Cap One MasterCard Taps Into Other Issuers' Accounts

  Capital One Financial Corp. is issuing a new debit card that has the potential to dramatically challenge Visa USA's control of the traditional debit card industry. The McLean, Va.-based card issuer began issuing a MasterCard Worldwide-branded debit card in the first quarter that can access any issuers' checking accounts.
  With a traditional debit card, the card and the bank's checking account are intertwined, as the bank that holds the account issues the card. Cap One's debit card, however, breaks up the relationship.
  Cardholders can select Cap One's debit card and have a checking account at any financial institution they choose. Gwenn Bézard, research director at Aite Group, a Boston-based consulting firm, describes the process as "decoupling."
  When Cap One's debit card is used to make a purchase, Cap One uses the MasterCard network to authorize the transaction but withdraws the money from the cardholder's account using the automated clearinghouse system. Cap One then deposits the funds into a Cap One account it uses to settle the transaction, Bézard says. As such, Cap One assumes some risk that the funds will not be in the cardholder's account after the transaction is authorized, he says.
  Private-label debit card networks, such as Tempo Payments Inc., have similar products. But because Cap One's debit card transactions are authorized over the MasterCard network, it stands out from the other ACH-based debit cards, which are designed to reduce the amount merchants pay in interchange.
  "You don't have worry about where you can use Capital One's debit card because it's good everywhere MasterCard, Maestro and Cirrus cards are accepted," Bézard says. "The card can be used at ATMs, [point-of-sale] terminals and over the Internet. In addition, the card can be used for both PIN and signature transactions. With a Tempo Payments-branded card, you're limited to where you can use it."
  MasterCards are accepted at 25.3 million locations worldwide, 6.6 million of which are in the United States. Tempo, which also supports an ACH-based debit card issued by merchants, is accepted at about 200,000 locations, virtually all of which are in the U.S.
  Large banks that issue credit cards can offer them to consumers who have no other relationship with the bank, Schatt says. But the decoupled card is innovative because no one has ever done this before, says Dan Schatt, senior financial analyst for Celent LLC, a Boston-based consultancy. "We will have to wait and see if consumers accept [Cap One's] debit cards the same way they have accepted its credit cards," he says. "I have not seen any evidence of that."
  Bézard contends the Capital One debit card is a "breakthrough that is made possible by MasterCard's willingness to play hardball with Visa's stronghold on the debit-issuing market."
  MasterCard is backing Cap One's debit card because the Purchase, N.Y.-based card company controls only 14% of debit card transactions compared with Visa's 48%, Bézard says.
  Tim Sloane, director of the debit service at Mercator Advisory Group in Waltham, Mass., agrees that MasterCard has faced an uphill battle competing with Visa in the debit card market. "MasterCard has definitely had trouble getting its debit card program moving," he says. "It's interesting, however, that Capital One is settling through ACH instead of through MasterCard."
  MasterCard's debit card issuers could become angry with the card company, Sloane adds.
  Indeed, Cap One's debit card could open the door for nonbank issuers such as American Express Co. and Discover to enter the debit card market and compete with MasterCard and Visa.
  "We suspect that other networks, such as American Express and Discover Financial Services could follow, as the decoupled product would provide them with access to a huge base of debit cardholders they barely touch today," Sloane says.
  Bézard believes Cap One's debit card also will boost interest in the market from monoline issuers that have been sidelined because they lacked demand-deposit account relationships with customers. The debit card market might experience the exponential growth the credit card market did in the 1980s and 1990s, when the monoline issuers dominated the industry, he says.
  Decoupled debit cards also could expose existing electronic funds transfer networks to new competition from AmEx and Discover in the debit arena, Bézard says.
  However, Cap One probably will work with EFT networks to settle transactions at the point of sale but use the ACH network to withdraw the purchase price from cardholders' accounts, Schatt says.
  Debit card issuers are expected to react quickly to Cap One's product by working to ensure bank customers keep their bank-issued debit cards, Schatt believes.
  Matt Sexstone, Cap One's head of business development and merchant client services, says Cap One has cobranded its debit card with a supermarket chain, which he declined to name, and the chain is issuing the cards to customers. A second grocer is expected to follow soon, he says.
  Because of the cobrand agreements, the customer rebates are higher on Cap One's debit card for signature transactions: 80 cents per $100 spent with each Cap One cobrand partner merchant that captures 15% of the card's spending. This compares with 10 cents for a traditional Visa and MasterCard debit card, the Aite report says.
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