive Officer September 2003 III Acknowledgements We wish to thank the many individuals who provided us with information, comments, and editorial and production support in the writing of this book. Among industry contacts, special thanks go to Paul Albright, Jeffrey Green, James Judd, Paul Tomasofsky, and Chris Truelson. Our colleagues at the Federal Reserve Bank of Kansas City were instrumental at all phases of the project—members of the Public Affairs Department, the Operations Division, and the Supervision and Risk Management Division all played key roles. And finally, we extend a special appreciation to Enis Alldredge for his guidance and support. Fumiko Hayashi Economist Richard Sullivan Economist Stuart E. Weiner Vice President and Economist V Contents 1 Introduction Recent changes in the ATM and debit card industry . 1 Issues and implications . 2 Scope and organization . 3 2 Overview of the ATM and Debit Card Industry General description of ATM and debit card transactions . 5 Industry infrastructure . 6 EFT networks . 6 Offline debit card networks . 7 Third-party service providers . 8 Summary . 12 Brief history of the industry . .12 ATM and debit card timeline . 13 3 ATM Introduction . 17 Transaction volume, terminal growth, and terminal functionality . 17 Industry structure . 19 Number and size of shared ATM networks . 19 Concentration . 20 Top ATM networks . 23 ATM terminal coverage . .24 Ownership structure . 26 Scope and consolidation of third-party service providers . 27 Industry pricing . 29 Retail ATM fees . 29 Wholesale ATM fees . 32 ATM authorization, fee, and settlement routing arrangements . 34 Four categories of ATM transactions . 34 Routing arrangements for a network on-us ATM transaction . 35 4 Debit Card Introduction . 41 Transaction volume, debit card issuance, and terminal growth . 41 Industry structure . 44 Number and size of online debit card networks . 44 Concentration . 44 Top online debit card networks . 47 Online debit card coverage . 50 Ownership and third-party providers . 50 Three competitive battlegrounds . 50 VII VIII A Guide to the ATM and Debit Card Industry Industry pricing . 52 Retail debit card fees . 52 Wholesale debit card fees . 52 Emerging payments . .56 Debit card authorization, fee, and settlement routing arrangements . 57 Four categories of online debit card transactions . 57 Routing arrangements for a network on-us online debit card transaction . 58 Offline debit card transactions . 59 Routing arrangements for an offline debit card transaction . 64 5 Economic and Policy Issues Introduction . 69 Market concentration . 69 Vertical integration and economies of scope . 72 Change in network ownership . 72 New and expanded processing services and payments methods . 76 Pricing . 77 Wholesale prices . 77 Retail prices . 83 Access . 86 Risk . 88 6 Future Research . 91 Appendices Appendix A. Timeline of regional EFT networks . 93 Appendix B. Schematic diagrams of ATM and debit card routing arrangements . 97 Endnotes . 119 References . ..