Transcript: The Future of Decoupled Debit Cards, Post Financial Reform

Evans: This is David Evans and the folks at linked me up with Joe Randazza of the National Payment Card Association. Joe’s one of the pioneers in introducing decoupled ACH-based debit cards. Today we’re going to talk to Joe about his business, we’re also going to get his perspective on how the swipe fee reform legislation that just passed the Senate yesterday, as part of the Dodd-Frank bill, is going to affect the debit card business.

Joe, thanks a lot for joining me today.

Randazza: Thanks for having me.

Evans: Whereabouts are you sitting?

Randazza: I’m in lovely Boca Raton, Florida.

Evans: Very nice. Well, I’m in the Boston area where I suspect it’s about as hot and as humid as it is down there.

Randazza: I would expect so.

Evans: Could you start by telling us a little bit about the National Payment Card Association – a little bit about what your product is, who your customers are, and what’s your business model?

Randazza: Well, National Payment Card was formed in 2004 as an alternative payment opportunity based on some regulatory event that was taking place at that time in terms of the Check 21 Act and the settlement of the VISA-MasterCard lawsuit. National Payment Card is a debit network that is a private label program for merchants to be able to issue their own debit cards without having the VISA-MasterCard rules or without having to capture costs of those networks.

Evans: And you guys are basically a network with other people issuing the card or are you also the issuer?

Randazza: We are the issuer and the processor. National Payment Card, to my knowledge, is the only independent, non-bank financial related company in the marketplace, issuing and processing debit cards.

Evans: So how do you guys doing?

Randazza: Excuse me?

Evans: As a business, how have you guys done?

Randazza: We’re actually doing quite well. When we started back in 2004, it took us into 2006 to build the proprietary system. Everything with National Payment Card is totally proprietary. We have about 21,000 hours of coding. We’re not reselling anyone else’s product, such as an ATM network or a VISA or MasterCard rail. We’ve been able to go ahead and get early adopters in terms of merchants in the petroleum industry and be able to establish that we are able to get consumer adoption and have uplift with our merchants in terms of their gallons that they’re selling.

Evans: So you’re basically getting gas station chains and folks like that on board?

Randazza: Well, as you know, debit is really comprised of three major verticals – petroleum, supermarket and drugs, that’s what we’re concentrating on. To date we have been involved in the petroleum space. We’ve had to operate in a closed loop network until recently, but today we have connectivity with the major processors in the petroleum space, which also brings us access to the supermarket area, which we’re now moving into.

Evans: Very interesting. There have been a bunch of decoupled debit startups in recent years, I think Tempo is the one – used to be called Debitman – has probably gotten the most press. Capital One got a lot of buzz a couple of years about their program, HSBC. How are you different from them?

Randazza: Well, from the very start, we decided to take a different path. We did not want to be on the VISA, MasterCard or Discover rails and have the captured cost or the network rules. We went ahead and formed a network that was totally proprietary, operating either as a closed loop network directly with merchants or going through the financial processors. So we don’t have that captured cost and rules of the VISA MasterCard network. I think that’s primarily the difference.

Evans: Joe, let’s talk Durbin. From the standpoint of your business, what aspect of the swipe fee reform is, in your mind, going to have the biggest effect on your business?

Randazza: Well, I think today after this interview, I’m going out and buy Senator Durbin a Christmas card because I see it as being a very positive aspect to our business. But to answer your question specifically, we do see that the way it’s going to be affected is that there will be a reduction in interchange fees, but those reduction in interchange fees, as I’m sure we’ll discuss a little further on, actually proves out our business model much greater than if we were in a situation where we were operating a open loop network on a signature based program with MasterCard or Discover, where essentially their business is being legislated away.

Evans: And did the network rules that are being – the network rule portion of the legislation, which restrict the ability of the card networks to have exclusivity rules and so forth, is that something that is going to have an impact, do you believe, on your success in the marketplace?

Randazza: No, we’re outside of all of that. Our program will be that merchants will be able to issue their own private label debit cards not involving any of those rules. Where we’re different is we give merchants information which they are not receiving today from other payment sources. They know how many times consumer has gone into their location, how much they’ve spent. They have their e-mail address, they have the ability to contact them. Consumers have the ability to go on the portal, look at real time information. Our e-mail engine communicates very aggressively with consumers. Every time someone makes a purchase, they receive a e-mail within hours from that merchant. Everything is branded by the merchant. So that has really helped us foster consumer adoption and I think that’s the real difference between operating an independent network with our own rules where merchants actually have a seat at the table.

