Are Debit Cards the Future?

In the Washington Post is an article on the changes now underway with respect to Debit and Credit cards. Unless you are completely ignorant of the fundamental change from Debt based payment Instruments to pay as you go mechanisms. It is interesting to see how the paradigm is changing in the US. Prepaid Cards, ACH Check Conversion, and RCK are examples of ACH payment solutions.

Excerpts:
A couple days ago, I got some pushback for arguing that the credit industry's tiered model amounted to a subsidization scheme: Credit card users who fall into debt get socked with fees and interest rates that in turn subsidize reward programs and low APRs for the credit users with a steadier cash flow.

In the recent past, I worked as a management consultant for some major credit card issuers. I can tell you that internally, these companies have a common term for customers who pay off their entire balance every month: “freeloaders”. These “freeloaders” aren’t necessarily unprofitable; some are, most aren’t, on average the group is mildly profitable, but not nearly as profitable as those who carry a balance. If you’re wondering how a “freeloading” customer can be unprofitable, there are several factors. For one, about 0.8% of the 2%-3% interchange fee goes to rewards, but a diligent customer can push that to 1.5% or more by optimizing the collection and redemption of rewards points. Beyond that, the credit card issuer finances everything the “freeloader” buys on the card for 15 to 45 days. Finally, there are the various expenses a customer costs: printing and mailing cards and statements, call center service, various card benefits, etc.[...] There are tradeoffs for everything. If hotels were banned from charging $8 for a minibar beer and $2/minute for phone calls and $25 for breakfast, the hotel chains would have to reevaluate their pricing structure. The result would probably be higher room rates and some closed hotels. If airlines had a price limit put on their business class seats, you can bet coach tickets would go up in price and the number of flights would go down.

Link to article here.
http://voices.washingtonpost.com/ezra-klein/2009/05/wre_debit_cards_the_future.html?hpid=news-col-blog

Kansas City Fed Chief promotes ACH Debit

An article on Digital Transaction News shows that the concept of Alternative to Card Association Debit is needed. With the recent changes in the Credit Card laws by President Obama and Congress. Those who in the past benefited from paying their balances on Time. Are now going to lose out to those who are not. This may drive many back to Checks, and Cash. Certainly with Rewards programs being reduced, and the perks being eliminated. Change is in the wind. It is time to evaluate how an alternative system might benefit, Merchants and Consumers.

Kansas City Fed Chief Espouses ACH for Debit Card Processing

(May 27, 2009) The Federal Reserve Banks should adapt the automated clearing house network to compete directly with private-sector networks for debit card processing, the head of the Federal Reserve Bank of Kansas City said this week. “The Federal Reserve could enhance competition in payment card markets by positioning ACH services as an alternative to debit card payment networks,” said Thomas R. Hoenig, president of the Kansas City Fed, in remarks delivered on Monday at a retail-banking conference held by the European Central Bank in Frankfurt, Germany.

Hoenig said he isn’t proposing the Fed issue cards or run its own card network. But he said the U.S. national banking regulator could “add enhancements” to the ACH that would allow the nearly ubiquitous network, which reaches virtually every bank in the U.S., “to become an alternative to running transactions over card networks.” He pointed to decoupled debit cards, in which banks issue debit cards that link to deposits held at other banks, as an example of the sort of adaptation he favors.

For the full article click link. Digital Transaction News is a great source for information on the payments Industry.

http://www.digitaltransactions.net/newsstory.cfm?newsid=2222

New Decoupled Debit provider

Payments news from GlennBrook Partners is reporting an ISO is doing a test of their Decoupled Debit Solution. The company is Maverick Network Solutions Inc. This company based in Delaware refers to their Decoupled Debit product as a Private Labeled Debit Card.

Teledraft the ACH processor in Scottsdale Arizona is also offering a similar service. That is currently being deployed through their Payday Loan clients. This shows that the concept is gaining traction. And that the Paradigm and domination of electronic payments by the Card Associations is beginning to give way to new mechanisms that offer electronic payment services minus the Interchange fees. The primary issues are Risk management, Collections, and Rewards or Loyalty Incentives.

