What a 'Decoupled' world might look like
Pelle Braendgaard
debit cards into any US bank account.
This is somewhat similar to what I propose with
http://capcard.heroku.com/. The only difference is that it uses ACH
rather than OAuth/OpenTransact. Which makes it impossible to impose
anything but voluntary limits on the card. It also wouldn't be
possible to revoke the card from the bank side, in case it was a
fraudulent card issuer. Interesting though.
http://www.tempo.com/Press/20080226-american-banker.pdf
American Banker
What a 'Decoupled' World Might Look Like
American Banker | Tuesday, February 26, 2008
Decoupled debit cards, which settle transactions through the automated
clearing house network, enable issuers to offer cards that access
checking accounts at any bank. This arrangement offers the promise, or
the threat, of fundamentally remaking the relationship between
consumers and banks.
Capital One Financial Corp. made waves last June when it said it was
working on a decoupled debit card, and Tempo Payments Inc., of San
Mateo, Calif., is currently testing a decoupled product with HSBC
North America Holdings Inc.
As the idea gained ground last year, many banks, especially community
banks, said they consider the cards a competitive threat to their
debit fee income.
In a wide-ranging conversation with American Banker's technology
editor Will Wade, Tempo's chief executive Mike Grossman discusses how
decoupled debit will change the debit market, who stands to benefit,
and what kinds of financial companies may be most at risk of losing
out.
How will these cards change the current debit relationship with
consumers? MIKE GROSSMAN: Historically, a debit card and the DDA
relationship have been synonymous. Debit cards have been features of
bank accounts, nothing more. Now, with decoupled debit, the market has
opened up, and there isn't necessarily going to be any relationship
between where somebody gets their debit card and where they bank.
That's exactly analogous to what has happened over the past 20 years
in the credit card market. If you could go in a time machine back to
the 1980s, most people got credit cards from the same bank where their
DDA account was held. When credit cards were introduced, it was simply
a logical step for banks to offer credit cards as a logical up-sell to
their existing checking account customers.
But eventually came the monoline issuers, which opened up the market,
so that 20 years later there's typically no relationship between where
somebody gets their credit card and where they have their checking
account. What's happening in the debit market now is entirely
analogous, and the name for it is decoupled debit.
With this technology, are banks about to lose one of their stickiest
of products? GROSSMAN: It'll just change the landscape. In some cases,
banks will have checking accounts without debit cards — they'll lose
the debit relationship.
In other cases, banks will gain a debit relationship without having
the checking account, so they'll gain a customer. There will be every
permutation, just like with credit cards. And in the process, the
losers will be banks, and the winners will be banks.
What kind of banks might be the most interested in offering this type
of card? GROSSMAN: In general, it's banks that have a more proactive
view about customer acquisition. One segment is financial institutions
that don't have a huge retail footprint. For them, the opportunity to
get new customers using debit is something they have never been able
to do before because they needed to have the bank account relationship
first — and it's very difficult to get folks to switch their bank
account. So that's one segment that has responded particularly well.
Within banks that have a larger retail footprint, there's a spectrum
of opinion. Some are more inclined to see this as a big opportunity,
and there are some that are more leery about it.
What kind of banks may lose out? GROSSMAN: Financial institutions that
have always relied on the stickiness of the debit relationship have
the potential to lose if they don't approach the issue proactively.
What kind of banks are you talking to now? Community banks? Regional
banks? Top 10 banks? Or all of the above? GROSSMAN: The most interest
has been from relatively larger banks. But to some extent that's a
self-fulfilling prophecy. We've spent more time talking to larger
banks, so that's probably why we've made more progress with them. It's
only been more recently that we've started talking more to smaller
banks.
I think decoupled debit is going to have real relevance in the
community banking segment. In many communities, there are several
community banks, and typically one of them will be more
entrepreneurial than the others.
When will we start seeing a significant number of decoupled debit
cards in use? GROSSMAN: You'll start seeing that in 2008. We will be
issuing cobranded cards with a variety of leading retailers in the
relatively near term.
But financial institutions move at a measured pace, and they often
like to test things before they aggressively roll them out. These
things don't happen overnight.
Can using the ACH network reduce the issuers' costs? GROSSMAN: The
overall cost might be impacted, but the interchange is no different.
It's hard to predict what the economic impact of decoupled debit will
be because there are different forces at work, which will affect
costs.
To promote these cards, you have to be willing to invest in [a]
rewards program. Traditionally, debit cards have not had much in the
way of rewards. I think that this shift heralds a much more
competitive debit market, which could have some effect on costs, but
in the long run it's hard to predict what will happen.
You have said that the main draw for decoupled debit is going to be
appealing rewards programs. What exactly does that mean? GROSSMAN: The
typical rewards for our decoupled debit cards are in the half-percent
to 1% range in general, and they can be tied to point systems, or they
can be provided in the form of cash. The key is finding a reward that
people find attractive and that motivates them to sign up for a new
debit card.
This represents a significant shift for consumers, who think that
debit cards are part of their bank accounts. How are you planning to
educate them? GROSSMAN: It's true that consumers see debit cards as
part of a checking account, but decoupled debit cards function in
almost every way like a traditional debit card. You can use it in all
the same places, and it takes money out of your bank account.
In our experience, customers have not been confused at all, even less
than I expected. We did some market research with decoupled debit
users, and the level of satisfaction with their cards was enormously
high. Ninety-seven percent of people said they were either very
satisfied or somewhat satisfied with their card.
So I don't know if a lot of education will be necessary. They will be
marketed by issuers as debit cards with attractive rewards and in some
cases tied to a cobrand relationship where the consumer has some sort
of affinity for the cobrand partner. All they need to understand is
that it works just like a debit card. If the reward is compelling,
consumers will pay attention.
How important are cobranded affinity relationships? GROSSMAN: I think
these cobranded cards are going to be one of our key segments but not
the only segment. In some cases financial institutions will market
directly to consumers without a cobrand partner. In other cases, a
cobrand partner will be involved.
Cobranded debit cards will be successful because a lot of merchants
have cobrand credit card programs, but a large percentage of consumers
can't qualify for them.
But with decoupled debit, the universe of people who will be accepted
is much higher. To be able to offer a debit card option to consumers
is a very good fit for a lot of their best shoppers.
In addition, debit card [use] has been growing at a significantly
faster clip than credit card [use], and merchants recognize that. The
reason is that there's a segment of the population that's motivated to
use debit a lot, and historically, their motivation for that has not
really been tied to rewards, but it's clear that rewards can influence
their behavior.
Many people have several credit cards, but only one debit card. How
will that fact affect issuers' strategies once they start competing
for debit customers? GROSSMAN: People might end up having multiple
debit cards, in some cases, cards that are tied to specific merchants.
I think that's possible.
In fact, in our experience with the decoupled debit cards that have
been issued, customers typically still have a traditional debit card,
which shows a willingness for people to have more than one.
But I don't know how much they're using the existing one. I think, in
many cases, the decoupled debit card will move to the top of the
wallet. The point is that they're motivated to get another debit card.
I can't predict the specific number of cards per person, but it's
clearly going to go above n=1, which has been the definition since
debit cards were introduced.
Are there any increased risks involved? GROSSMAN: I doubt that fraud
is going to be any different with decoupled debit. Just because the
issuer is now a different organization than the DDA-holding bank, I
don't think is going to increase the risk of fraud.
But there is a type of risk that's specific to decoupled debit: the
risk of insufficient funds because the issuer doesn't know the account
balance.
That's a new kind of risk that decoupled debit issuers need to be
comfortable with. © 2008 American Banker and SourceMedia, Inc. All
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