The Broken Link - Digital Transactions

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Also, last year, PayPal began offering its debit card holders backup funding through a traditional bank account. If the card user isn’t sure the PayPal account has enough funds to complete a transaction, the user can authorize an ACH withdrawal from his or her bank account. Or, the cardholder can institute a charge against a PayPal credit line. PayPal charges no fee for the transaction. But if the bank account is used as the backup funding source when there isn’t enough money in the DDA, then the bank typically charges an insufficientfunds fee, George says. He adds that customers who sign up for the backup funding tend to be those who use their PayPal account as their primary transaction card. “They aren’t so worried about limiting their purchases to the PayPal balance,” he says. As with other decoupled debit cards out so far, rewards are an important part of the PayPal program. Card users get 1% cash back on all signature-debit transactions. PayPal’s George notes that some accounts from the program’s early days are grandfathered in with a 1.5% rebate on purchases. In general, rewards linked to debit cards are on the rise (chart, page 30). Part of that is due to rising interchange making rewards more affordable for issuers, according to Bézard. (Credit cards still offer richer rewards because issuers can fund them from lucrative interest revenues.) But competition may be equally if not more important. “Consumers’ embrace of debit cards has forced banks to increasingly compete on the features of debit cards, with big banks increasingly competing with smaller banks,” he says. “Their embrace of debit cards is having a ripple effect across the banking industry, prompting even small institutions to offer debit rewards as a defensive measure.” Debit Goes on a Tear (transactions in billions) Total: 15.6 Signature: 10.3 PIN: 5.3 The decoupled debit card could open new possibilities in the rewards arena as a way to garner new customers. Linking rewards and a debit card without the hassle of changing a checking account represents a “powerful package,” according to Celent’s San Francisco-based senior analyst Ariana-Michele Moore. At Capital One, customers earn rewards everywhere they spend with the card—boosting its consumer appeal. They also earn extra rewards at partner merchants’ locations. For example, in the Sheetz pilot program, cardholders earn bonus points on purchases made at Sheetz stores, according to a report in the restaurant-industry magazine QSR. These bonus rewards are given in the form of gift cards to make future purchases at Sheetz stores. Unlike most debit rewards cards, some of Cap One’s cards even give rewards on PIN-based purchases as well as signature purchases. Cap One also is testing versions with rewards only for signature purchases, the company spokesperson says. Aite’s Bézard figures Capital One’s decoupled debit card on average returns rewards valued at 46 cents per $100 of purchases, compared Total: 25.3 Signature: 16.0 PIN: 9.4 2003 2006 Note: Figures may not sum due to rounding. Source: Federal Reserve with a 10-cent return from a traditional debit card. For $100 spent at a merchant partner’s store, the debit card holder would receive 80 cents, he says. And because Capital One collects interchange when the MasterCard-branded card is used at other merchants, Capital One can afford a higher level of rewards, Bézard says. Potential Glitches Before CVS began testing a decoupled debit card, the company already had a loyalty program called “ExtraCare.” Working with HSBC and Tempo Payments, CVS enhanced that program to create “ExtraCare Plus,” which is tied to a decoupled debit card. Customers make one card swipe to earn points and complete a purchase. “It increases convenience and speeds checkout,” says HSBC’s Eckert. The upshot of a reward-rich decoupled debit card will be even more rewards, according to Steve Kenneally, vice president at the Washington, D.C.-based American Bankers Association. “The more popular decoupled debit becomes, the more banks will offer rewards on their homegrown debit programs,” he says. 28 • digitaltransactions • February 2008
From the merchant perspective, decoupled debit could be a winner. Merchants are always looking for ways to reduce acceptance costs and, compared with credit cards, decoupled debit does that. But Aite’s Bézard says Capital One’s product is not being sold to merchants as a cost-saving vehicle. Instead, he says, the product is being positioned as an instrument to create loyalty and lift sales. But merchants’ true decoupleddebit cost picture is far from clear. Celent’s Moore notes that while retailers like any product that reduces card-acceptance costs, she also points out that merchants may have to spend time and money training employees on how to manage the transaction at the point of sale, especially if the transaction runs on a proprietary network. “Employee training could be a significant cost for large retailers,” she says. And, she adds, anything that “jeopardizes the customer experience is worrisome.” Also, some merchants are already wary of how decoupled debit rewards will evolve. Many feel they’ve been burned by rising interchange rates used to support expensive credit card rewards programs (“A Rewarding New Proposition for Interchange,” April 2007). Recent postings on the merchant Web site merchantaccountblog.com contend other issuers will soon follow Capital One’s lead. The effect will be an eventual increase in debit card interchange fees set by MasterCard and Visa in order to fund issuers’ generous reward programs. One blog entry says: “Until consumers stop buying into reward cards, interchange can’t go anywhere but up.” Financial institutions also have misgivings. “What I hear from large debit card issuers is a reluctance to get behind this [product] because it disrupts the relationship between the account and the transaction,” says Javelin’s Cundiff. Besides that disruption, some banks worry that the decoupled debit card issuer could open new DDAs for cardholders. Deposit institutions are concerned about losing penalty fees and interchange income from their own debit cards too. Another possible wrinkle: a bank that issues its own decoupled product could potentially cannibalize its established debit accounts. Account settlement also is fraught with potential pitfalls. NACHA recently Aggregated debit transactions do carry some risks, according to NACHA’s McEntee. ruled that debit card ACH transactions can’t be aggregated. The rule takes effect in May. NACHA in late 2007 began an analysis of transaction aggregation at the request of a member bank, according to Elliott C. McEntee, president and chief executive at NACHA in Herndon, Va. The bank had not experienced any problems, but was concerned about potential glitches. In particular, the bank was worried that aggregated transactions could not be identified, increasing the possibility of February 2008 • digitaltransactions • 29
Page 1: VOLUME FIVE, NUMBER TWO • DIGITAL
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 and 26: Earn Interchange with United Cash S
Page 27 and 28: Inc., has announced enhancements to
Page 29: The SEAA is Back in the SouthEast A
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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