Article in Digital Transaction News

The purpose for this blog is to promote ACH Debit or Decoupled Debit. It can be said that the reasons it is needed can only be articulated when you discuss the Topic of Interchange. The Interchange System business model runs contrary to normal Free Market Economics. In that the Card Brands Visa and MasterCard. Which were formerly Non Profit Corporations are now For Profit Corporations with Shareholders and Investors to make happy.

US Merchants pay twice as much as Canadians and three times as much as European Union merchants for a Debit or Credit Card transaction. The impact this is having is growing in severity to US Merchants. At a time when Merchants are facing severe financial pressures from declining revenues, increasing Taxes and Fees, and a tough credit market.

Visa's USA President recently disclosed the fact that nearly 70% of First Quarter US transactions were Debit. And that Debit volumes have exceeded Credit Card Volumes for the First time. With the Credit defaults hitting Card Portfolios hard. Advanta Financial announced they will be closing their Small Business Card Portfolio in June of this year.

Merchants need credit card and Interchange fee relief. Competition is the real answer to this need for a paradigm change. Alternative Payments offer Merchants and Consumers the first real hope for a change in the system.

Here is a recent artic le on the impact of Interchange fees. The passions that Merchants feel over this issue is not going away.

http://www.digitaltransactions.net/newsstory.cfm?newsid=2212

ACH @ POS

by Carol Coye Benson on January 29, 2008 · 0 comments

in ACH, Decoupled Debit, NACHA

I spoke last week with Elliott McEntee, President and CEO of NACHA about two current issues - NACHA’s reaction to “de-coupled debits” and the progress of the Secure Vault Payments program.

Decoupled Debit - Background

Decoupled debit programs, announced by both Capital One and HSBC (as issuers) and Tempo (as a processor) take a normal debit card, issued by a bank and a merchant co-branding partner, and stop the transaction short at the issuer - who does not have a checking account relationship with the cardholder. Instead, the issuer initiates a second, ACH debit transaction, which debits the cardholder’s account at their DDA bank.

The upshot of these transactions is that the debit card interchange is held by the issuer bank, (rather than flowing through to the DDA bank) and used, along with possible merchant contributions, to fund a relatively rich merchant-centric reward program. From the perspective of the consumer DDA bank, the transaction could take away “normal” DDA bank debit card transactions, which produce interchange revenue to the bank, and substitute a non-interchange bearing ACH transaction.

Recent industry “buzz” about de-coupled debit centered largely around the potential for Capital One - or other de-coupled debit card issuing banks - to poach debit transactions and their interchange from the consumer’s bank.

NACHA’s board, meeting last November, released a rules interpretation designed to clarify open questions around not only de-coupled debit but also other point-of-sale initiated ACH debits. (This would include programs such as ACH-enabled supermarket loyalty cards (e.g. Blackhawk’s “Fast Forward“, ACH-enabled drivers licenses (e.g. National Payment Card) and ACH-enabled merchant programs such as those offered by Tempo or Pay By Touch.)

McEntee explained that NACHA studied the issue to determine the whether or not these transactions were in compliance with NACHA rules. The biggest concern, McEntee said, was the risk management perspective. NACHA was concerned that programs such as this not unintentionally subvert risk management practices at NACHA or receiving banks (RDFI’s). Of particular concern was the possibility that the “real merchant” in a purchase transaction not be visible, and therefore not recognized by risk management systems, which may have flagged certain merchants for closer review. Banks were also concerned about the customer service perspective. Would the consumer be able to understand, looking at their bank statement, what the transaction was?

So what was the result? The rules interpretation released had three directives:

• First, the transactions must be classified as “POS” transactions, rather than using other ACH transaction codes
• Second, the transactions cannot represent an aggregation of underlying consumer purchases - e.g. three separate purchases at one (or more) merchants on a given day cannot be combined into a single ACH debit transaction
• Third, the “payee” in the ACH transaction, which is carried through to the consumer’s bank (and therefore appears on the consumer’s statement or online transaction listing) must be the underlying merchant, and not the card issuer: in other words, “Capital One” could not be the payee shown on the consumer’s statement.

These seemingly innocuous “interpretations” in fact pack quite a punch.

