A recent study by Aite Group in the US
points towards a healthy consumer market for decoupled debit cards.
Attractive rewards schemes are attracting customers; however, there
remain several challenges to overcome before these products make it
into the financial mainstream. Truong Mellor reports.

One of the biggest challenges to debit card
programmes in recent times is the idea of decoupled debit schemes.
These are card products that can be linked to any bank account with
transactions being routed through automated clearing house (ACH)
networks. This breaks the link between a customer’s current account
and the debit card generally issued as part of that account,
effectively removing the bank from the relationship between the
customer and the bank’s current account debit card.
Although HSBC has been piloting several
decoupled debit card schemes in conjunction with pharmacy chain CVS
and supermarket consortium Pathmark, it was the decision last year
by Capital One to release a decoupled debit card that put the issue
firmly on the map. The title of a report released by Aite Group at
the time of the Capital One launch – The Next Big Thing in Cards –
formed a suggestion that decoupled debit cards would mark a
sea-change within the cards and payments space, exposing the major
card issuers and electronic funds transfer networks to new
competition that would shake up the industry.

Sizable market

A more recent study released by Aite Group, entitled Who Wants A
Decoupled Debit Card?, suggests that a sizable market for decoupled
debit cards currently exists in the US. An online survey of 500
banking consumers revealed that approximately a third of them were
interested in such a product. Notably, Aite Group was able to
identify various demographic trends amongst those respondents whose
reactions were positive. The report offered a profile of early
adopters that emphasised a predominantly ‘Generation X’ consumer
that is both financially and technologically savvy. “They seem to
have a sense of confidence about what they are doing,” according to
Judith Fisherman, an analyst at Aite Group, who spoke to

Understandably, since one of the main
attractions of this new concept is the high points available from
rewards and loyalty schemes, those who expressed a solid interest
in decoupled debit cards tended to be ‘rewards addicts’ –
above-average spenders who often shopped for more than one adult.
The consumers attracted by decoupled debit cards also tended to be
shopping for two children under the age of 18. The multiplied
offering of rewards points is a huge part of the Capital One
decoupled scheme. “From a customer perspective, it offers a way to
maximise rewards points on everyday debit spending, getting points
where customers didn’t get points before, without the hassle of
changing bank accounts,” said Capital One spokesperson Pam Girardo
when the proposition was announced.
However, the majority of US banking consumers
do not easily fit the above description, which makes much of the
doom-mongering focused on institutions such as Bank of America and
Wachovia, which rely on their demand deposit account business and
the corresponding punitive fees, seem somewhat overstated. “The
majority of US consumers are not ‘addicted’ to rewards programmes,”
agrees Fisherman, but adds that “there is a very interesting slice
– and not a tiny or inconsequential slice – that will chase the
products that benefit them”.

Risk management

Because decoupled cards use the ACH networks, the time-lag involved
in processing and authorising transactions means that there remains
a risk that there will not be sufficient funds in the bank account.
The lack of clarity surrounding this as well as other risk
management issues such as account validation is one hurdle that
these products will have to overcome. There is also the question of
whether merchants will warm to the decoupled debit card concept,
which will be necessary for it to take off in any meaningful way.
For the moment, while the appeal of reduced interchange fees for
retailers is no doubt strong, it is primarily the mid-size to
larger retail players that can support the funding of the generous
rewards schemes involved.

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Another threat to the success of these
decoupled debit products is whether the consumer will be able to
fully understand them. As the card will be effectively run through
two separate institutions – the ACH and the issuing bank –
confusion may arise when dealing with issues such as disputed
payments or a lost or stolen card. However, Fisherman believes
that, given the type of financially savvy consumer that will be
attracted to decoupled products, this will not be a significant
problem. “These are consumers that have a strong handle on what is
in their wallet,” she explained.
In light of the current consumer group-driven
furore regarding interchange fees in both the US and Europe, any
product that takes these fees out of the pockets of financial
institutions may prove to be popular with potential customers. It
is worth bearing in mind, however, that should the major banks
begin to issue decoupled debit cards, this income will still be
channelled back to them if they are acting as the intermediate
service providers. However, any legislation that puts a ceiling on
interchange fees would in all probability leave the decoupled debit
card concept in ruins.