payments
Decoupled Debit Cards
Threaten Standard Debit Cards
T
By Viveca Ware
70 ICBA IndependentBanker 10|2008
he debit card, ranked
the most important payments mechanism by 94
percent of the respondents to the
ICBA 2007 Community Bank
Payments Survey, faces new competition. Capital One Financial
Corp. is leading the competition
by testing the so-called decoupled
credit card—a debit card that
allows cardholders to make purchases and withdraw cash using a
card issued by a third party.
Capital One, however, is
no longer alone in pursuing
decoupled cards. HSBC USA,
partnering with Tempo Payments Inc., also has a decoupled
debit card program. And financial institutions of all sizes and
charters, payments networks
and non-bank payments providers are all eyeing this particular
payments innovation. Some are
exploring the merits of issuing
their own decoupled debit cards,
or co-branding them with large
retailers.
Today, debit cards are issued by
the financial institution—such as
a commercial bank, thrift, credit
union or brokerage firm—and are
directly linked to a specific checking account. The decoupled debit
card is issued by an entity other
than the financial institution
holding the deposit, and the card
is not linked to the cardholder’s
checking account.
The payments industry was
rocked when Capital One’s
two decoupled debit card test
programs became public knowledge approximately 18 months
ago. One test program involved a
Capital One card that was issued
to prescreened Capital One
credit cardholders. The other test
program involved co-branding
cards featuring both the Capital
One and merchant logos. Each
card in both programs provided
signature and PIN functionality and carried the MasterCard
logo, which guaranteed acceptance at any merchant or location
accepting MasterCard, Maestro
and Cirrus.
To assist Capital One in managing its settlement risk—since
it did not have direct access to
checking account information—
the cards had transaction limits
of $500 per day for purchases,
payments
$200 per day for cash withdrawals with aggregate limits
of $500 per day or $2,000 over
a 30-day period. Daily transactions were aggregated into a
single ACH debit transaction
for clearing and settlement
and posting to the cardholder’s
checking account within two or
three days.
Moreover, lucrative rewards
programs provided cardholders
with incentives to accept and use
the Capital One decoupled cards.
Points earned with the debit
cards were pooled with Capital
One credit card points. Cards cobranded with merchants earned
extra rewards on merchant purchases, with rewards redeemable
only at the merchant’s store.
Follow-up Strategy
Some payments system observers mistakenly believed that
Capital One was abandoning its decoupled debit card
strategy due a NACHA rules
interpretation late last year
and the conclusion of its two
co-branded programs in May.
The interpretation clarified
that NACHA rules require
debit card point-of-sale transactions settling via the ACH
network to have a separate
ACH entry for each pointof-sale transaction. It also
prohibited the aggregation of
multiple transactions into a
single ACH entry.
To the chagrin of many,
Capital One is continuing its
decoupled debit card, with
some tweaks. The company
is now marketing a card with
an annual fee of $19.95 and a
generous rewards program that
awards two points for every
dollar spent. This latest model
will not aggregate transactions
consistent with the NACHA
interpretation.
Pam Girardo, a Capital One
spokeswoman, was quoted in
an American Banker article
stating that, “[We] have a
broad, multifaceted and comprehensive decoupled debit
learning agenda that is ongoing. We’re testing a variety of
things at the moment.”
The Next Step
Clearly, the decoupled debit
card could have long-term
72 ICBA IndependentBanker 10|2008
implications for the payments
system, community banks’ debit
card portfolios and core relationships. A decoupled debit
card strategy is not appropriate
for all financial institutions.
For example, a decoupled debit
card provides Capital One with
a rich opportunity to expand
its footprint given its 45
million credit cardholders
and its proven marketing
prowess.
Capital One’s decoupled
business model has two main
steps: First, draw cardholders
to the program with its aggressive rewards program. Next,
convince the cardholder to
open a new deposit account
relationship directly with the
company.
This strategy seeks to
separate the debit card from
the deposit relationship. In
the near future, it could place
the debit card in a competitive marketplace wherein
cardholders first select a debit
issuer, rather than an account
provider. Under this framework, consumers could have
multiple debit cards, just as
many have multiple credit
cards today.
Deposit-holding community banks will also earn less
interchange revenue—an
important revenue stream
for banks of all sizes—while
shouldering the new burden
of responding to cardholder
questions about payments
they do not authorize.
Ultimately, the decoupled debit card threatens
to disintermediate banks’
core relationship, the
demand deposit account
relationship.
The decoupled debit card could have
long-term implications for community
banks’ debit card portfolios and
core relationships.
