Decoupled debit cards are gaining more traction in Europe as a way to tie digital-first features to legacy bank accounts.
These cards can be linked to bank accounts but aren’t provided by the bank that holds the funds. This allows the merchant or fintech issuing the cards to add features that the bank doesn't support, while lowering its own costs by using cheaper payment rails to move the funds.
In Europe, decoupled debit cards are offered by fintechs licensed as card-based payment instrument issuers under the EU’s PSD2 and the U.K.’s Open Banking regulations. This means they are allowed to use open banking APIs to link their cards to their customers’ external bank accounts without holding any funds on their behalf.
“These cards could be attractive to people wanting modern app-based debit cards without having to open accounts at neobanks,” said Ron van Wezel, senior analyst at Aite Group.
Open banking makes it easier to issue decoupled debit cards, as PSD2 requires banks to allow authorized third parties issuing these cards to conduct an account balance check before authorizing transactions, van Wezel said.
Various decoupled debit models have emerged in Europe. Germany’s Solarisbank and Belgium’s Aion Bank offer decoupled debit cards as white-labeled services to fintechs. Vienna-based NumberX International wants to partner with smaller banks which lack the resources to offer digital apps to their debit cardholders.
U.K.-based
Decoupled debit issuers settle their cardholders’ transactions with merchants through the Visa and Mastercard networks, and earn interchange revenue. But they pull the funds for transactions from their customers’ linked bank accounts via direct debit.
In the U.K. and Europe, direct debit payments take 24 to 48 hours to settle and also provide chargeback protections for customers. Thus, decoupled debit issuers have various ways of dealing with risk.
Currensea and Solarisbank review credit scores for new customers and set transaction limits for each decoupled debit payment. They also perform real-time checks at the time of purchase that the underlying bank account has sufficient funds, although they can’t view the actual balance.
“Our view is that banks aren’t a problem,” said Craig Goulding, co-founder of Currensea. “People feel comfortable with their high street bank and their money is safe there. But it’s expensive to use your bank’s debit card for foreign purchases, with banks typically charging 3-3.5% per transaction.”
Currensea reduces foreign exchange costs by providing the interbank rate on 16 major currencies. In the coming months, Currensea will offer additional services such as money transfers and P2P payments, Goulding said.
Aion Bank and Solarisbank have Belgian and German bank licences, respetively, as well as banking-as-a-service businesses, enabling them to offer loans to decoupled debit cardholders.
“There’s a big trend for nonbanks to start offering financial services products to their customers,” said Leif Wienecke, Solarisbank’s managing director, digital banking and cards. For example, a football club could issue decoupled debit cards to its supporters without needing to offer them checking accounts, and pay them rewards whenever they use the cards at its stadium or stores in its hometown.
Decoupled debit cards are starting to become a real anchor product for a multitude of use cases, Wienecke said. “Solarisbank can offer a large number of products that it can combine with decoupled debit cards, such as its Splitpay installment loan product,” he said.
Solarisbank’s German decoupled debit clients include Samsung Pay Germany, personal financial management app provider Finanzguru, and the SV Wehen Wiesbaden football club.
“Samsung Pay operates differently in Germany compared to elsewhere,” said Wienecke. “As Germany has a highly fragmented banking landscape with thousands of small banks, Samsung offers German customers the ability to pay via Samsung Pay using virtual Visa decoupled debit cards issued by Solarisbank.”
Each time customers use their Samsung Pay Germany card, Solarisbank settles the outstanding amount against their external bank account via direct debit. Solarisbank uses Splitpay to enable Samsung Pay debit cardholders to convert their purchases into an installment loan.
NumberX, which plans to launch a decoupled debit card in Austria and Germany this year, has a different approach to funding cardholders’ transactions.
“When a customer links their bank accounts to our app, with their consent, we view their previous 90 days’ banking transactions,” said Claudio Wilhelmer, NumberX’s managing director and previously Revolut’s country manager for Austria, Germany, Liechtenstein and Switzerland.
NumberX then suggests a monthly budget, and if the customer consents, transfers the funds to a holding account at its partner bank. Customers can release any of the monthly budgeted amount that they haven’t spent, or put it into a savings sub-account held by NumberX’s partner.
NumberX sees an opportunity for co-branding and revenue-sharing partnerships with small European banks which don’t want to develop their own digital platforms, but have a high level of customer trust.
Wilhelmer predicts the role of banks will change fundamentally over the next few years. There will be fintech-provided interfaces between payments transactions and customers’ money at their incumbent bank, he said. “We want to become that interface.”
NumberX’s customers can use its app to manage their spending and obtain insights on saving money, said Wilhelmer. “Our long-term goal is to offer four products: payments, savings, installment loans, and investments. We target young professionals who want to remain with traditional banks but access new types of financial technologies.”
NumberX’s technology partners include Klarna, which supplied its open banking APIs; and U.K.-based PPS, which acts as NumberX’s issuer-processor. “NumberX leverages our European e-money institution licence and Mastercard principal membership,” said Ray Brash, PPS managing director. Mastercard, which has a 30% equity stake in PPS, referred NumberX to the payments service provider.
According to Brash, NumberX has a major opportunity in Germany, which is underpenetrated with mobile payment methods such as Apple Pay and Google Pay and is dominated by debit cards.
“NumberX cardholders can pay with Apple Pay and Google Pay, but debit cards from traditional debit cards may not be enabled for these payment methods,” he said.
Aion Bank partners with Poland-based banking-as-a-service provider Vodeno to issue decoupled debit cards to fintechs. U.S. private equity firm Warburg Pincus has equity stakes in both companies. In April 2021, Mastercard selected Aion Bank as a strategic partner for its Fintech Express programme, which provides services for fintech start-ups.
The first fintech to deploy decoupled debit cards from Aion Bank and Vodeno is Germany's Vantik, which offers a debit Mastercard paying 1% cashback on every purchase into cardholders’ personal pension plans.
“Vodeno’s advantage over fintechs providing decoupled debit services is that we leverage Aion Bank’s banking licence to offer a number of features over and above the card technology,” said Tom Bentley, Vodeno’s chief operating officer. “These include Aion’s KYC compliance and security expertise, an open banking data regime, card tokenization through Apple Pay and Google Pay, and installment loans.”
