MCLEAN, Va. -- Noted credit card issuer Capital One is working on a new debit card product that will allow cardholders to withdraw funds from their credit union share draft accounts and heralds the beginning of what may be another revolution in the retail card market.
The new card will be called a "decoupled" debit card, a term that arose from the fact that the debit card will be issued by an institution that does not hold the card holder's savings or checking account and thus "decouples" the card from the depository institution.
This change will be revolutionary because it will break the debit card-deposit account link that has heretofore served to make debit cards among the most stable and important credit union card products. After all, as many analysts have noted in the past, many Americans have at least two and sometimes up to as many as six or seven credit cards but usually only one debit card, or two if they happen to have depository accounts with two institutions.
This link has meant the debit card has been a key part of a credit union's ability to remain high in the minds of their members and become their primary financial institution. But it is unclear that the relationship could survive the advent of debit card products that could allow account holders to make debit transactions with competing organizations and companies.
Pam Girardo, a spokeswoman for Capital One said that the card issuer had struck upon the decoupled debit card product as a means of entry with consumers with whom they did not already have a relationship. Capital One owns two regional banks, one in the mid-South and one in the Northeast, but it not known as a depository institution and has generally focused on offering credit card and other consumer loans.
Speaking to an investors conference on Sep. 18 of this year, Richard Fairbank, Capital One co-founder and CEO, told attendees that the firm is excited about the card's possibilities but urged caution too, that the card issuer is "in the very early days of testing this." But Girardo confirmed other reports that the card issuer has already rolled out prototypes of the product to some of its credit card holders.
Sources familiar with the card idea said the "testing" the card issuer has been doing related to streamlining the ACH procedures and addressing issues like dispute resolution and fraud risks.
Norm Patrick, Director of Debit Strategic Consulting for PSCU Financial Services said the organization echoed some of these, pointing out that the current model which Capital One seems to be using has a greater degree of risk than most other debit cards.
"In this scenario they are going to authorize transactions without being able to tell if the cardholder has money in their account," he pointed out, adding that the CUSO, which serves more than 500 credit unions which use the First Data card program, is keeping an eye on the product to see if and how Capital One is able to resolve some of the detailed issues the new cards brings with it.
The new decoupled debit card will carry a MasterCard logo. According to sources, Capital One sought to put a Visa logo on the card but the card brand turned down the issuer out of concern over objections from its member issuers. Neither Visa nor MasterCard has yet commented on the new product or their role in it.
Girardo also confirmed the card will carry a rewards offering similar to the one Capital One offers on its credit cards and that consumers who hold both a Capital One credit and debit card will be able to pool their rewards. She also acknowledged that Capital One would use the debit card as another way to introduce the brand for cross selling of other loan products.
When it finally comes to market, the Capital One card will be the biggest and latest of what has been only a fledging effort by some organizations to promulgate payment mechanisms that bypass the two major card brands and their interchange schedules.
Joe Randazza, CEO of National Payment Card, headquartered in Boca Raton, Florida, chartered the birth of the decoupled card idea with the settlement of the suit between Wal-Mart and the card brands that saw the card brands abandon their long standing "honor all cards" rule.
The most well known aspect of that previous rule had been that if a merchant accepted a Visa or MasterCard, it had to accept the entire line, including debit cards. A lesser-known aspect of the rule was that it effectively prevented merchants from accepting other forms of card payment. Abandoning honor all cards meant that merchants could begin to explore how to turn existing loyalty cards, which reward consumers for their purchases, into debit cards, which would offer consumers lower prices by cutting out the interchange fee.
Randazza said that currently the three different players in the decoupled debit card space are his NPC, an organization called Tempo which is owned by HSBC bank and Capital One. He distinguished NPC from the other two by noting that NPC not only would co-brand cards with merchants or financial institutions, it would also work with merchants or financial institutions, such as credit unions, to issue their own decoupled debit cards.
The threat to a significant stream of credit union non-interest income seems clear. Once Capital One rolls out the card in a big way, credit unions whose members accept it and link their accounts to it will stand to lose interchange income every time their members swipe the Capital One card. They will also be faced with ACH fees for the transfer of the funds out of their members' accounts.
