The Broken Link - Digital Transactions

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Debit’s Decisive Moment Many observers hail so-called decoupled debit cards as the latest innovation in payments. Industry participants are quickly trying to size up the unknown risks and possibly rich rewards. By Jane Adler As card issuers look for ways to tap into the growing popularity of debit cards, a new product is poised to shake up the market: the so-called decoupled debit card. What’s so innovative about the card, as its name suggests, is that it’s not linked to a demand-deposit account, or DDA. Traditional debit cards are issued by the bank where the depositor has a checking or savings account. Industry players see big possibilities with decoupled debit cards and they’re lining up to carve out a niche. Several financial institutions, notably Capital One Financial Corp. and HSBC USA Inc.’s HSBC Retail Services, a big third-party private-label card issuer, are testing PIN-secured decoupled debit cards already. Capital One’s card is seen as a true innovation because it carries the MasterCard Inc. logo, guaranteeing acceptance wherever MasterCard is taken—a huge advantage. Tempo Payments Inc. (formerly Debitman Card Inc.), which HSBC uses to process its product, is marketing its decoupled-debit platform to other financial institutions. Other players are in or plan to be in the game with variants. Discover Financial Services LLC is actively looking at allowing its bank partners to issue decoupled debit cards on the Discover Network, according to a company spokesperson. Meanwhile, PayPal, the payments unit of eBay 24 • digitaltransactions • February 2008
Inc., has announced enhancements to its debit card, which is linked to a PayPal account, not a traditional checking account. The development of decoupled debit and its ripple effects could represent a sea change in the card landscape. The situation has similarities with that of the 1980s when a few big banks, wearing their credit card issuing hats, first began marketing plastic to consumers who had no deposit accounts with them. “The evolution of the decoupled debit card will be extremely fun to watch,” notes Robert Meara, senior analyst at Boston-based consulting firm Celent LLC. rewards programs eventually may be as costly for retailers as credit card rewards. And recently, NACHA, the group that governs the automated clearing house, ruled that decoupled transactions cannot be aggregated, a seemingly minor technicality that nonetheless could delay widespread implementation of the product. At the same time, banks worry that their checking-account customers might be lured away by decoupled debit card issuers. And serious concerns remain about security, risk management, and potential liability. “There are a lot of variables that could easily affect the willingness of banks to issue this product,” notes With debit so hot, it’s no wonder at least some financial institutions are seeking new ways to tap into the demand. And it’s really no surprise that McLean, Va.-based Capital One, one of the payment industry’s most adept marketers, is at the forefront of decoupled debit. The company started out in 1993 as a monoline credit card issuer spun off from the old Signet Bank and quickly grew into one of the nation’s top issuers. It later bought two sizable regional bank-holding companies. In 2007, Capital One began testing two types of decoupled debit cards. One is a standalone card offered to a group of its credit card holders. The other card is cobranded with merchant partners. Both cards have a daily Banks are taking note, though they’re reluctant to talk publicly about what some bankers view as a threat to their core consumer relationships. But lest they be left behind, large financial institutions are either exploring the issuance of their own decoupled debit cards or at least watching the market very carefully, industry sources say. Meanwhile, merchants have some hopes that decoupled debit might help them build customer loyalty. “There are reasons to be excited about this product,” says Gwenn Bézard, research director at Aite Group LLC, a Boston-based consulting and research firm. “It’s a great product for many reasons.” A Sensitive Issue But despite decoupled debit’s promise, many questions have yet to be resolved. At this early stage, it’s difficult to gauge the extent of consumer and merchant acceptance. Already, merchant Web sites are logging comments about how decoupled-debit Bruce Cundiff, research director at Javelin Strategy & Research in Pleasanton, Calif. A spokesperson for JPMorgan Chase & Co., one of the nation’s top debit and credit card issuers, in an e-mail expresses many bankers’ feelings about decoupled debit cards: “We don’t plan one. We think our convenience—3,100 branches and 9,100 ATMs—and range of products make Chase very attractive to customers.” Lending impetus to a new type of debit card is the fact that debit card usage is growing rapidly. Debit card transaction volume has surpassed credit card transactions in the U.S. A December report by the Federal Reserve estimates that debit card transactions (signature- and PIN-based combined) grew at a 17.5% annualized clip in the Fed’s 2004-2006 study period (chart, page 28). And a recent report by TowerGroup, an editorially independent research arm of MasterCard Inc., predicts debit card charge volume will grow to nearly $180 billion in 2008, a $30 billion increase over 2007. spend limit of $500. For customers, they work just like traditional payment cards, but are different under the hood: For purchase transactions, they debit cardholders’ existing checking accounts via the automated clearing house network. A Capital One spokesperson declines to name the merchants, but industry sources say they include Richmond, Va.-based Ukrop’s Super Markets Inc. and Altoona, Pa.-based convenience-store operator Sheetz Inc. The spokesperson also declines to give the number of cards that have been issued or transaction volumes. But Capital One is “pleased” with adoption rates and card usage so far, the spokesperson states. Besides their issuer-provided features, the Capital One decoupled debit cards represent a breakthrough because they carry the MasterCard logo, which gives them utility at about 6 million U.S. acceptance locations. MasterCard, sources say, is hoping to use decoupled debit to challenge Visa Inc., which has about a 70% share of the signaturebased U.S. debit card market compared with just 30% for MasterCard. February 2008 • digitaltransactions • 25
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Page 4 and 5: SOME COMPANIES STAND OUT FOR OBVIOU
Page 6 and 7: D I G I T A L T R A N S A C T I O N
Page 8: THE GIMLET EYE FEBRUARY 2008 • VO
Page 11 and 12: challenges to interchange. Last yea
Page 14 and 15: TRENDS & TACTICS TRENDS & TACTICS A
Page 16 and 17: ACQUIRING February 2008 digitaltran
Page 18 and 19: ecently adopted NCR Corp.’s solut
Page 20 and 21: In addition, 67% of retail treasury
Page 23 and 24: Changing consumer behavior regardin
Page 25: Earn Interchange with United Cash S
Page 29 and 30: The SEAA is Back in the SouthEast A
Page 31 and 32: From the merchant perspective, deco
Page 33 and 34: Revolutionary Times Call for a Revo
Page 35 and 36: Yes, we’re on the Web. And in you
Page 37 and 38: SECURITY February 2008 digitaltrans
Page 39 and 40: they don’t want approved. Some cu
Page 41 and 42: ENDPOINT Behind the Experimentation
Page 43 and 44: ©2007 Digital Check Corp. All righ

The Broken Link - Digital Transactions

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