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Letter from the CEO



As we approach the MAG’s 5th Annual Conference October 7-9th in New Orleans, payments issues are dominating the news, especially the recent Washington District Court’s ruling against the Fed’s interpretation of the Durbin amendment. As a veteran of the formative years of debit, I’d like to offer my perspective.

Many in the banking industry on both sides of the Atlantic are proclaiming the sky is falling in light of the EU’s recent move to cap interchange fees and a U.S. federal court decision that current debit swipe charges are too high. What these doomsayers conveniently forget is the business case for promoting debit cards was one of cost avoidance for the banks, not revenue. The rationale for debit that existed then holds true today.

When debit was developed in the 1970s and 80s, interchange – the fee charged to merchants and paid to the card networks and banks every time someone uses a debit or credit card – was not even a part of the equation.

Since I was running a U.S. PIN debit network, I’d like to offer a little history. American banks initially developed debit cards for use at ATMs. The rationale was to lower costs by reducing the use of checks and live tellers. Automated solutions for cash withdrawals, like ATMs, were simply a less expensive means of conducting business with banks’ account holders.

Not long after individual banks and credit unions introduced ATM services, the industry recognized that the best path toward ubiquitous ATM services was to form ATM networks. Networks were mandated by law in several U.S. states, and they soon came to be the standard for banks and credit unions offering ATM services.

After many years of building the existing ATM business, the networks began leveraging their investment in ATM infrastructure by extending it to point-of-sale. . Before this, the two prominent signature card networks, Visa and MasterCard, had failed to spark interest in debit cards used at the point-of-sale. Despite those failures, banks were eager to implement widespread point-of-sale debit acceptance to eliminate the considerable cost of processing checks.

The first significant point-of-sale debit usage in the U.S. occurred mostly in Midwestern states, and there were little or no interchange fees charged. In fact, merchants were often given equipment or paid monetary incentives to accept PIN debit. I don’t have absolute insight into what other networks did, but the network I ran, Money Network, did not collect any fees from the merchants who accepted the cards. At first, PIN debit volume grew slowly since PIN pads were not commonly used by merchants, outside of a handful of early adopters, primarily gas retailers. Eventually, national retail chains caught on and began accepting PIN debit. Built solely on the business case of reducing the costs of card issuing banks and providing convenience to cardholders and merchants, debit reached critical mass by the early 1990s.

The growth of PIN debit at the point-of-sale caught the attention of the signature networks, Visa and MasterCard. They responded with newer versions of debit products and successfully sought out partnerships with the existing PIN debit networks, leveraging their technical infrastructure to provide connectivity to the card issuing banks.

Eventually, the signature networks built such a presence in the debit market that they no longer needed their PIN debit network partners. Visa and MasterCard then offered a value proposition to the banks that the other networks could not. By requiring that merchants accepting their credit cards must also accept their debit cards, Visa and MasterCard found they could extract debit interchange from merchants.

In the hands of the signature networks, debit interchange became a new source of revenue that today is viewed by the banks as a natural right. But, this gambit by Visa and MasterCard, which came well after debit usage reached critical mass, does not alter the fundamental business case upon which debit was built. In the 1980s issuers were better off with zero-interchange debit than they were with checks and tellers. They will be better off today and into the future with reduced interchange revenue instead of reverting to checks and cash withdrawals.

Some may say that there was a grand plan to introduce and steadily increase interchange once point-of-sale debit was kick started with zero interchange and merchant incentives. However, I was among those debit network captains who would have hatched such a plan, and I’m here to tell you it was simply not the case. Merchant incentives no doubt would have ended, but we never envisioned charging the fees that the signature networks’ used to attract issuers to their debit products. There was no need for interchange to make debit at the point-of-sale a good value proposition for everyone involved, including debit card-issuing banks.

My point here is not to engage in the argument over interchange, but to point out that the sky is not falling for debit as a result of recent rulings. Banks need debit. It helps them serve their customers more efficiently and cost-effectively, even without high interchange fees. Their customers demand debit, and they will continue to offer it as long as they offer checking accounts.


Mark Horwedel
, CEO, Merchant Advisory Group