The potential impact of the decoupled cards on the overall debit card space has drawn the attention of Gwenn B?(C)zard, an analyst for the Aite Group, a financial consulting firm headquartered in Boston.
In a short report about the new cards and their impact, entitled The Next Big Thing in Cards: Co-Branded Decoupled Debit Cards, B?(C)zard saw the Capital One debit card as the forerunner of lasting market change.
"We believe that Capital One's innovation will likely be emulated and will contribute in the reshaping of the debit card processing and issuing landscape," he wrote in the report. "As an aside, we view Capital One's foray as a direct assault against the fee-income streams generated by major banking institutions, including the income derived from punitive fees such as Non-Sufficient Funds (NSF) incidents. We believe the market is ripe for change."
B?(C)zard saw using the decoupled debit card as a way consumers could bypass the increasingly frequent occasions where debit card transactions overdraw depository accounts and, in turn, generate fee income for the financial institution, although this is not as much a credit union practice.
B?(C)zard predicted consumers would love the card because Capital One's rewards program will be much better than the rewards programs generally offered on debit cards. Consumers have also shown themselves to be "cherry pickers" in financial services, B?(C)zard argued and predicted that if the Capital One debit card has a strong enough rewards platform it could even compete with credit cards as well. Merchants will love it because it will allow them to have a chance to issue their own debit cards, he contended.
"Over the past decade, deprived from a chance to provide their own debit card product, merchants have looked at consumers' massive embrace of debit cards helplessly," he wrote. "Of U.S. merchants' transactions, the share of debit cards has grown from 1% in 1995 to 15% in 2005. Signature debit, in particular, has been corroding retailers' bottom line, and it continues to do so despite the 2004 settlement between Wal-Mart and Visa/MasterCard over signature debit acceptance. With the introduction of co-branded decoupled debit cards, merchants now have an historic opportunity to ride the debit card wave."
To Fight or Not To Fight?
He also predicted financial institutions, particularly major ones, will not fight the technology but will instead jump on board, noting the purchase of the Tempo card issuer by HSBC.
But will they jump on board or should they fight it? B?(C)zard clearly thought some financial institutions would embrace the technology and acknowledged in an interview that financial institutions could also try to oppose it. For example, both banks and credit unions might block the ACH transactions or apply fees to them. But if they did so B?(C)zard pointed out that they would be standing in the way of something their members or customers wanted and might just drive them away.
He pointed out that while the advent of the new card would be revolutionary, they were not likely to come on the scene in a big way which should give financial institutions a chance to position themselves for dealing with the change--perhaps by issuing their own version of a decoupled card.
This was the heart of Randazza's message to credit unions as well, arguing that the impact a decoupled card could have on a credit union's local community could allow CUs to develop a decoupled product that could withstand the competition from a Capital One or HSBC.
He pointed out that the first place the three decoupled card companies were making inroads was with gas stations which have been able to offer their customers who use a decoupled debit card to buy their gasoline at a three cent per gallon discount on the purchase. NPC currently has 5,000 gas stations signed up for the decoupled cards even though it really only got off the ground in 2004.
Other merchants have indicated a willingness to offer similar discounts as incentives to use the decoupled card he said and the merchant desire to get out from underneath the interchange burden gives CUs an opportunity to offer their members a new service.
"Essentially credit unions have a choice," he said. "Do they say 'screw you' to their members, and 'we won't let you benefit from this new technology' or do they get in front of the curve and embrace it themselves and offer it to their members first?"
There may also be an effort to fight the decoupled card institutionally. B?(C)zard and other sources reported hearing rumors about efforts among some major banks to lobby the Federal Reserve to stop the cards by some regulatory means, but no one has been able to substantiate the rumor.
Neither CUNA nor NAFCU commented on the decoupled card issue for this story, nor did the American Bankers Association.
For the longest time, B?(C)zard said, debit cards have been sheltered from the same sorts of competition that have marked the credit card market. Those days are likely coming to an end, he said, adding, "credit unions and banks need to get ready for this."