Cap One Says Its Decoupled Debit Card Pilots Ended on Schedule

Capital One Financial Corp. ended a pair of merchant pilots involving its decoupled debit card product because the tests were scheduled to end, a spokesperson for the financial-services company tells Digital Transactions News. “They were initiated as pilot programs and they've run their course. That's it,” says the spokesperson in an e-mail message responding to inquiries about the pilots. Speculation about Cap One's backing for its controversial new debit cards erupted this week in the wake of the news that the two programs would stop this weekend. Press accounts speculated the pilots had fallen victim to a new rule interpretation that prevents Cap One from aggregating automated clearing house transactions. But the spokesperson says neither the interpretation, issued in November by NACHA, the governing body for the ACH, nor any other factor shut down the programs. Nor, she says, did they end earlier than expected. “These were small pilot origination programs designed to inform our broader decoupled learning agenda that are complete,” she says. “They're done. That's it.” She refuses to disclose how many cards were involved or give any other details about the tests, saying these are “proprietary.” The McLean, Va.-based financial-services company, known as an innovator in marketing credit cards, will likely continue experimenting with decoupled debit, the spokesperson says without giving details. “Capital One has always used a test-and-learn strategy,” she says. “We continue to pursue a comprehensive learning agenda on decoupled debit.” The end of the pilots at Altoona, Pa.-based convenience-store chain Sheetz Inc. and Ukrop's Super Markets Inc., a Richmond, Va.-based grocery, has touched off industry speculation that Cap One is bowing to pressure from competing banks upset about what they see as a threat to their demand-deposit bases. Decoupled debit is so-called because the cards are issued by Cap One but access checking accounts held at other banks through the ACH. This allows Cap One to peddle the cards, which are branded by MasterCard, as they do credit cards, bringing them to a nationwide market. News that Cap One was developing the card and planned to market it as a cobranded product with merchants emerged late last spring (Digital Transactions News, June 7, 2007). Information from the merchants involved in the pilots is sketchy. A Ukrop's spokesperson confirmed the test is “now complete” but refused to say more. A Sheetz executive referred inquiries to Capital One. But it's likely Cap One is testing a number of configurations for the product besides the Sheetz and Ukrop's programs, observers say. “They're in a test and analyze mode,” says Mike Grossman, chief executive at San Mateo, Calif.-based Tempo Payments Inc., a processor that offers decoupled debit programs to banks. “It wouldn't surprise me if there were a marketing blitz 10 months from now. In fact, I expect it.” At the same time, experts say it's unlikely NACHA's aggregation-rule clarification, announced in November (Digital Transactions News, Nov. 28), had anything to do with the pilots coming to an end. And, though the rule may have been the result of pressure from competing banks, it will not have much effect on Cap One's strategy for decoupled debit, they say. Under the new interpretation, NACHA said transactions that require settlement to payees within 14 days?chiefly, those tied to debit cards–can't be processed in bundles because the aggregation of these payments causes the loss of merchant and other information needed for risk assessment. Some observers said at the time that the rule interpretation was intended by competing banks specifically to cripple Cap One's decoupled debit effort, which many banks see as a threat to their demand-deposit bases (Digital Transactions News, Dec. 5). NACHA said at the time that its ruling was part of an effort to improve risk management and not a response to pressure from member banks. It added that it would affect a number of programs and wasn't aimed particularly at Cap One's. By forcing Cap One to treat decoupled debit transactions discretely, the ruling might raise transaction costs for the company, but only slightly in the early going when transaction volumes are low. ACH origination fees run from a quarter of a cent per item up to three-tenths of a cent. “This aggregation issue is somewhat trivial in terms of cost,” says Gwenn Bezard, research director at Aite Group LLC, Boston-based research firm. To the extent that Cap One's technology was geared for aggregation, the ruling might require the bank to rewrite some programs. “Cap One likely needed to modify its underlying technology platform in order to move away from aggregation,” says Tempo's Grossman in an e-mail message. Cap One's spokesperson says the company is complying with NACHA's rule. Tempo does not aggregate transactions.