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A Thing On-line Off-line


On-line Off-line


A s many Green Sheet readers know, debit cards are different from credit cards because they transfer an asset, rather than initiate a credit. With a debit card, the merchant authorizes the transaction in the same way they authorize a credit card transaction, and the process appears the same to the consumer. But the difference is that the consumer is not promising to pay; the money is transferred to the merchant’s account and debited from the customer’s account. This transaction can occur either on-line or off-line.


It may seem hard to believe, but some consumers still aren’t quite sure what a debit card is and where they can use it. In fact, a survey conducted by Star Systems found that 56% of respondents will not use their debit card if they don’t see a sign with logos matching those on their card. Even so, on-line POS debits are expected to be the fastest growing electronic funds transactions, according to a study by Dove Consulting. The study found that on-line debit volume will increase 17% annually.

More often than not, if a consumer has a checking account, they have a debit card. According to the Faulkner & Gray Debit Card Conference, 58% of the 172 million people with checking accounts have a debit card, but that is only 37% of the 273 million total U.S. population. What this means is that every day the number of debit card transactions increases, and with that, the fees that Visa and MasterCard earn for those transactions. It also means that debit has a huge market left to penetrate. That opportunity could translate to millions of dollars in transaction fees.

On-line, Off-line—What’s the Difference?

When we say “on-line debit” we are not referring to online in the sense of Web shopping. We’re talking on-line in the sense that funds are verified and transferred at the time of purchase. For example, if a merchant asks “Debit or credit?” what they are actually asking is “On-line or off-line?”

On-line is when a consumer chooses “debit” and enters a PIN. Off-line is when the consumer chooses “credit” and signs the receipt. But, the reality is that the consumer is rarely asked how they wish the transaction to be processed. When was the last time a cashier asked you which way you prefer the transaction be routed? Usually it is set up to be processed one way—off-line. Why? Because off-line means more money for Visa and MasterCard. How much money? Well, let’s put it this way: If Wal-Mart moved all of its customers from off-line to on-line, they could save more than $1 million annually.


On-line debit cards perform just as ATM cards do. The transaction is an immediate electronic transfer of money from the consumer’s account to the merchant’s account. Funds availability is confirmed at the time the card is used and the actual deduction from the account is made that day. When using a PIN, the success of the transaction is dependent on funds the cardholder’s bank says are available, at the time of inquiry.


Off-line debit transactions resemble credit card transactions. The merchant’s terminal reads the card, recognizes it as a debit card rather than a credit card, and creates a debit against the account. But, here’s where the difference occurs: Instead of moving the money immediately (posting to the account), the transaction is stored, to be processed later, usually in 2 to 3 days. Due to the delay, an off-line debit card is often referred to as a “check” card.

When it comes to off-line debit, usage is increasing. In fact, last year alone 4.1 billion POS transactions using off-line Visa Check Cards and MasterCard MasterMoney Cards were initiated. That is up 41% from the 2.9 billion purchases in 1998. Remember, off-line means a higher fee to the merchant, which costs the consumer more in the long run. To counteract this, some retailers are encouraging consumers to use on-line debit. Time will tell if they are successful.


Debit cards mean money to banks, especially off-line debit cards. As we’ve mentioned in previous articles, a $50 transaction processed on-line would cost the merchant $.20. Processed off-line it can jump as high as $.73. Also, some banks charge their customers for the cards. Some retailers are unhappy, and lawsuits have resulted.

In January Visa USA, Inc., and MasterCard International, Inc., were sued by a San Francisco man who accused the companies of antitrust violations. The companies are accused of forcing retail stores, restaurants, gas stations, and other businesses to accept Visa and MasterCard debit cards as a condition of being allowed to accept their credit cards. The suit says that credit card companies charge businesses “unreasonably high charges’’ for handling purchases using the Visa Check and MasterMoney debit cards, and the costs are passed on to customers.

Visa and MasterCard are also the target of a 1996 antitrust suit brought by Wal-Mart Stores Inc., Sears, Roebuck & Co., Safeway Inc., and other retailers, which has now been certified for all merchants in a class action. And, we can’t forget the antitrust suit by the Justice Department.

In off-line debit, when a signature is used rather than a PIN, the merchant pays a higher fee, because Visa and MasterCard feel there is a higher risk associated with signature-based transactions than PIN-based transactions. This may seem backward to you. But, it seems that Visa and MasterCard feel that the likelihood of someone stealing your card and duplicating your signature is higher than someone stealing your card and your Pin number. As we report in the enclosed GSQ, 30% of people write down their PIN and keep it with their card, so it’s not uncommon for a thief to find a PIN. And many cardholders still use their birthday or 1234. So, it seems that a PIN transaction should have at least as high, or higher risk than an off-line transaction.

If it is true that signature-based transactions have higher risk, it would seem that card associations are not enforcing the verification of signatures against the one on the card. How many times have you received your card back before evening signing the slip?


Debit’s rapid growth, and yet untapped market, translates to a lot of money for Visa and MasterCard and their banks. Debra A. Janssen, president and CEO of eFunds Corp., predicts that within five years 19% of all POS transactions will be initiated with debit cards. If these transactions are processed on-line, issuers will make millions. If they are processed off-line, they will make millions more, if, and only if, consumers continue to use debit. If off-line debit fees continue to soar, and merchants are unsuccessful in converting off-line debit users to on-line debit, off-line could cannibalize the market. If Visa and Mastercard are not the victors in the suits and if merchants decline to offer debit, this gold mine could turn into a lump of coal.

But then again, that’s a lot of ifs.

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