US Banker  |  February 2008

By Anthony Malakian

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The days of decoupled debit cards are upon us. And while it may not be a particularly welcome innovation from banks' point of view, since it reduces their transaction fees, customers will certainly benefit. "One of the outcomes will be to drive banks to deliver better value with their existing debit-card rewards program," says Gwenn Bezard, director of research for Boston-based consultant Aite Group.

After Capital One Financial Corp. burst onto the scene with its decoupled debit card in May, Bezard predicted the product had a high likelihood of success. It may, in fact, prove a disruptive technology. Decoupled debit is an alternative ACH-based debit card product that utilizes two existing systems in the financial-services industry that were not designed to work in combination: the ACH network and the branded payment networks such as MasterCard, Visa, NYCE, etc., according to the Mercator Advisory Group.

Here's how it works: An intermediate service provider, such as Capital One, issues a consumer a new "debit" card. When the consumer makes a purchase, the transaction is performed and settled between the merchant and the intermediary online, over the branded payment networks. Then, the funds are then deducted from the consumer's checking account and paid to the intermediary using the offline ACH network. The "decoupling" of the debit transaction from the bank at which the consumer maintains a checking account allows the intermediate service provider to capture the interchange income from the card transactions which would normally go to the bank that holds the checking account, Mercator says. That allows the consumer to capture points he might not otherwise.

Capital One's co-branded debit cards function much like co-branded credit cards: Customers earn rewards by using the cards anywhere and redeem rewards exclusively through the merchant. Capital One's offering "gives consumers two to five times the actual value of traditional reward debit cards," Bezard says.

Customers like reward points that can be accrued through simple, everyday purchases, without the threat of paying interest, as on a credit card. "From a customer perspective, it offers a way to maximize rewards points on everyday debit spending, getting points where customers didn't get points before, without the hassle of changing bank accounts," says Capital One spokesperson Pam Girardo.

To compete with Capital One, banks may have to start to improve rewards programs to keep customers' interest. Another bank has already jumped into the fray. In September HSBC and CVS began testing a new decoupled debit card at 141 CVS stores in the Indianapolis area. The new card links the CVS customer's checking account into his ExtraCare account, a CVS-loyalty program, says Daniel Eckert, HSBC's head of product venture, acquisition and development.

In October HSBC announced a similar agreement with Pathmark Stores to create a pilot program in New York and New Jersey. Pathmark Advantage Payment Card, the new offering, will combine the customers' debit card and the Pathmark Advantage Club card. "Stay tuned. I think there will be several more [agreements] to follow in the early days of '08 as well," adds Eckert.

But Viveca Ware, director of payments and technology policy for Independent Community Bankers of America, is not so enthusiastic for small banks. "At this point, I don't anticipate community banks embracing the product," she says. "The primary concern of the community bank has been the increased likelihood of the increased customer-service calls because of a lack of understanding."

Smaller banks may not have the financial leverage to offer a rewards platform. "Community banks could take a look at their rewards programs and look at ways of enhancing them," she says. "But there have discussions of that before and not just because of pressure of the decoupled debit card."

(c) 2008 U.S. Banker and SourceMedia, Inc. All Rights Reserved.

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