A New Era in Debit Card Competition

Capital One’s new debit card can link to accounts at any bank or credit union, bringing new competition to the debit card market.


It has always been a given – wherever a member had a checking account was also where their debit card originated. The two services have always been a package deal. However, a new service from Capital One is looking to change that.

Recently, Capital One began issuing debit cards that could be linked to accounts at any bank or credit union. Capital One is not the first company to attempt such an action. There have been other instances in the past of third parties issuing debit cards that used the ACH (automatic clearing house) network to function as a full-fledged debit card. Although the overall idea is not new, most of the previous cards using the ACH network ran into difficulty, as few merchants would accept the cards. This mainly stemmed from the fact that the third party was the one who became responsible for authorizing the transaction and accepting the risk associated with that transaction. Capital One has been able to circumvent this problem by pairing with MasterCard. This means that Capital One’s card will now be accepted everywhere that MasterCard is accepted.

Merchants should have little problem with the transition, as MasterCard is a name they are familiar with and no new systems are required in order to accept the card. Competitors, including credit unions, are not so pleased. This new card has a few key components that could result in credit unions losing debit card business. One of the large draws the Capital One card has is a high value rewards program that can be bundled with Capital One’s credit card program. This challenge could be compounded as Capital One looks to pair these cards with merchants, offering cards that work anywhere, but have bonus rewards when used at the co-branded merchant. Co-branded merchant rewards is one addition that may have members straying from the standard credit union debit card.

The Possible Implications for Credit Unions
This new competitive reality could become a significant challenge for credit unions. Members have long since had many options available when choosing a credit card, but the debit card has typically been a natural addition to a credit union checking account. If the debit card market were to take a turn towards mimicking the credit card market, it would represent a significant change for the industry. This can obviously have a direct impact on a credit union’s fee income.

According to Callahan & Associates’ most recent Non-Interest Income survey, debit card transactions accounted for nearly 21% of non-interest income as of June 30. In 2006, total non-interest income for all credit unions was $9.03B. This could mean that the $2.6B portion of debit card interchange income for credit unions is under fire. Although the introduction of this new option will not eliminate the credit union’s role in debit cards, it does add a new competitor to an area where credit unions are not used to having to compete. The success of this new program remains to be seen, but as the idea begins to form credit unions may have to get competitive, offering enhanced reward programs or additional services in order to remain competitive in this game.




July 16, 2007


  • Competition is what a free market is about. I would suggest instead of waiting to see what kind of effect it has, maybe get creative now. And since many credit unions are more localized, your rewards can be tailored to businesses in your area and the program would become a win-win.
    Chris Duncan
  • We have more of a problem with the likes of high yield savings accounts, like ING et al, that are also attached to accounts at other financial institutions allowing members to move their money with ease.
    Joseph Madaio
  • I am interested in finding out who Mastercard makes responsible for fraudulent activity and how the members will fair when they have to request a chargeback. Who takes the loss on transactions of this nature - Capital One or the FI that holds the checking account?
    Heidi Martin
  • Credit Unions are no longer localized, having national access to member''s accounts through shared branching. This is serious competition to member owned credit unions! I agree , however, that it is a wait and see effect. I also am interested as is Ms. Martin to know where responsibility will rest with fraud and chargebacks!