Decoupled-debit card programs could see a surge of fresh interest from merchants and consumers if the Federal Reserve Board’s new debit-interchange rules go through as proposed, the purveyor of one such alternative payment scheme insists.
The theory is that, if the proposed lower rates force banks to slash debit-rewards programs and increase fees and restrictions on debit cards, then more consumers might flock to decoupled-debit programs offering immediate rewards on cards that carry no fees, contends Joe Randazza, CEO of Coconut Creek, Fla.-based National Payment Card, which offers rewards-based decoupled-debit programs through 26 merchants.
The Fed has proposed capping the interchange merchant banks pay card issuers at 12 cents per debit transaction as part of the so-called Durbin amendment within the Dodd-Frank Act; final comments on the proposal are due Feb. 22 (
“Merchants who think they’re getting a gift of 12 cents per debit transaction with the Fed’s proposed rules could see this backfire if consumers switch from using Visa and MasterCard debit cards to using checks, credit cards or prepaid cards, which in some cases costs merchants more,” Randazza says. “This creates a whole new equation for decoupled debit because it guarantees a low-cost transaction for merchants with a direct rewards program.”
Consumers in certain markets have showed enthusiasm for National Payment Card’s product. Launched in 2006, it provides retailer-branded PIN-debit cards that draw funds from customers’ checking accounts via the automated clearinghouse system (
Parker’s Corp., a 24-unit gas/convenience store chain, is the latest to adopt National Payment’s program with its Parker’s PumpPal Club card, offering customers an immediate 10-cent-per-gallon discount on fuel purchases. The Savannah-Ga.-based company claims to have signed up more than 3,000 customers since introducing the card Feb. 1.
Though National Payment Card has operated as a closed-loop system, the company in June will add the option of processing transactions through the Pulse PIN-debit network, with an eye to expanding its rewards program nationally, Randazza says.
Adding a national network like Pulse will boost National Payment Card’s access to larger merchants that are reluctant to add new payment-acceptance systems but want point-of-sale rewards programs, Randazza says. “Our market research suggests we will see a surge of interest from a new category of medium- to large-size merchants that want to offer cards with broader utility, when we add Pulse,” he says.
But the core business case for decoupled debit, which has struggled for several years to find a foothold, remains in doubt, analysts say.
Tempo Payments Inc. has gained attention for the Discover-branded decoupled debit cards it offers through Brookings, S.D.-based First Bank and Trust with convenience-store chain QuikTrip Corp., but relatively few such programs have gained a mass following (
Randazza’s success in providing rewards programs with regional merchants is laudable, but it does not portend broader success in expanding decoupled debit nationally, regardless of the new debit-interchange rates, Patricia Hewitt, debit advisory service director for Maynard, Mass.-based Mercator Advisory Group, tells PaymentsSource.
“Direct-debit rewards for persistent local purchases such as gas have had success because it’s a very straightforward commodity a consumer is buying regularly, at the same location, and most people would welcome a discount on it,” she says.
If the Fed approves its debit-interchange rules as proposed, it likely would change the economics of rewards, causing merchants to look for ways to fund rewards more directly, Hewitt says. “But the concept of decoupled debit still suffers from the problem of who will pay to promote it, and there is no clear incentive for a merchant to put money into a national decoupled debit program that doesn’t directly drive sales at its own locations,” she says.
It is also stretch to assume that merchants will see a benefit in decoupled debit if overall debit rates decline, Zilvinas Bareisis, a senior banking analyst at Celent LLC, tells PaymentsSource.
“National Payment Card’s whole business case seems to be predicated on the idea that merchants are looking to save money on transaction-processing fees, and with the new debit rates they will have less incentive to go with a decoupled-debit program to solve that problem,” Bareisis says. “In fact, what is likely to happen is that ACH and card-network processing fees will converge.”
And decoupled debit does not have a cloudless horizon, analysts point out. “The regulatory environment will continue to evolve so any perceived loophole could be closed rapidly,” Beth Robertson, director of payments research at Javelin Strategy & Research, tells PaymentsSource.
Moreover, the changing economics of debit rewards could put more pressure on decoupled-debit operators as bank-operated merchant-funded rewards become more attractive, Robertson says.
“From the rewards perspective, merchant funding is one of the better options for banks right now, as it will enable them to continue to offer rewards but not bear the direct burden of doing so,” she says.
Cardlytics Inc. and Billshrink Inc. are among the emerging bank-based merchant-funded program providers (
Randazza is undeterred by doubters, saying his company continues to get new inquiries from merchants and is projecting record growth this year.
“There is still a lot that remains to be seen about how Durbin will affect the marketplace. But it is becoming increasingly clear that it means merchants are going to have more options for providing incentives to consumers, and we are going to help them with that,” he says.
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