The pending overhaul of debit interchange regulations is widely expected to lead to cuts in banks' rewards programs, but it remains unclear how this could affect decoupled debit cards that have long promoted their lucrative rewards offers.
Decoupled cards settle transactions through the automated clearing house systems rather than the standard debit networks and, therefore, are unlikely to be significantly affected by the Dodd-Frank Act or the amendment sponsored by Sen. Dick Durbin authorizing the Federal Reserve to regulate debit interchange rates. These rules have not yet been drafted.
Tempo Payments Inc — perhaps decoupled debit's biggest champion — said it has no plan to capitalize on the changes.
"We already facilitate higher rewards than consumers get with traditional debit cards," said Mike Grossman, Tempo's chief executive. "And in a post-Durbin world, that may increase. But our primary focus is on our current business model."
Tempo's debit system lets people link any bank account to its cards, and affinity partners get transaction fees when the cards are used. The transactions are authorized over standard card networks but settle through the low-cost ACH network. As a result, transaction fees are lower than on regular debit cards, and the savings typically go toward rewards and other benefits.
In the past year, Tempo has expanded its focus to nonprofit groups that see the cards as fundraising tools.
Grossman said he is taking a wait-and-see approach to the major payment networks' response to the new legislation before considering any change in Tempo's business model.
Gwenn Bezard, a co-founder of and research director at Aite Group LLC, said debit interchange regulation will have a profound effect on the payments market but may not translate into an opportunity for decoupled cards.
Prepaid debit cards and payroll cards, which are already chipping away at the lower end of the market, could be the biggest beneficiaries of new interchange rules, said Bezard. "A lot of banks are not realizing that, but those prepaid debit providers are going to ride this wave," he said. "They are going to have opportunity."
However, "the overall opportunity is that it's not so much with decoupled," he said.
Bezard said he expects to see a variety of responses from banks once the final rules are issued next year. "I would be surprised if the networks used a one-size-fits-all approach," he said. "But there are a lot of unknowns."
Tempo is making other changes now.
Last month, it announced that Discover Financial Services's networks would handle transactions for the card it offers with QuickTrip Corp. Other Tempo cards, and QuickTrip's earlier card, use the MasterCard Inc. network.
Grossman said he is seeing more retailer interest than ever before in Tempo's cards, which are issued by First Bank and Trust, a unit of Fishback Financial Corp.