First it was free checking. Then it was spending rewards. Are decoupled-debit cards the next casualty of the Durbin amendment?
Tempo Payments Inc., a pioneer in the decoupled-debit card industry, claims that is the case.
Tempo currently is winding down its operations as it grapples with Durbin amendment rules it says make its decoupled-debit programs unsustainable. The San Mateo, Calif., alternative payments company is already notifying cardholders in specific programs about the decision, a process it expects to complete by year end.
Mike Grossman, Tempo's chief executive officer, specifically cited language in the Federal Reserve Board's final debit interchange rules that he said singled out decoupled-debit programs, which typically enable a consumer to link any existing checking account to a card issued by another bank.
"We're a casualty of the Durbin amendment," Grossman said in an interview. "Our business model depended on … debit interchange. Even though the bank with which we work has less than $10 billion in assets, we're not able to take advantage of the exemption that's in the Durbin amendment, because of the Fed's rules."
Analysts acknowledged that the Fed's final rules, issued June 29, may have ensured the demise of some decoupled-debit programs, but they noted the product has had a bumpy road over the last several years. Large issuers such as Capital One Financial Corp. and HSBC Holdings PLC, an early Tempo backer, dipped their toes in the water with their own products but scrapped them or scaled them back after consumers balked and the financial crisis hit.
Still, Grossman said, Tempo in the past two years had started to hit its stride, pushing a business model that centered on forming partnerships with retailers such as convenience store operators QuikTrip Corp. and Sheetz Inc., and non-profit organizations.
A spokesman for QuikTrip said the Tulsa, Ok., convenience store chain's decoupled-debit program was ending Friday. The card allowed customers to earn a 5-cent-per-gallon discount on gasoline purchases during the first 90 days of signing up and then 2 cents for every gallon after that.
"Our logic was fairly simple," said Mike Thornbrugh, a spokesman for QuikTrip. "We would prefer to give the money that we [would have had] to pay on interchange fees back the customer directly on a discount on gasoline."
Even as Tempo blamed the new interchange rules for its decision to shut down, another decoupled-debit company, National Payment Card Association, said the regulation would be a major boon to its business, which currently routes transactions over the automated clearing house network, thereby lowering acceptance costs for merchants, which had lobbied for lower debit card interchange.
"Decoupled debit is not dead," said Joe Randazza, the chief executive of National Payment Card Association in Coconut Creek, Fla.
The divergent response to the Durbin amendment is partly due to the companies' business models.
In its current iteration, Tempo, which started out several years ago as Debitman Card Inc., relies on existing debit interchange rates, which have cost merchants an average of 44 cents per transaction, according to the Fed.
Its customers' transactions are routed over either MasterCard Inc.'s or Discover Financial Services' payment networks. The transactions are authorized by Tempo in close conjunction with its bank issuer partner, Fishback Financial Corp.'s First Bank and Trust. But because Tempo relies on First Bank and Trust to settle transactions from the deposit accounts that customers link to their decoupled cards using the ACH network, costs are lower for Tempo.
Tempo is able to take the money it saves using ACH as the settlement vehicle and share it with its co-branded merchant partners, which in turn can use it to provide customers with discounts and other rewards for using the cards.
The Durbin amendment, named after its proponent, Sen. Richard Durbin, D-Ill., was included in the Dodd-Frank Act and instructed the Fed to set interchange rates that are "reasonable and proportional" to the costs that issuers incur.
Last month the Fed released its final rules for implementing the provisions, set a cap that on average will be about 24 cents per transaction. While better than the 12-cent cap that the Fed initially proposed in December in its preliminary rules, the final rate is not enough to fund Tempo's business model, Grossman said. "It becomes very difficult to fund a compelling reward, and from a merchant perspective, the economic value is somewhat diminished." The Durbin amendment does include exemptions for certain types of card issuers and products, including banks with less than $10 billion in assets and prepaid cards that meet certain requirements.
First Bank and Trust, the company that issues Tempo's debit cards, has less than $10 billion in assets but does not qualify for the small-issuer exemption because of specific requirements the Fed included in its final rules. The Fed wrote that an issuer for purposes of the exemption is the entity "holding the asset account that is debited through an electronic debit transaction."
First Bank and Trust does not hold the checking accounts. Rather, consumers link accounts from other banks.
In a footnote to the rules on the small-issuer exemption, the Fed also reiterated that guidance it gave in its prelimary rules, which is that "an issuer of decoupled debit cards, which is not the institution holding the consumer's asset account from which funds are debited when the card is used, would not qualify for the exemption … regardless of the issuer's asset size."
"You can argue about whether they had a viable business proposition anyway, but I would say that it would appear that the Durbin amendment put the final nail in the coffin of decoupled debit and Tempo," said Eric Grover, a principal with the payments consulting firm Intrepid Ventures.
Randazza, however, welcomes the amendment, which he says would make National Payment Card Association a more compelling option for merchants. His reasoning is that his company already charges an average of 15 cents per transaction. If banks take steps to curb consumers from using debit cards and steer them towards credit cards, which have higher transaction rates than debit cards, merchants will have a bigger incentive to push proprietary payments products that have cheaper rates.
"Since 2004 we really have been swipe-fee reform," Randazza said. "We've always been the 15-cent transaction model and we're able to make a fair and reasonable profit at that 15-cent model."
Unlike Tempo, National Payment Card Association's cards have not been equipped with a card network logo, which means they can only be used at the specific merchant offering a card program through the company. Randazza said the company plans to add two PIN debit networks to its cards, including Discover's Pulse network, later this year. Tempo's cards have either been equipped to run over either MasterCard or Discover, which means that in addition to merchant partner locations the cards can also be used at other merchants that accept MasterCard or Discover. That is also part of the reason for the difference in pricing between the two companies.