Evans: Very interesting. The Fed is going to be regulating debit card interchange fees, and based on the experience of other countries when there’s been interchange fee regulation, it would seem likely at this point that signature debit card interchange fees are going to fall significantly, if one had to make a guess. Again, just projecting the experience of other countries, it wouldn’t be surprising to get it down to 60, 70 basis points. Doesn’t that reduce your competitive advantage?

Randazza: Well, actually, we’ve never operated on the signature debit rates. Signature debit rates really have been to the Tempo/HSBC/Capital One models, where they’ve relied upon that to be able to compensate merchants as well as consumers. We’ve always been more aligned with the PIN debit tables. As an example today, petroleum PIN debits is around 32¢ to 35¢, signature’s around 43¢. We’re at 19¢ a transaction. So even at the basis rates that are going to be reduced, we’ll be par with the other card offerings, and positioned correctly. And where we’ll really see the difference is that consumers – we project that consumers are going to be responsible for making up some of the difference and that merchants will be able to offer our card at a no-fee card and gain the consumer loyalty and stickiness in terms of consumers coming to their locations.

Evans: Got it. That actually gets me into my next question – good segue there. Banks that have got signature debit interchange fees are going to lose billions of dollars. I don’t have the number off the top of my head, but it’s in the tens of billions of dollars, collectively, that they could lose if interchange fee revenues go down. How do you think they’re going to react? And to what extent do you think they’re going to be raising fees to make the money back by basically raising fees to the consumer?

Randazza: Well, I think merchants have done a wonderful job in being able to lobby to reduce their interchange. I look at it as they got a get out of jail interchange card. But what really is going to occur is that merchants are pushing the cost of cards back to banks, and banks are going to push that down to consumers. So consumers will go ahead and most likely, as we’re seeing now with banks from the NSF phase, consumers will now be responsible for debit card fees. We’re estimating that the average consumer, lightly banked and middle banked, will pay something around $10 a month, either through transaction fees or annual card fees, and that consumers will find a resistance to accessing funds with their own money. And this is where we really see the business proposition change, because consumers will most likely look for merchants who are going to be issuing cards that have no fees. So they’ll select the one grocery chain, they’ll select the one drugstore chain, they’ll select the one or two petroleum chains that will have cards for convenience without fees.

Evans: Yeah, no, that’s a great answer. I guess one of the things I’m curious about is – I guess one of the implications of that is you think that one of the consequences of raising fees is that the financial institutions are going to end up having less take-up on the part of consumers with their debit cards. Either they’re going to pull back on offering debit cards or consumers are going to be less interested in actually using them, as a result of the increased fees.

Randazza: Once again, this is where I see National Payment Card’s vision five years ago in not getting involved in reselling rails in terms of MasterCard or ATM networks will really come to fruition here. Because what’s going to occur is that the programs that were offered by people such as Capital One or HSBC, where they’re relying on signature rates, those are going away. Our competition will be going away. What will be left is that banks are going to make up the difference and that will remain whole because they’re simply going to pass that on to consumers, and then consumers will have choices about going to card programs where they don’t receive those fees.

Evans: Right. This may be a completely naïve question, and if it is, just tell me that I’m all wet here. But with the reduced interchange fees, do you think banks are going to be more interested in basically outsourcing the debit card business to other people?

Randazza: That’s left to be determined, but we have received a lot of inquiries over the last 90 days with banks questioning those type of can our platform support those results? What I do see happening is that banks are going to have to decouple the relationship from their own DVA holders and clip coupons from other banks by having products and platforms like us, where they can serve as vertical markets such as grocery, petroleum, and drugs, and use those as a platform and an issuing method for them to be able to help reach the gaps in their revenue.

Evans: Very interesting. One of the things I’m curious about is how you think this is going to affect the handful of PIN debit networks that aren’t associated with MasterCard and VISA, so the STARs and PULSEs of the world.

Randazza: Certainly their bases are going to change from a volume standpoint, but their revenue is certainly going to be diminished.

And to your previous question, I think that platforms such National Payment Card, where we’re actually decoupling relationships, will be more valuable to working with PIN based networks, maybe more so than signature based or bank networks. PIN based networks will be the people that we will be going against and taking their market share away.

Evans: Joe, I wonder if you could help me with one practical aspect of the Durbin amendment that I’ve been struggling with. So we have a bunch of exemptions in the bill. So if you’re a financial institution with assets of less than $10 billion a year, the interchange fee cap doesn’t apply to you. If you’re a general purpose prepaid card and meet certain conditions, it doesn’t apply to you. So from the standpoint of the system, there are going to be all sorts of different cards being presented at merchants, some of which are regulated and some of which are not regulated. How is that all going to work out in the marketplace? It seems very complicated to me.

