Merchants Take Another Look at Decoupled Debit

Don’t look now, but decoupled-debit programs may be on the verge of a comeback as merchants look for ways to circumvent payment networks and spur loyalty among consumers.

That’s the take from a new report, “Decoupled Debit: The Start of Mainstream Adoption?” issued by Maynard, Mass.-based Mercator Advisory Group Inc.

Graybeards will remember decoupled debit’s last go-round a decade ago. Capital One Financial Corp. made the biggest splash when it introduced a decoupled debit card that consumers could associate with a checking account held at other financial institutions. Not long after the storm of publicity died down, the bank quietly shelved the project.

Even today, Target Corp.’s RedCard soldiers on as a decoupled debit card and Coconut Creek, Fla.-based ZipLine offers a decoupled debit service that gasoline retailers including Cumberland Farms offer. In November, Citgo Petroleum Corp. launched the Citgo Check Card using ZipLine’s technology.

But now more organizations like the appeal of decoupled debit, suggests Sarah Grotta, director of the debit advisory service at Mercator. There are two major reasons for that, she says.

The first reason, no surprise, is cost. “There is real interest among merchants to circumvent the [payments] networks when they can,” Grotta says. “They’re looking for opportunities for potential cost savings.”

Decoupled debit uses the automated clearing house network, which typically is less expensive than a payment card network. For example, an ACH payment made using Stripe costs 0.8%, with a cap of $5. Any payments of more than $625 cost a flat $5, Stripe says. A comparable payment using a bank card, assuming a typical 3% fee, has an $18.75 cost.

Many merchants eyeing decoupled debit would like at least a certain percentage of their transactions in that program, Grotta says.

The other reason has to do with engendering loyalty among consumers. Target, Grotta says, found that RedCard shoppers increased their shopping at the retailer by 50%. “They think about it as a cost savings, but it’s really an opportunity to create a loyalty platform,” she says.

Cumberland Farms, which won’t disclose the number of users of its SmartPay app, fosters that loyalty with a 10-cent per gallon discount. In July, it said customers saved $50 million using the app since its January 2013 debut.

Despite the allure of lower costs and loyalty gains, decoupled debit could be uncomfortable for merchants accustomed to how payment cards operate. One issue is that the ACH does not have an upfront authorization step, Grotta says. This step, with payment cards, gives the merchant some assurance funds are available to pay for the transaction.

Fraud also could be a concern. A person might fraudulently open a checking account using a stolen identity, Grotta says. There are no chargebacks with ACH transactions, though there is a dispute process, she says.

Should decoupled debit gain greater acceptance, it could have an impact on transactions for debit card issuers, Grotta says, though so far it’s only had success in niche markets. “Debit loyalty is not what it used to be,” she says.

—Kevin Woodward