Capital One Financial Corp. is issuing debit cards that can be linked to accounts at any bank and route payments across the automatic clearing house network.
The cards separate two banking products that have long been closely linked — the checking account and the debit card — and could threaten to cut into banks' interchange revenue from handling debit transactions.
Other companies have tried to promote the use of cards that use the ACH network but have had little success, because few merchants will accept such cards. Capital One says it has addressed that problem by working with MasterCard Inc.
The cards bear the MasterCard logo and can be used at any merchant that accepts MasterCard cards; the Purchase, N.Y., card company forwards the transaction information to Capital One, which generates ACH debits to customers' bank accounts.
Scott Grimes, Capital One's senior vice president of payments, said in an interview Monday that the McLean, Va., company has been working on the new cards for "several years," focusing on creating a new type of payments infrastructure.
"Where the ton of the innovation has been around is how do you separate the debit card from the bank relationship," he said. "The thing we solved for when we originally started developing this product was how do we secure the debit relationship with a customer and separate that debit relationship from the checking relationship."
Because banks have such control over debit accounts now, "you don't see near the degree of competition for great debit cards" that you see with credit cards, Mr. Grimes said. "That's something we're trying to push and change — to elevate debit marketing to the national level."
Letting consumers select their debit issuer in the same way they can choose a credit card would be a major change in the industry and would provide "just a better debit experience for the consumer," he said.
The new cards, which can be used for both signature and PIN debit transactions, will appeal to consumers because their rewards program will be more lucrative than those available on standard debit cards, Mr. Grimes said, though he would not elaborate.
Capital One started issuing the new cards in March, to its existing credit card customers. The new cards offer reward points that are pooled with points earned on Capital One-issued credit cards.
The company issued a cobranded version of the debit cards last month with a large grocery store chain, which Mr. Grimes would not name. A spokeswoman for Capital One said it expects to offer cobranded cards with other merchants soon.
Mr. Grimes said that the cobranded cards could prove a selling point to consumers, who may "value an affinity relationship with the merchant and value rewards with the merchant they have a relationship with."
Gwenn Bezard, a research director at Aite Group LLC in Boston, said that the product threatens to disintermediate banks from the debit transactions on their own accounts and could cut into their debit interchange revenue.
Previously, someone who had a checking account with Bank of America Corp. could get a debit card only from B of A, he said. "The checking account and the debit card product are intertwined. They are bundled together." But Capital One's cards undermine this relationship, and "most banks will be very unhappy with that."
Mike Marzec, the manager of electronic banking for First Horizon National Corp., said that Capital One's debit cards "circumvent the normal banking debit authorization process."
"There's some concern there, certainly," he said.
Other vendors are offering ACH payments systems, including some that use driver's licenses or fingerprints to authorize transactions at the point of sale, Mr. Marzec said. "There's multiple attacks against the debit system, and in aggregate will it hurt? It may." All these systems have "the potential to move the relationship with the consumer away from the bank to a third party."
Other major debit-issuing banking companies, including JPMorgan Chase & Co. and Bank of America, either did not return calls seeking comment or would not discuss Capital One's debit strategy.
Mr. Bezard, who issued a report Monday on the new cards, agreed that the rewards program would attract users. "The market is ripe for this. You have consumers who are rewards addicts. They don't get a good deal with debit today. And this product will give them a very good deal."
The average reward on a Visa reward debit card is 25 cents for every $100 of purchases, but the Capital One cards will offer more than 40 cents, he said. "The rewards provided by the card are far superior to the rewards provided by a regular Visa or MasterCard debit card."
In his report, he wrote, "We believe that this product will be emulated by other issuers. In the long run, we expect cobranded decoupled debit cards to help reshape the card-issuing landscape."
A handful of companies are already pursuing ACH-based debit cards, notably Tempo Payments Inc. The San Mateo, Calif., company (which was known as Debitman Card Inc. until November) lets merchants issue their own debit cards, which route transactions across the ACH network. Tempo says that its cards, which carry the Tempo brand, are accepted at 200,000 merchant outlets, including Wal-Mart, Sam's Club, CVS, QuikTrip, Kohl's, Macy's, Burger King, and Barnes & Noble stores.
In April, HSBC North America Inc.'s retail services unit began issuing ACH debit cards, working with Tempo and another partner.
Mike Grossman, Tempo's chief executive, said in an interview Monday that the Capital One debit cards are a "validation" of his company's approach and will "shake up" the debit market.
"Historically, a debit card has been effectively a feature of a DDA account, and what Tempo and Capital One are doing is decoupling from that relationship," he said. "That's going to lead to an interesting change in the debit card market, which for 20 years has grown very rapidly but has shown very little innovation."
