Guide to the ATM and Debit Card Industry

I've added reading notes on the Federal Reserve Bank's study of the ATM and debit card industry, which details the rapid change within the banking industry to accommodate a consumer marketplace in which electronic methods of payment have rapidly gained popularity over the past 25 years, and the rapid transformation in both existing payment systems (physical cards and online payments) and emerging technologies (person-to-person and mobile payments).

It's also significant to consider that the incidence of electronic payment, which it has grown considerably over a short period of time, is further exaggerated by hype. Significant marketing has been done to create the perception that electronic payment is universal and that anyone who still uses cash and checks is an old-fashioned oddball who just isn't in step with the current age ... but the numbers tell a different story: 63% of retail payments in the US market are still being made with cash and checks, and of electronic payments, credit cards still dominate by a ratio of six-to one.

Taken together, this means that debit cards and other forms of electronic payment that directly transfer funds from the customer's bank to the merchant constitute a mere 5.2% of all retail transactions. One one hand, it seems like all the attention and excitement over electronic payment is entirely unwarranted ... but on the other, there's no denying that there has been significant advancement and considerable room for growth as the methods continue to expand and mature.

From a consumer marketing perspective, this is largely trivia: paying and accepting payment electronically has become a matter of course, even though it was almost unheard of a few decades ago: three's a great deal of back-end technology and business practices that supports the simple act of swiping a card, keying an account number into a Web site, or "beaming" payment information from a mobile device to a point-of-sale system. Ideally, a merchant should seek to support any method of payment that a customer chooses to present.

But from an operations perspective, the differences in fees for processing different methods of payment, while negligible on the level of an individual transaction, can come to quite a lot for large volumes of transactions. A difference of even half a percent in processing fees means five million dollars per year for a retailer whose revenues are $1 billion - and for a retail giant such as Walmart, whose receipts exceed $400 billion, the difference is $2 billion per year - and to cover that expense without passing surcharges directly to the debit card consumer, this would mean covering the cost indirectly, by raising the price of merchandise to all consumers.

As such, it makes sense that Walmart would have taken the lead in the suit to protest the "honor all cards" policy of national debit card processing networks: being compelled to accept a method of payment that is disadvantageous to merchant and customer alike is particularly toxic to a firm of its size, and whose primary source of competitive advantage is price ... customer convenience be damned, and convenience of 5% of customers at the expense of the other 95% is plainly offensive.

Ultimately, the dispute between card processors and merchants will be resolved by a higher authority - the consumer himself - who will decide whether the convenience of using his preferred method of payment is worth switching to the retailers that support it. And of all the reasons that a customer might prefer one merchant over another, the fact that the retailer accepts a specific kind of payment has never, to my knowledge, been a deciding factor in the success or failure of any merchant.