Three Decoupled Debit Approaches That
Could Impact Credit Unions
Decoupled debit cards allow consumers to access accounts they hold at one financial institution through cards issued by a third-party financial institution. 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. The impact of these cards would be felt in multiple ways, whether it be the loss of interchange income for the credit union, or simply the relationship impact of having one additional party between the credit union and its members.
According to Callahan and Associates' 2007 Non-Interest Income survey, debit card transactions accounted for nearly 21% of Non-Interest Income as in the first half of 2007. In 2007, 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.
Detailed below are three forms and types of decoupled debit cards, the two most significant are from Capital One and PayPal.
1. The Original Decoupled Debit Programs
Decoupled debit cards began life as cards issued through a particular merchant, often used for specific purchases. One such example, rolled out in 2007, came from QuikTrip, a convenience store/gasoline retail chain. In early 2007, QuikTrip paired with Tempo Payment Network to offer a debit card through the ACH network. The card offered reduced fees for merchants that processed the transactions in hopes that the merchant would pass the savings along to the consumer.
Although the benefits of the card were available at QuikTrip, the problem these debit cards encountered was the fact that they could only be used at locations that accepted payments via Tempo, thus limiting the number of locations where the card could be used. This limited access saw the debit card market following a similar trend as the credit card market, where members would carry multiple cards for specific purchases or retailers. The limited acceptance of these cards has played a role in the relatively low adoption rates from these targeted decoupled debit cards.
2. Capital One
Capital One has begun issuing debit cards that can be linked to accounts at any bank or credit union. This is accomplished by routing transactions through the ACH network. While the idea is not new, the previous cards using the ACH network ran into difficulty as few merchants would accept the cards. This stemmed from the fact that the third party 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. The partnership 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. One of the draws the Capital One card has is a high value rewards program, although the debit rewards cannot 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. This reward program is one addition that may have members straying from the standard credit union debit card.
Recently, Capital One has announced that they have stopped processing payments on cards issued through two of their merchants. Although Capital One has not officially announced a reason for this pullback, some sources speculate that Nacha's rules on ACH payment aggregation played a role in this decision. Despite this pullback, Capital One remains committed to the decoupled debit card market as they continue to adjust variables and test new strategies. The next phase of their decoupled debit card strategy will see the cards rolled out on a national level without being co-branded, as well as implementing a $20 annual fee, a first for the program.
Another addition to this market comes from PayPal. While PayPal has traditionally been on online resource for individuals to make and receive payments, they are now looking to branch into the debit card market. Technically, this debit card is intended to be used to access the funds an individual has in their PayPal accounts. However, as a safety measure, a "backup funding source" is also tied to the card that could be an account at a credit union.
This debit card, like the Capital One option, is also accepted anywhere that MasterCard is accepted. This provides the card with a no-fee structure and the benefits related to MasterCard, like protection against unauthorized purchases and travel assistance. On top of the MasterCard benefits are those specific to PayPal through the PayPal Preferred Rewards program, such as cash back bonuses.
While a majority of individuals that have PayPal accounts use them exclusively to make payments, the PayPal clients that make withdrawals from the account are typically small business, especially those run through the internet, that receive payment through PayPal. As this product is specifically catered towards them, credit unions may see increased competition for their small business clients. For now, this service extends only to the debit card, giving credit unions the opportunity to position themselves in a positive light by highlighting all the additional services and products they can offer that benefit small businesses.
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 these new programs 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.