The pending overhaul of debit interchange rates is spurring interest in alternative payment systems, according to executives.
This shift means debit card issuers should take a close look at their business models, an analyst said.
"No one knows yet what debit revenue streams will look like a few years from now, so it's vital for debit issuers to analyze and explore options so they understand exactly where the value lies in their debit operations today," said Patricia Hewitt, the debit advisory service director at Mercator Advisory Group in Maynard, Mass. Then they will be ready when the new rules kick in, she said.
Under the Dodd-Frank Act, the Federal Reserve Board has been authorized to set debit interchange rates that are "reasonable and proportional." As a result, many payments executives are anticipating a decline in debit revenue.
Hewitt said that this could spur debit growth. "We may see merchants embrace debit more aggressively as the lowest-cost payment channel, causing debit transactions as a whole to increase in value for issuers," she said. "That could open up opportunities in a variety of directions for traditional and nontraditional debit operators."
Some executives of alternative payment companies say that they are already seeing more interest in their systems.
Bling Nation Ltd. is getting more inquiries from smaller banks for its closed-loop, automated clearing house debit card network, partly as these banks look for new sources of revenue, according to Rod Stambaugh, Bling's western regional vice president.
Bling in September announced a deal with VeriFone Systems Inc. in which resellers of the payment terminal company's products will include Bling transactions tied to PayPal Inc. payments in their offerings to merchants, starting next year.
About 15 banks operating in five states have begun offering Bling in local markets since the company's start-up in 2008. Guaranty Bond Bank in Mt. Pleasant, Texas, signed on to the program in August to improve debit program revenues, according to Martin Bell, a Guaranty executive vice president.
"Banks and merchants win by reducing costs, and consumers win by accumulating rewards each time they use Bling," Bell said.
Customers initiate Bling payments at local merchant sites with a postage-stamp-sized contactless payment sticker, which most users attach to their mobile phones. Bling sends text message confirmations to customers' cell phones after authorizing the transactions.
Merchants pay 1.5% of the sale for Bling transactions, about half what they must pay to accept credit cards, Bling said. But because there are no intermediaries, banks retain a larger share of the fee than they do with traditional network debit programs, Bling said.
About half of local retailers in markets where Bling operates are participating in its programs, the company said.
National Payment Card Association also is betting that disruptions in the traditional debit landscape will spur interest in its closed-loop, decoupled debit card program.
The company provides retailer-branded PIN-debit cards that draw funds from customers' checking accounts, offering merchants lower transaction fees and the opportunity to create merchant-focused rewards. Transactions are processed within a day through the ACH system.
Since its introduction in 2004, National Payment Card has signed up 23 merchants, including the Enon, Ohio, gas station company Speedway SuperAmerica LLC, which in September began broadcasting TV commercials in the nine states where it offers its Speedy Rewards Pay Card to customers.
Merchants pay about 19 cents per National Payment Card transaction, or half the expense of traditional debit rates for gas station transactions, said Joe Randazza, the Coconut Creek, Fla., card company's chief executive.
"We believe the Fed's new rules … will reduce debit interchange fees by at least 50%, which will ultimately cause banks to begin charging customers for checking accounts and debit card services," he said. "Customers, in turn, will gravitate away from traditional bank-issued debit cards with fees to products like ours, that offer consumers rewards and no fees."
Most such closed-loop networks face long odds for gaining widespread acceptance, said Beth Robertson, the director of payments research at Javelin Strategy and Research in Pleasanton, Calif.
But she did not rule out the possibility that issuers may yet benefit from innovative ACH-based payments that are in development or struggling to get off the ground.
"There may be ways to establish hybrid payment products, whether decoupled debit or prepaid, that could generate new debit-profitability channels for issuers," Robertson speculated, though she would not say which channels look most promising.
Decoupled debit is another idea that could get another look. The system uses payment cards that draw funds through the ACH network from accounts not supported by the issuer. Capital One Financial Corp. has tested it, and Tempo Payments Inc. offers decoupled products. However, these products have not become a mainstream payment tool.
In its latest iteration, Tempo Payments' decoupled debit program, which went live in 2001 under the name Debitman Card Inc., recently shifted to an open-loop system, said Mike Grossman, Tempo's chief executive.
Tempo this year entered a partnership with First Bank and Trust in Brookings, S.D., to issue decoupled debit cards that it plans to offer to merchants, including an existing program with the convenience store chain QuikTrip Corp.
But the complexities of decoupled debit mean it is unlikely to come into use widely, said Zilvinas Bareisis, a Celent LLC senior banking analyst.
"The fact that Capital One walked away from decoupled debit said a lot," he said.