Payment Methods

Decoupled Debit — Again?

The year is 2007.

Headlines are filled with news of a “revolutionary” product that will change the fortunes of merchants and unlock countless benefits for consumers when using it. Analysts at the time called this product “an historic opportunity” to bolster the merchant’s “corroding bottom lines,” and innovators rushed to build new applications to help them seize it.

And what was the product?

No, not the iPhone, but that would be a good guess.

It’s the decoupled debit card.

Capital One made the headlines then — a genius move, many called it at that time, for an issuer that lacked demand in deposit accounts and had no other way to provide a debit-like offering that would make their brand sticky to consumers.

[Note to the payments history buffs out there: The real decoupled debit interchange pioneer was a company called Tempo, aka Debitman, established in 2000 and acquired by HSBC in 2006 after struggling for years to get acceptance at merchants.]

Creating a product that pulled funds from depository accounts at other issuers and was accepted at any Mastercard-accepting merchant gave Cap One something new to offer consumers — and a new business model around which to build rewards to get consumers on board.

The consumer value prop was the functionality of a debit-like product, since funds to pay merchants were pulled directly from their checking accounts, without the consumer having to switch their existing DDA account to a new bank to get the generous cash-back goodies. Merchants paid less when they accepted those cards.

Inspired, retailers set out to develop their own products with those same benefits: debit functionality, rich consumer rewards and a lower interchange fee burden when consumers used them to shop their stores.

This all went … basically, nowhere.

Aside from a handful of special use cases, there wasn’t mass adoption of decoupled debit cards, and merchants didn’t end up issuing many. Decoupled debit accounts for very little of ACH volume.

But today, more than a decade since those headlines and lackluster performance, decoupled debit is again in the news, touted (again) as the interchange fee elixir for merchants — made more powerful, they say, in the age of merchant-branded payments apps. Instead of calling it decoupled debit this time, though, it now has a new name — and in the EU, a new friend in the regulator who is breathing new life into it under the auspices of PSD2.

There’s only one problem.

Consumers in the U.S., by and large, haven’t taken the bait, and have even more reasons not to now.

2018: Same Song, Different Verse

I have to admit that after reading the Bloomberg story last week describing how retailers are revving up their efforts to use ACH-linked branded payments apps and methods to avoid paying interchange fees, I had to look twice at the dateline.

To me, it seemed like déjà vu all over again, as that famous American philosopher, Yogi Berra, put it.

Just like 2000, and then again in 2007 with the initial hype over decoupled debit.

Just like 2010, with the launch of ISIS, aka Softcard, and its merchant-friendly mobile payments scheme.

Just like 2012, with the launch of MCX and CurrentC merchant-branded, ACH-linked mobile payments products.

And each time, the headlines were all about how great these merchant-branded initiatives would be.

For the merchants.

Detailed financial models showed merchants the billions they would save using new schemes that sidestepped the card networks. Fancy PowerPoint decks detailed examples of those schemes and projected the savings and bottom line impact when implemented.

Yet all of them were devoid of the reality of how consumers want to pay merchants and the underlying benefit of using payment cards.

Many of those schemes have either fizzled and died, or are today found sputtering.

The only real success story, the Target REDCard, has plateaued.

When it was first introduced in 2007, the REDCard was cited as a merchant-branded ACH payments wunderkind, a pathbreaker for merchants that wanted to keep their best customers in the fold using their most economically advantageous payments product. REDCard holders linked that card to their checking account, and users were given 5 percent cash back on purchases made using it.

Today, Target says that REDCard transactions account for roughly 24 percent of sales, and that’s nothing to sneeze at. A payment method that has managed to capture nearly a quarter of sales over a decade hasn’t done badly.

But that may be as good as it gets.

The REDCard has seen its growth slow appreciably since 2013, the year of the infamous Target breach.

Between 2010 and 2013, it’s been reported that the volume of sales on the REDCard grew from 6 percent to 19 percent – in other words, like gangbusters.

But between 2013 and 2015, it’s been a different story.

Over those two years, REDCard sales grew more slowly: from 19 percent to 22 percent of all Target sales. And between 2015 and 2017, REDCard sales grew from 22 percent to 24 percent.

In May, Target introduced a new loyalty program that could be linked to any payment card a customer wants to use. The richer rewards still accrue to the REDCard holders whom, Target says, produce baskets that are as much as 50 percent higher than non-REDCard customers.

But Target execs concede that not all customers want to establish a new payment method in order to be considered — and treated as — a loyal Target customer.

Particularly, it seems, one whose loyalty is measured solely by their interest in linking their checking account to it.

