It’s easy to imagine that in the high-stakes debit/credit card game, either Visa or MasterCard, as the two largest payment networks, would emerge as the dominant player in the market. But what consumers fail to realize is that how they decide to pay for their purchases at point of sale – whether though signature or PIN – plays a big factor in determining which company gets the greater market share.
A telling New York Times article published Monday relates how Visa has been able to rule in the debit card market by, surprisingly, pushing for higher transaction fees.
Signature or PIN?
For individuals making payments for everyday purchases at checkout counters, it matters little whether they affix their signatures or punch in their PIN code. Either way, the bank debits the exact amount from their accounts. To the retailer or merchant however, the fees incurred between signature and PIN transactions differ greatly.
Stores are charged about 75 cents for every $100 transaction amount when the customer signs a receipt at point of sale. This seemingly minimal amount is reported to be “more than twice the fee charged when a PIN code is used.”
Higher Fees, Greater Market Share
So where do the payment networks figure in the fee scheme and how did Visa use this to get hold of the larger market share? According to the Times, Visa and Mastercard are actually the ones to set the fees that the merchants must pay to the cardholder’s bank. And so for these two networks, it has simply become a matter of getting more banks to issue their brand to cardholders.
And what could be a more failsafe way of winning over banks than by giving them more income from fees paid by retailers. Dangling increased incentives for banks is reportedly the smart, albeit controversial strategy that Visa used to propel the company to market dominance.
Mastercard attempted to gain a bigger share of the pie by raising debit card profit for banks too, at times, even higher than those imposed by Visa. This move of continually increasing fees to recover market share is one that only the card industry can get away with.
The Figures Tell the Story
Currently, Visa has a very strong hold of signature debit transactions, getting 73% of the US market. Its share for domestic PIN debit market on the other hand, is at 42% presently – and growing.
Further, despite efforts of some big retailers like Costco, WalMart, and Home Depot to lead store customers towards the direction of PIN transactions, debit card signatures still account for 61% of all debit transactions. This may be largely due to the fact that banks offer more rewards for cardholders using signature such as affiliate programs and frequent flier miles.
Visa’s Response to Critics
Visa officials in the meantime, are saying that while merchants can gripe all they want about the costs associated with debit cards, it still doesn’t change the fact that debit use has changed the landscape of the retail industry, providing convenience for customers, and in turn, generating higher sales for the merchants. William M. Sheedy, Visa’s President for the Americas, calls it a “perspective problem.”
“Debit has become so mainstream, some of the people who have benefited have lost sight of what their business model was, what their cost structure was,” Sheedy said.