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Home arrow eBook Categories arrow Finannce arrow A Guide to the ATM and Debit Card Industry

A Guide to the ATM and Debit Card Industry

August 28 2010

INTRODUCTION
Recent changes in the ATM and debit card industry

A Guide to the ATM and Debit Card IndustryThe 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-of-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 United States. Today it accounts for nearly 12 percent of all retail noncash payments, a fivefold increase in just five years.1 Growth has been sharp in both online (PIN-based) and offline (signaturebased) 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 also has undergone significant change, including consolidation, nonbank ownership, and increased transaction processing located at nonbank (third-party) processors. Consolidation of ATM and debit card networks began in the mid-1980s and continues today. One result is that in 2002 the top three regional networks (Star, NYCE, and Pulse) had a 70 percent market share in switch volume, while the top three networks in 1995 had a market share of just 39 percent.

The recently proposed merger of First Data Corporation and Concord EFS, and its potential for combining their network subsidiaries NYCE and Star, would represent a further step toward consolidation. 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 10 regional networks, while in 2002 nonbank organizations owned five of the top 10.3 Acquisition of networks by nonbank 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. The proposed First Data Corporation/Concord EFS combination underscores the quest for scale and scope among payments processors. ...

Download Free eBook: A Guide to the ATM and Debit Card Industry

PDF format, 904KB, 104Pages.

Fumiko Hayashi, Richard Sullivan, and Stuart E. Weiner
Payments System Research Department
Federal Reserve BAnk of Kansas City
Kansas City, Missouri, USA

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
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

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Felicia Alexander said:

I need a dedit card
August 07, 2013

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Last Updated ( August 28 2010 )
 
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