Decoupled Debit Loses Its Bite in Latest Incarnation

Decoupled debit cards, which were once viewed as a significant threat to banks' transaction revenue, appear to be fading away.

Tempo Payments Inc., which pioneered the concept, has introduced a new business model built around affinity card programs for special-interest groups, a major shift from its earlier model of encouraging large merchants to offer its cards to consumers.

And Capital One Financial Corp., one of the few banks that had endorsed the idea, confirmed Monday that it quietly shuttered its test of decoupled debit cards last year.

"We've concluded there's no inherent value in decoupled debit itself," Michael S. Grossman, Tempo's chief executive, said in an interview. The value "is really in the ability to offer affinity and co-branded debit cards that benefit organizations and cardholders."

The San Mateo, Calif., company said the model announced Monday represents a "relaunch," to manage debit card programs for nonprofit groups and other organizations. It also announced three clients: the Breast Cancer Fund; Greenpeace; and Surfrider Foundation.

Consumers link the cards to their existing checking accounts. When they make purchases, the transactions move initially across MasterCard Inc.'s debit network to Tempo, which switches them to the automated clearing house system and debits the consumers' bank accounts. The organizations receive a share of the processing fees paid by the merchants.

Tempo originally targeted large merchants, which it believed would be eager to cut their processing expenses by distributing the cards to consumers; when merchants proved reluctant to do so, it shifted its focus to banks by promoting the cards as a way to poach transaction fees — and potentially customers — from other financial companies.

One of the few banks that has agreed to offer Tempo's cards is HSBC North America Holdings Inc., which began offering cobranded cards with retailers in 2007. An HSBC spokeswoman wrote in an e-mail Monday that the banking company "remains committed to supporting its current merchant relationships in the decoupled debit space."

Capital One also tested decoupled debit cards, but spokeswoman Pam Girardo said it concluded its tests last year. "Given current conditions in the market, we didn't feel that it would merit further testing at this time," she said.

James Van Dyke, the founder and president of Javelin Strategy and Research of Pleasanton, Calif., said that merchant-centric decoupled debit suffers from a disconnect between the merchants' interests and their consumers.

"Merchants can have some success in getting consumers to use a particular method of payment, if you give them incentives," he said. "The merchants that have a lot of sway with consumers in getting them to use a particular payment method tend to be mom and pops. They have more of an affinity with their customers."

Tempo plans to offer its program to a wide range of schools, causes and companies, which can offer incentives, such as charitable contributions, in the case of nonprofits, or discounts and incentives, in the case of merchants or other businesses, Grossman said. "A much broader set of organizations can now have access to affinity and cobrand programs."

First Bank and Trust of Brookings, S.D., a unit of Fishback Financial Corp., is issuing Tempo's MasterCard-branded debit cards.

Van Dyke said that Tempo's new approach allows it to tap into "some pretty passionate groups of members" by allying itself with prominent causes.

"What Tempo is trying to do is to work through these grassroots organizations," Van Dyke said. "I don't think it's particularly revolutionary. But sometimes the grassroots method succeeds."