Last week’s announcement by TSYS of its new hybrid card marks the latest application of the decoupled debit technology first made popular by Capital One in 2007 (though arguably pioneered by PayPal some years before in an online, non-card form). In fact, depending on how it is ultimately deployed, the TSYS product could provide a compelling version of a promising concept that has largely been a disappointment in the marketplace.
To review, under the typical decoupled debit approach, a deposit account at nearly any financial institution can be linked to another bank’s payment card that is used at point-of-sale, and the funding will ultimately be drawn from the deposit account via ACH debit. The card issuer must provide an immediate authorization response to the merchant, and must do so without the benefit of knowing the status or balance of the deposit account (the ACH system lacks those capabilities). A very low cost overnight batch process is used to perform the funding leg of the transaction, withdrawing the funds from the consumer’s depository bank.
Until now, decoupled debit cards have been conceived as a new and separate card product, running on the MasterCard signature debit network and rules, that the consumer needed to be convinced to carry and use. Now, TSYS is offering a flexible set of tools designed to allow card issuers to offer consumers access to several different credit and deposit accounts from a single card. A pre-arranged or dynamic set of business rules (involving merchant category, transaction size, and the like) can be configured by the card issuer and consumer to determine which transactions would be posted to the revolving credit line and which would be deducted from the deposit account via ACH.
We think one likely and early application of the capability will be to connect checking accounts to an existing credit card. So, rather than needing to create a value proposition for carrying an entirely new card, the Hybrid card holds the potential to make decoupled debit an add-on feature to a credit card. Several benefits and opportunities would emanate from such a product design:
- Credit issuers could participate in the more rapid growth of debit transactions without the need to build a full deposit business or issue an entirely new payment card
- The issuer would earn a credit card level of interchange on all transactions, including those ultimately debited from another bank’s checking account. Credit interchange in any given category is significantly higher than the signature debit interchange that has been available to decoupled debit card issuers in the past
- We would expect credit issuers to extend existing rewards programs to the new debit transactions. The higher credit interchange rates being earned should permit them to offer a richer level of rewards than is typical on any traditional or decoupled debit card. A highly compelling rewards proposition is essential to any decoupled debit program, as virtually all the target customers already have a traditional debit card from their main depository institution
- The credit card may also provide some enhanced risk management to the decoupled debit issuer. Since the decoupled debit transactions are subject to credit risk (that is, the ACH funding transaction could “bounce”), a carefully crafted cardholder agreement might use the revolving credit line to backstop the risk of failed debits
- Credit card issuers may have an advantage in the somewhat challenging process of enrolling consumers for decoupled debit. Issuers who have captured checking account information from check and Internet payments received from their customers will have an opportunity to “pre-approve” some of their cardholders for the decoupled debit feature and streamline the registration process.
As noted above, other product concepts are made possible by the new capabilities as well. Banks that are primarily debit issuers may see an opportunity to efficiently diversify into the credit business. Banks that are strongly oriented to relationship building and product cross-sell (think Wells Fargo) may appreciate the opportunity to deliver several different products from a single piece of plastic. However, we see the clearest business case for large credit card issuers to use the Hybrid card, particularly those that do not have a large existing deposit franchise (TSYS is highly focused on credit card issuer processing and counts Capital One among its large customers). Large retail banks, who are the major issuers of traditional debit cards, would stand to lose the most if Hybrid card programs shift existing debit transaction volume to the decoupled model.
It will be interesting to watch the reaction of other industry participants as well. Merchants can be expected to voice clear opposition if they perceive that the Hybrid card is moving transaction volume from traditional debit cards to higher cost (for them) credit cards. The card networks will need to carefully evaluate their stances toward this product: Visa has not previously permitted decoupled debit transactions and could feel more pressure to allow it; MasterCard has supported decoupled debit with its signature debit cards, but may not be comfortable with its migration to credit cards. American Express will certainly be watching developments closely as it formulates plans for its recent acquisition of Revolution Money.
Another interesting question is how industry participants will even know the extent to which credit-decoupled debit hybrid products are being used. As described above, the transactions performed with Hybrid cards would look like standard credit card transactions to merchants, acquirers and card networks. Presumably, only TSYS, the issuing bank, and the cardholder need to be privy to which funding account is used for any given transaction. Given the history of litigation over debit card identification and pricing, it will be interesting to see what voluntary or mandated disclosure might accompany the use of Hybrid cards.
We’ll be watching all of these developments with great interest.