Despite the uncertainties surrounding debit card programs caused by the pending overhaul next year of debit card interchange rates, certain alternative payment-network operators say they are seeing an uptick of interest from card issuers and merchants.
As such, debit card issuers should closely examine their portfolio profitability and consider their options, one analyst contends.
“No one knows yet what debit-revenue streams will look like a few years from now, so it’s vital for debit issuers to analyze and explore options so they understand exactly where the value lies in their debit operations today” so they will be ready when the new rules kick in, Patricia Hewitt, debit advisory service director for Maynard, Mass.-based Mercator Advisory Group, tells PaymentsSource.
The Federal Reserve Board next year will release new rules that will determine “reasonable and proportional” debit-interchange rates, thanks to the Durbin amendment within the The Dodd-Frank Wall Street Reform and Consumer
Protection Act President Obama signed into law July 21.
Debit-interchange revenues may decline if the Fed imposes new, lower interchange rates, as many observers expect, along with other effects. But a federal mandate to lower debit rates also could spur debit growth across the board, Hewitt says.
“We may see merchants embrace debit more aggressively as the lowest-cost payment channel, causing debit transactions as a whole to increase in value for issuers,” Hewitt says. “That could open up opportunities in a variety of directions for traditional and nontraditional debit operators.”
It is too early to know what effect lower debit-interchange rates could have on the growth of alternative payment schemes that bypass traditional debit networks such as Visa Inc. and MasterCard Worldwide and route transactions instead through automated clearinghouse channels less costly to merchants.
Some alternative-payment company executives say demand is increasing this year as the debit landscape braces for change.
Bling Nation Ltd. sees growing interest among smaller banks in its closed-loop, ACH-based debit card network programs this year, partly as they look to new sources of revenue, Rod Stambaugh, Blings’s western regional vice president, tells PaymentsSource.
Bling in September announced a deal with VeriFone Systems Inc. in which resellers of the payment terminal maker’s gateway network will include Bling transactions tied to PayPal payments in their offerings to merchants next year.
Some 15 banks in five states have begun offering Bling in local markets since the company’s launch in 2008. Guaranty Bond Bank, headquartered in Mt. Pleasant, Texas, in August signed on to the program to improve debit-program revenues, according to Martin Bell, Guaranty executive vice president.
“Banks and merchants win by reducing costs, (and) consumers win by accumulating rewards each time they use Bling,” Bell says.
Customers initiate Bling payments at local merchant locations via a postage stamp-size contactless payment sticker, which most attach to their mobile phones. Bling sends SMS text-message confirmations to customers’ cell phones within seconds of authorizing their transactions.
Merchants pay 1.5% of the sale for Bling transactions, about half the discount rate merchants pay to accept credit cards, Bling says. But because there are no intermediaries, banks retain a larger share of the fee than they do with traditional network debit programs, Bling says.
About half of local retailers in markets where Bling operates are participating in its programs, the company says.
National Payment Card Association, which operates a closed-loop decoupled debit card program, also is betting that various disruptions in the traditional debit landscape, including the Durbin amendment, will indirectly enhance its fortunes.
The company provides retailer-branded PIN-debit cards that draw funds from customers’ checking accounts, offering merchants lower-cost transaction fees and the opportunity to create merchant-focused rewards. Transactions are processed within a day through the ACH system.
Since its launch in 2004, 23 merchants have signed on with National Payment Card, including Enon, Ohio-based Speedway SuperAmerica LLC, which in September launched a TV commercial airing in local markets of the nine states where it offers its Speedy Rewards Pay Card to customers.
Merchants pay about 19 cents per National Payment Card transaction, about half of the cost of traditional debit rates for gas-station merchants, Joe Randazza, CEO of the Coconut Creek, Fla.-based company, tells PaymentsSource.
“We believe the Fed’s new rules related to the Durbin amendment will reduce debit-interchange fees by at least 50%, which will ultimately cause banks to begin charging customers for checking accounts and debit card services,” he says. “Customers, in turn, will gravitate away from traditional bank-issued debit cards with fees to products like ours, that offer consumers rewards and no fees.”
Most such closed-loop networks face long odds in gaining widespread acceptance, says Beth Robertson, director of payments research at Javelin Strategy & Research.
But Robertson does not rule out the possibility that issuers may yet benefit from innovative new ACH-based payments that are in development or struggling to get off the ground.
“There may be ways to establish hybrid payment products, whether decoupled debit or prepaid, that could generate new debit-profitability channels for issuers,” Robertson speculates, without specifying which channels look most promising.
Decoupled debit, in which a payment card draws funds from accounts not supported by the issuer, so far has failed to take hold widely, despite a well-publicized test by Capital One Financial Corp. and ongoing efforts from Tempo Payments.
In its latest iteration, Tempo Payments’ decoupled debit program, initially launched in 2001 as Debitman Card Inc., recently shifted to an open-loop system, Mike Grossman, Tempo CEO, tells PaymentsSource.
Tempo this year partnered with Brookings, S.D.-based First Bank and Trust to issue decoupled debit cards it plans to offer to various merchants, including an existing program with convenience store chain QuikTrip Corp. Discover Financial Services is replacing MasterCard as its partner handling the transactions through its networks.
One of decoupled debit’s flaws is the status of a customer’s funds in a third-party account is unknown at the time of the transaction. Tempo charges customers $30 when they have insufficient funds to cover a transaction, he says.
“A key part of the decoupled debit business model is managing that risk and effectively communicating it from the beginning to merchants and customers,” Grossman says.
Grossman contends that the Quiktrip program is “very successful,” and there is growing interest from a number of other retailers in the program. Tempo eventually also may work with other banks to issue decoupled debit cards.
Given the complexities of decoupled debit, it unlikely will take off widely because the risks and customer-service issues present too many challenges within the existing banking environment, says Zilvinas Bareisis, a Celent LLC senior banking analyst.
“The fact that Capital One walked away from decoupled debit says a lot,” he says.
It is too early to know how the Fed’s final rules may affect debit interchange, but debit card issuers in the upcoming months have the opportunity to analyze their portfolios and weigh their options to prepare for challenges and opportunities ahead.