So, what’s different about the new talk of ACH-based cards?

Nothing, really.

Well, maybe there is one thing.

The Consumer-Merchant Interchange Battlefield

The merchant’s war on interchange fees (or just the merchant discount for three-party systems) is as constant as the sun rising every day in the east and setting every day in the west.

It’s a battle that has raged for nearly all of the 60 years that general purpose payments cards have been in existence, despite the growth in retail spending they have ignited — and all of the benefits that have accrued to merchants when accepting them.

It’s a battle that exists even though merchants dangle store-branded cards in front of consumers and few say yes.

And it’s a battle that rages even though the notion of ACH-linked, merchant-branded payments schemes haven’t exactly set the world on fire — despite the investments and valiant efforts made by merchants, merchant consortia and innovators to convince consumers to give them a try.

There’s a simple reason for that resistance.

Consumers make their payments decisions based on what’s best for them, not how much it costs a merchant to accept what they want to use.

And if we’ve taken one lesson from the mobile, contactless point of sale experiment, it’s that it’s not so easy to get consumers to change their preferences, once established. No matter how hard the mobile pays shout, entreat and wish it to be so, consumers just haven’t been all that interested.

It’s also not clear what merchants are fighting for anymore when it comes to debit interchange. The Durbin amendment capped interchange at 24 cents, significantly reducing the difference between ACH and debit.

In fact, those economics – or perhaps the lack of them – helped to shutter most decoupled debit schemes operating at the time, since there just wasn’t enough of an economic proposition to fund the kind of rich rewards that might get consumers to make the move – although frankly, there wasn’t much evidence they would move anyway.

A move that now, in the face of the litany of merchant breaches, seems a big ask of consumers for whom the safety and security of their payments and bank account credentials is at all-time high.

Since 2005, sources claim there have been 4,500 data breaches, 3,455 of which have happened since 2013, the year of the Target breach.

Merchants have been the subject of many of those breaches, which resulted in compromised payments credentials. At least cards can be replaced easily and the consumer has some protection. With merchant-branded ACH-based products, not so much. Consumers will likely think twice about giving their bank credentials to hack-prone merchants.

Not surprisingly, perhaps, when we asked last summer who consumers trust to innovate their payments experiences, merchants (with one exception) don’t rise to the top of the list – in fact, they sink way to the bottom.

Banks that issue network-branded cards, PayPal and Amazon round out the top five. Consumers, it seems, want a layer of protection – a trusted intermediary – standing between their payments credentials used at a merchant and the precious funds they have sitting in their bank accounts.  Consumers use their debit cards, all right – just the ones issued by their banks.

That really shouldn’t be bad news for merchants, particularly as technology and digital platforms open new channels for consumers to find products and merchants from which they’d like to buy. Getting consumers comfortable with those new experiences can only happen if consumers are comfortable that they are protected when they plunk in their payments credentials and click (or say) “buy.”

As for interchange, and the business model that underpins the payments system that operates globally today and powers trillions of dollars in sales, someone has to pay.

Consumers don’t, so merchants must – and the biggest of those merchants pay very little, despite the protections consumers are afforded if things go amiss. For every story that talks about merchants touting merchant-branded schemes to reduce interchange, there are thousands that just want to get the sale before someone else does.

Perhaps even more ironic is that the justification for interchange fee reduction was once to give merchants more parity in the cost of accepting cash at the point of sale – a form of payment they once said was the cheapest way that a consumer could pay them.

But even that has changed.

Cashless is now becoming king in stores, as merchants push digital over paper (and coin) in the name of efficiency and a better user experience. Consumers are using less of it – and using it only introduces friction for cashiers who have to take it and make change, not to mention the consumer who is standing in line behind someone who pays that way.

In fact, the real irony may be that the merchants that once sought regulations to reduce card acceptance so they could do more with cash, may now be faced with regulation to make them take cash instead of cards.

At least, if New Jersey lawmakers have their say.

Oh, and if you want a real walk down memory lane, check out my MCX Fairy Tale, a piece that I wrote back in 2013 when talk of their replacing card networks was at a fever pitch.

Unlike most fairy tales, it does not come with a happy ending – as that piece then, or the reality of the scheme now, has proven.



Social distancing has changed eCommerce from a ‘want to have’ to a ‘must have’ for businesses, yet retailers could struggle to create convenient payment and refund experiences for their apps and websites, says Abdul Raof Latiff, head of DBS Bank’s digital institutional banking group. In the April 2020 B2B API Tracker, Latiff explains how banks can provide a timely assist via application programming interfaces (APIs) that integrate payments into those eCommerce platforms.