March 17, 2004 -- What's in your wallet?
Among the 185 million card-holding U.S. consumers, the average person carries three bank-issued credit cards, four retail credit cards and one debit card, according to CardWeb.com.
That's a lot of plastic — reflecting an incredibly competitive industry that's becoming even more so.
Over the past year, the credit and debit franchises of Visa USA and MasterCard International have become increasingly threatened by consolidating banks and payment processors, multiple law suits and even themselves. The battleground is getting bigger and nastier.
Over the past few years, credit card issuers have improved rewards and cashback cards. Citibank, a unit of Citigroup, now offers a card that grants 5 percent cashback on everyday purchases at supermarkets, gas stations and retailers. That's almost 400 basis points more than a standard checking account earns in interest.
Even debit cards have joined the rewards game.
Banks are also moving very fast into pre-paid, gift and payroll cards. There are mini-cards for a keychain and wireless card acceptance terminals.
Plastic payments now account for 53 percent of consumer purchases, compared to 43 percent in 1999, according to a survey by the American Bankers Association and Dove Consulting.
For the largest issuers, Citigroup, MBNA and J.P. Morgan Chase cardholders are generating tremendous amounts of purchase volume. Total plastic purchases — either credit or debit — are up 54 percent since 1999.
"Banks are looking for higher revenue out of consumer spending," says Matthew Park, an analyst covering specialty finance for A.G. Edwards.
Merchants Prefer Debit
But merchants, lead by retailers like Wal-Mart, Sears and Safeway are set on lowering transaction fees. They're pushing for more debit card transactions which, not coincidentally, cost merchants much less. Pulled directly from a buyer's bank account, such purchases accounted for 29 percent of more than $2 trillion in card activity last year compared to 17 percent of $1.3 trillion in 1999, according to The Nilson Report.
Last April, Visa USA and MasterCard International helped that process along by settling a seven-year lawsuit over their charges for debit purchases confirmed with a signature — as opposed to the ATM-style PIN entrance. They agreed to pay restitution to merchants and lower their fees.
"PIN-based debit is cheaper for the retailers," says Doug Bergeron, chairman and chief executive of VeriFone, a former Hewlett-Packard unit that dominates the U.S. market for point-of-sale terminals. "In the intermediate term, the fees could become more indistinguishable and tighten the spread," says Bergeron.
For now, that's simply pushing the banks and card associations to get more credit flowing since the fees on the credit side are bigger. Yet that volume may not come from the friendliest of places.
A pending federal antitrust verdict against Visa and MasterCard stands to open up their member banks to issue cards from competitors American Express and Discover, a unit at Morgan Stanley.
Amex Vs. Visa
In January, American Express announced that MBNA, the largest independent credit card issuer in the United States, would begin issuing American Express credit cards. (Not to be confused with AmEx charge cards, which have no spending limits but must be paid off monthly.) AmEx, which has 79 partner issuers around the world, expects many more U.S. deals to come. The difference between American Express and most other cards continues to be higher fees associated with accepting the card.
While the interchange fees charged to merchants for accepting any type of credit cards are getting more competitive, the fee for American Express processing is often higher. AmEx argues the premium is worth it, since AmEx cardholders allegedly make larger purchases.
"We have a spend-centric model," says Steve McCurdy, an executive in AmEx's third-party card business. "And it receives a premium price from the merchant."
But not all merchants agree. Some think the Amex fees aren't worth it: thus the snarky Visa ads that plug places that "don't take American Express."
Unlike publicly held Amex, Visa is ultimately an association of banks, serving as a clearinghouse to promote the brand. It collects a fee every time a transaction takes place between a card-issuing bank and the merchant's bank. Last year Visa USA crossed $650 billion in credit card transactions and $454 billion in debit transactions
Much-smaller MasterCard, with $514 billion in credit and $82 billion in debit transactions last year, is virtually a public company. Following a 2001 merger with Europay, the company registered its stock with the U.S. Securities and Exchange Commission and files quarterly and annual financial statements.
Last year, in the wake of its $1 billion settlement in the merchant case, MasterCard suffered a net loss of $385 million on $2.2 billion in revenue compared to a $116 million profit on $1.9 billion in revenue in 2002.
A big test for both MasterCard and Visa will come in the pending merger between J.P. Morgan Chase, the third largest MasterCard issuer, and Bank One, the largest Visa issuer in the United States.
"They'll have to decide which association and which processor," says Gwenn Bezard, a senior analyst with Celent Communications. "Switching will involve a lot of costs."
All of this means good news for the consumer, who's come out as the big winner in the credit card wars. There's little chance the merged bank will be able to push the consolidation costs on to its customers. But wherever those costs get pushed, there's sure to be even greater pushback.
Could this be the big break for multi-use cards or smart cards?
Your wallet would surely thank them.
For more, go to Forbes.com..