Since Capital One Financial Corp. began issuing a third-party debit card in May, community bankers have feared losing lucrative debit-related business to the McLean, Va., company while fretting that they would be the ones fielding angry phone calls from customers should problems arise with their Capital One cards.
So far, bankers are not seeing a meaningful drop-off in interchange fees from debit card use, and one of their main customer-relations concerns was resolved by a recent a ruling from Nacha, the electronic payments organization.
But it's still early. The so-called decoupled debit card has only been available for about six months, and bankers say they are not standing pat while Capital One uses its marketing muscle to promote its card to consumers eager to accumulate rewards points for everyday debit purchases.
Indeed, the $2.9 billion-asset First Financial Bankshares Inc. in Abilene, Tex., is planning to roll out a reward debit card product of its own so that customers will not be tempted to sign up for the Capital One card, said Mike Mauldin, the chief executive officer of Hereford State Bank, one of First Financial's 10 subsidiaries.
"Competition is really good for you," Mr. Mauldin said. "When the competition does something, you have to figure out a way to make sure your customers don't become their customers."
The decoupled card is tied to a customer's existing checking account and routes payments across the automated clearing house network. But its main selling point to consumers is the rewards program, which offers one point for every dollar spent, in line with what credit cards typically offer, said Kevin Bell, the senior vice president of payments at ICBA Bancard, a subsidiary of the Independent Community Bankers of America.
Many banks do not offer rewards for debit use, and those that do typically require users to spend "two, three, or even four dollars" for every point accumulated, Mr. Bell said.
The $143 billion-asset Capital One would not say how many people have signed up for its debit card, but industry watchers agree that bankers will have to find ways to make their cards more attractive, either by adding their own rewards or by including them in a product package that is attractive enough to keep customers from trying Capital One's card.
"If [Capital One] is easy to deal with, convenient, and appealing in terms of their rewards program, it stands to reason the rest of the customer relationship might follow," said Anat Bird, the chief executive of SCB Forums, a Granite Bay, Calif., company that organizes banker peer groups.
One concern about the transparency of the aggregated ACH debits has been addressed. Bankers had worried that customers' daily debit purchases using the Capital One card would show up in the account as a single ACH transaction, leaving it up to the customer to keep track of spending.
On Nov. 7, that problem was alleviated by a new interpretation from Nacha. The interpretation, which takes effect in about six months, will require each transaction by the third-party card issuer to have a separate ACH debit, instead of a day's worth of debits being aggregated into one, said Elliott McEntee, the president and chief executive of Nacha.
"The basic reason for the interpretation is, it is important for both Nacha and the community bank, or any financial institution, to see the name of the merchant involved in the transaction," he said. He pointed out that the interpretation affects all third-party debit providers, not just Capital One.
Another big threat to banks whose customers opt for Capital One's debit card is the potential decline in interchange fee revenue. Funds for a purchase made with the Capital One card would be withdrawn from the customer's primary checking account, but the transaction would be handled through the ACH network rather than on a card network.
But community bankers say they have other concerns as well, including what they say are increased risks of fraud and the potential loss of customer accounts.
"How many debit cards can you have, and how many people do you want with their claws in your account?," said Mike Hofmann, the president of the $165 million-asset Main Street Bank in Kingwood, Tex. Customers "may be better off just closing their account and going to Capital One."
They also worry that they, not Capital One, will be the ones hearing from customers if service falls short of expectations.
"They are still testing the card on our accounts, and we are still going to be providing that service," said Mr. Mauldin. "I don't want to make this about the fees because everybody says we are just crybabies and we want the money. But we need the fees to offset the cost of fraud prevention."
Community bankers also say these cards could damage the customer service reputation they have worked hard to earn.
"If a customer has a problem, you do everything in your power to help them straighten it out," said Mr. Hoffman. "But, with this, you are limited. I could try to help the customer, but ultimately it is their problem with Capital One to solve."
A Capital One spokeswoman said the company makes it clear to customers that they should call Capital One when problems arise and noted that a customer service telephone number is printed both on the card and on statements.
The responsibility involving fraud will lie with the card's issuer, but community banks will probably take some heat from customers if anything goes wrong with their account, said Doug Johnson, a senior policy adviser at the American Bankers Association.
"Capital One would be responsible for fraud at the end of the day, but at the beginning of the day, the customer is still the customer of the community bank," Mr. Johnson said. "The customer's expectation is going to be that the community bank is going to be their first stop, and community banks are going to take the initiative on that because it is all about customer care and confidence in the system."
And questions about who pays for items will undoubtedly arise, Mr. Mauldin said, as unusual circumstances occur. For example, he said, a government levy could deplete a checking account after a third-party ACH transaction has been approved but not yet debited. Another potential problem he pointed out would arise if a community bank account holder's information is stolen and used to obtain a card on the customer's account, he said.
"We aren't going to know if they are authorized or not," he said. "It just comes through to the customer."
Mr. Mauldin said he would like regulators to become involved by issuing some guidance on fraud before the industry gets bad press regarding the new cards — or Congress gets involved.
"This should have been a major debate within the industry before it came out," he said.