10|2008 ICBA IndependentBanker 73
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AIG United Guaranty . . . . . . . . . . . . . . . . 44 . . . . . www.aig.com
Banc Investment Group . . . . . . . . . . . . . 69 . . . . . www.bancinvestment.com
BancIntelligence.com . . . . . . . . . . . . . . . 58 . . . . . www.bancintelligence.com
BancVue Ltd. . . . . . . . . . . . . . . . . . . . . . 8 . . . . . . www.bancvue.com
Building Committee Inc. . . . . . . . . . . . . . 29 . . . . . www.bciusa.biz
Consultants & Builders Inc. . . . . . . . . . . . 39 . . . . . www.consultantsandbuilders.com
CPI Card Group . . . . . . . . . . . . . . . . . . . 6 . . . . . . www.cpicardgroup.com
Discover Network . . . . . . . . . . . . . . . . . . 71 . . . . . www.discovernetwork.com
Dougherty Funding LLC . . . . . . . . . . . . . 62 . . . . . www.doughertymarkets.com
Elan Financial Services . . . . . . . . . . . . . . c3 . . . . . www.elanfinancialservices.com
Environmental Data Resources Inc. . . . . . 14 . . . . . www.edrnet.com
Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . 23 . . . . . www.efanniemae.com
Fidelity Information Services . . . . . . . . . . c4 . . . . . www.fidelity-ifs.com
FifthThird Processing Solutions . . . . . . . 49 . . . . . www.eft.53.com
FirstBank Community Bank Products . . . 65 . . . . . www.communitybankproducts.com
fisCAL Financial Analysis . . . . . . . . . . . . . 2 . . . . . . www.fiscalsoftware.net
FLOODWATCH . . . . . . . . . . . . . . . . . . . . 4 . . . . . . www.floodwatch.fprsi.com
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . 67 . . . . . www.freddiemac.com
Harland Financial Solutions . . . . . . . . . . . c2 . . . . . www.harlandfinancialsolutions.com
HTG Architects . . . . . . . . . . . . . . . . . . . . 18 . . . . . www.htg-architects.com
ICBA Convention . . . . . . . . . . . . . . . . . . 62 . . . . . www.icba.org
ICBA Energy Star . . . . . . . . . . . . . . . . . . 72 . . . . . www.icba.org
ICBA Services Network . . . . . . . . . . . . . . 10, 63 . . www.icba.org
Institutional Deposits Corp. . . . . . . . . . . 66 . . . . . www.idcdeposits.com
LendingTools.com . . . . . . . . . . . . . . . . . 16 . . . . . www.lendingtools.com
Level 5 . . . . . . . . . . . . . . . . . . . . . . . . . . 68 . . . . . www.level5.com
Metavante Image Solutions . . . . . . . . . . . 40 . . . . . www.metavante.com/is
Modern Banking Systems . . . . . . . . . . . . 5 . . . . . . www.modernbanking.com
National Office Furniture . . . . . . . . . . . . 36 . . . . . www.nationalonline.com
National Processing Co. . . . . . . . . . . . . . 61 . . . . . www.npc.net
NewGround Resources Inc. . . . . . . . . . . 35 . . . . . www.newground.com
Panini North America . . . . . . . . . . . . . . . 55 . . . . . www.paninina.com
PMA Financial . . . . . . . . . . . . . . . . . . . . . 73 . . . . . www.bankfunding.com
Precision Computer Systems . . . . . . . . . 19 . . . . . www.pcs-sd.com
Pulse EFT Association . . . . . . . . . . . . . . . 77 . . . . . www.pulse-eft.com
Sandler O’Neill & Partners . . . . . . . . . . . . 12 . . . . . www.sandleroneill.com
SCAN COIN . . . . . . . . . . . . . . . . . . . . . . 44 . . . . . www.scancoin-usa.com
Security Systems Equipment . . . . . . . . . 33 . . . . . www.sse-corp.com
SHAZAM Inc. . . . . . . . . . . . . . . . . . . . . . 9 . . . . . . www.shazam.net
Sheshunoff Management Services . . . . . 57 . . . . . www.smslp.com
Silverton Bank . . . . . . . . . . . . . . . . . . . . . 21 . . . . . www.silvertonbank.com
Strohl Systems . . . . . . . . . . . . . . . . . . . . . 53 . . . . . www.planetstrohl.com
Strunk & Associates LP . . . . . . . . . . . . . . 7 . . . . . . www.strunklp.com
Suntell . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 . . . . . www.suntell.com
Taylor Bean & Whitaker . . . . . . . . . . . . . . 51 . . . . . www.taylorbean.com
The Kansas Bankers Surety Co. . . . . . . . 43
Travelers . . . . . . . . . . . . . . . . . . . . . . . . . 59 . . . . . www.travelers.com
Young & Associates . . . . . . . . . . . . . . . . . 52 . . . . . www.younginc.com
74 ICBA IndependentBanker 10|2008
Unanswered questions
remain: Will consumers allow
third-party debit card access to
their checking accounts? Will
they carry multiple debit cards?
Are lucrative rewards programs
sufficient incentives to lure
consumers? What are the compliance issues? How will the
account-holding bank or debit
card issuer resolve issues regarding fraud, security or service?
Does the decoupled card model
expand fraud risks? Will banks
embrace the model?
Facing the Threat
How should your bank prepare
to meet the threats of decoupled
debit cards? Look beyond the
horizon and embrace strategies
to retain, maintain and grow
stronger customer relationships
and profitability. Cross-sell as
many products as possible to
your account holders to enhance
their loyalty. Satisfied customers
do not change banks.
To determine whether your
customers are satisfied with
your community bank’s products and services, conduct a
customer satisfaction survey.
Then develop strategies to
respond to those survey results.
Develop marketing campaigns
highlighting the advantages of
customers using your bank’s
debit cards. Offer competitive
rewards programs at the debit
card or relationship levels.
Your community bank can successfully respond to the threats of
decoupled debit cards, but don’t
delay your preparations. ib
Viveca Ware, ICBA’s director of
payments and technology policy,
can be reached at viveca.ware@
icba.org.