Could Debit Start Trending Toward PINs?

While First Data Corp. vows to contest action by the Department of Justice to stop its acquisition of Concord EFS, industry observers say the Denver-based processing giant may have good reason to fight for a stronger position in the market for debit transactions secured by personal identification numbers. The $7.3 billion merger, announced in April, was one of the largest corporate combinations proposed this year and would hand First Data control of the country's largest processor of PIN debit traffic. Concord owns the Star, MAC, and Cash Station electronic funds transfer networks. That reason lies in what these observers say is strong potential for the debit card market to move increasingly away from signature-based, or off-line, processing and to transactions secured by personal identification numbers. Forces behind this shift include the recent settlement of the so-called Wal-Mart case against Visa and MasterCard, which narrowed the revenue advantage card issuers enjoy on offline debit over the PIN variety, and rising concerns among issuers, merchants, and consumers about fraud, which increasing use of PINs could help reduce. “It'll be important to have a position in PIN debit,” says one long-time observer and former card-company executive. Signature-based debit cards account for approximately two-thirds of the 13 billion point-of-sale debit card transactions processed annually, so there's plenty of room for PIN debit to take share. And many merchants, such as fast-food outlets, that never accepted any form of card payment are showing increasing interest in PIN debit as a cash replacement that doesn't slow down service. But the biggest factor favoring PIN debit may well be fear of fraud. Identity theft alone accounts for $47 billion in annual losses, estimates the Federal Trade Commission. Still, some experts, while agreeing that going after PIN debit business is sound strategy, disagree that First Data should contest the Justice Department's suit to stop the Concord takeover, since resolution of the case will cost First Data valuable time while the marketplace moves on. Says one such observer: “I don't know how it makes sense strategically for them to fight it.” Instead, he advises, the processor should concentrate on smaller acquisitions and on “aggressively” bidding for business for its NYCE debit network, in which it holds a 64% stake. In an official joint statement released after the Justice Department's announcement, First Data and Concord called the federal action “inaccurate and ill-advised” and alleged it “could have detrimental impacts on the the payments marketplace,” including higher prices. The companies further said they would go ahead with their Oct. 28 shareholder meetings on the merger, and would also, “well in advance” of the deal's Jan. 31 termination date, seek a ruling from the court on Justice's suit to enjoin the merger.