Capital One Financial Corp. appears to be backtracking on its decoupled debit card program.
The McLean, Va., company, which has been testing the cards since last year, confirmed Friday that it would terminate programs May 10 with two merchants: the Altoona, Pa., convenience store chain Sheetz Inc. and the Richmond, Va., grocery chain Ukrop's Super Markets Inc.
According to a source familiar with the situation, at least one of the retailers notified customers last week that it would be "discontinuing the program," and that "debit card accounts issued by Capital One will be closed at that time."
Rich Steckroth, the director of business development for Sheetz, would not discuss changes in the debit program Friday, saying Capital One had instructed him to refer all inquiries about the card back to the issuer.
The decision on terminatins the programs seems to have come from Capital One.
"We like the program," Mr. Steckroth said.
Spokespeople for Ukrop's did not answer questions before press time.
Pam Girardo, a Capital One spokeswoman, said in an e-mail that it had completed its pilot tests with the two merchants. She would not say why her company is shuttering the two programs.
She also would not confirm whether Capital One has tested the cards with other merchants, though Patty Hayward, a senior analyst in the debit advisory services practice of Mercator Advisory Group Inc., said that she believes those are the only two programs.
The cards route point of sale transactions across the MasterCard Inc. network from merchants to Capital One, which sends the transactions across the automated clearing house system to the cardholders' banks for settlement. The cards bear the MasterCard logo and can be used at any merchant that accepts MasterCard cards.
MasterCard spokespeople did not return calls.
Banks have long viewed debit cards and demand deposit accounts as tightly linked, but the decoupled cards break that connection; Capital One is the issuer and can link the cards to accounts at any bank capable of receiving ACH debits.
Ms. Hayward said the concept is viewed as a significant threat to banks, especially small ones, that fear losing debit interchange revenue if their customers begin using decoupled cards.
Capital One has not "been touting the card as much" in recent months as it had last year, Ms. Hayward said. As recently as a few weeks ago she could not apply for the card, because the program "was not taking new applications."
Any decision to shut down the program might be related to Capital One's financial condition, rather than problems with the concept, Ms. Hayward said.
Capital One, like many other financial companies, is facing problems related to the ongoing credit crunch. Last month it said its first-quarter profits dropped 18.7% from a year earlier, to $548.5 million, and net income from its banking unit fell 26.8% from the fourth quarter and 45.5% from a year earlier, to $75.8 million.
"Our guess is they are paring things down," Ms. Hayward said. "This was a new product and needed a lot of oomph behind it, and they just don't have the capital at the moment."