Randazza: It is complicated but I’ll share with you my viewpoint and certainly the Congressional leadership didn’t look at the implementation aspects of this. But most likely, in today’s environment, you have a series of interchange tables based on vertical sectors. You have a petroleum interchange for VISA, you have petroleum interchange for MasterCard, then the various ATM networks – STAR will have a petroleum rate. This is speculation on my part, but I think this is the best method of implementation is that banks will go ahead and find themselves in buckets. They’ll go into tiers. So a non-exempt bank – so an exempt bank will go ahead and make a determination of what tier they want to fit into and that will be their offer. So in the petroleum space, as an example, there’ll be an exempt rate and there’ll be a non-exempt rate with various tiers for various banks.

Evans: The community banks seem to be quite concerned about the bill, which suggests that at least from their standpoint, they think the net effect of it is that their ability to collect interchange fees regardless of what the bill says is going to be curtailed quite a bit. Do you agree or disagree?

Randazza: I can see their viewpoint, but progressive marketers in the community banks will go ahead and take a page of out of history and try to do what Capital One did with affinity cards in terms of credit. They now have opportunities, through platforms such as ours, to go out and use distribution points for merchants such as petroleum merchants to decouple the relationships with some of the larger banks such as bank of America. So they can start to develop new relationships and have the opportunity to go in and do that.

As an example, one of the technology innovations that we’ve put forth that will be available through community banks is a 4 digit PIN can go at an access debit, a 5 digit PIN will go ahead and give them a decoupled overdraft protection line. So a small community bank that might be in a section in Florida will be able to offer overdraft protection away from a traditional DVA account and develop a new relationship with that consumer. And our platform can accommodate that, and we really see that as an opportunity by not being part of the networks to be able to offer that.

Evans: So it sounds like you anticipate that there’s going to be quite a bit of innovation and change in the debit card business coming out over the next few years, not only from you guys, but generally from community banks and the other banks that are exempted from the legislation.

Randazza: We certainly believe that and we feel that we’re in the position of being first to market with taking advantage of that because we’ve had five years to develop a system that now can be very reactive to the changing times.

Evans: For my last question, I want to turn back to the National Card Payment Association, but before I do that, let me ask you your thoughts on another puzzle that many people have had on the Durbin amendment, which is how is it that Congress ended up imposing a regulatory regime on debit cards which don’t really seem to be terribly connected in anyone’s mind to the financial crisis, but – and I’m not suggesting that they had anything to do with the financial crisis, but not imposing a regulatory regime on credit cards which at least some people complain more about with regard to the excessive amount of credit in the economy. That’s been a puzzle for a lot of people. Do you have any answers to that?

Randazza: You got to call it for what it is. It’s the way that – and they say two things you don’t want to see, the way sausage is made and the way laws are made. What happened here is that very effective lobbying by the retail associations have taken place. And the question here, has won the ba – they certainly won the battle but have they lost the war? Merchants are going to see their consumers are going to now go back to 1990 levels of going from 3% check writers today back to 15% check writers because they’re going to not want to pay the debit fees, so merchants are going to start paying check guarantee fees that are not regulated. They’re going to have lower transactions if people are only going to be using cash. They’re going to be pushing people to be higher credit users.

So I think what’s happened is that the merchant associations were effectively able to get this bill passed. I congratulate them on achieving that. The question is, have they just won the battle or have they won the war?

Evans: I guess another interesting question is what’s going to happen to credit card interchange fees, whether there’s going to be another attempt to layer that as a – to give that to the Federal Reserve Board as another layer of responsibility for them. So I guess we’ll have to wait to see on that.

But before we go, let’s turn back to NTPA and talk a little bit about what your plans are. What are your plans over the next two to five years to build your business, whether it has to do with the Durbin amendment or just generally. What’s next for you guys?

Randazza: We remarkably have stayed on the original business plan that was put forth almost six years ago. Our efforts are in what consumer is doing is everyday spending – light necessity spending. We’re concentrating on what 70% of the debit market is, which is grocery, petroleum, and supermarkets. We have built up a network of processing relationships with people such as RVS and Heartland and NBS, which now gives us the ability to concentrate on the petroleum market but also gives us connectivity to supermarkets and to drug store chains. So our market and our development over the next two to five years is within those three verticals.

Evans: Joe, that sounds like you have an exciting time coming up, and the Durbin amendment, for better or worse, sounds like it’s going to make your business a lot more interesting, lots of opportunities for you. We really appreciate your time today and hope to see you again on So thanks again and have a good rest of the day.

Randazza: Thank you