The first provision insures that these types of transactions can be isolated at the receiving (consumer) bank, and recognized as different from other incoming ACH debit transactions. This means that a bank could apply actions to those transactions that they don’t apply to other ACH debit transactions. What kind of actions? Well, a consumer bank might assess a fee to the consumer, for example, for that type of transaction. McEntee expressed skepticism that banks would actually do that - recalling the consumer outrage when banks tried fees to “steer” consumers to the use of signature debit over PIN debit at the point of sale. But still, the capability is now there. Other possible actions could include denying consumers debit reward points for those transactions, or even applying different overdraft policies. McEntee made clear that any actions like this are entirely in the individual bank’s domain. The NACHA network, in his view, has simply done its job by ensuring that these transactions, with their unique attributes, can be individually identified - and managed - by RDFI’s.

The second point is that the POS transactions cannot be aggregated. In some ways, this serves to strengthen the programs - presumably, consumer confusion will be less if they see a one-to-one relationship between their purchases and what appears on their statements. But aggregation might have been used by a de-coupled debit issuer to encourage a user to come online to the issuer, rather than their DDA bank, to see transactions listed - and this rule makes that less likely to happen. The same is true of the third part of the rules clarification - that the underlying merchant’s name is carried through to the consumer bank. This also reduces the chances that the issuing bank becomes the primarily online interface for consumers looking for transaction history. The identification of the “real” merchant also ensures that existing risk management systems will work with these types of transactions.

What was equally fascinating to us at Glenbrook is what the NACHA board did not do. Given that the board had authorized, for the first time, an interchange-like “authorization fee” for the Secure Vault Payments (SVP) pilot program (more on that below), it seemed like some other interchange-like fee might be applied to these POS transactions. After all, NACHA board banks (and other members) have seen PayPal successfully build a program that has the effect of keeping interchange-like revenue themselves while using interchange-free ACH WEB debits to access the consumer’s DDA bank. At Glenbrook, we have spoken with bankers who have rued the NACHA decision to permit WEB debits for PayPal-type transactions (although bankers like these transactions when used for other purposes, such as online payment of a credit card bill). So my question was, why not assess a fee on the ODFI of POS debits, and have that fee flow to the RDFI?

In short, McEntee said that this was not an issue which had come before the board - and the implication was that the NACHA board was not the proper venue to discuss the protection of consumer bank revenue streams. In his opinion, the SVP case is special because the consumer bank takes action to authorize - in effect guaranty - the transaction, not dissimilar to what they do when they authorize an interchange bearing debit card transaction. They play no similar role in a POS (or WEB) transaction, so, by that logic, an equivalent fee for a POS transaction would not make sense.

We moved on to a brief discussion of the SVP program.

Secure Vault Payments - Background

SVP is NACHA’s second attempt at a “credit push” program for online payments (the previous attempt was “Project Action”). SVP is designed to be used in consumer eCommerce purchases, online bill payment, and account-to-account transfers. A consumer at a participating eCommerce site would click on SVP as a payment option. They would be redirected (in a manner similar to Verified by Visa or MasterCard SecureCode) to their DDA bank, authenticate themselves to the bank (presumably with online banking credentials) and instruct the bank to “push” a payment to the merchant. The merchant would be protected from both NSF and fraud risk, and the consumer’s account information is not seen by the merchant. NACHA announced the “authorization fee” structure referred to above as a payment from the merchant/merchant’s bank to the consumer bank, to compensate the consumer bank for the authentication and guaranty service.

SVP is nicely designed, in our opinion, but it will take great effort - on the part of participating merchants, billers, and banks - to implement. This is a challenge for the program, and I asked McEntee how things stood.

He was encouraged, he said, by recent decisions by Metavante and Jack Henry to support the program. Specifically, this means that bank clients who are using the online banking applications of these vendors will be able to support SVP transactions, presumably with minimal effort on the bank’s side.

He also said that large banks, who had been notably absent as early supporters of SVP, are re-thinking the program in the light of the potential for authorization fee revenue. (Many large banks, we knew, were previously unenthusiastic about the potential of cannibalizing debit card revenue with no-revenue ACH debits). He anticipates more announcements and participation both from bank processors and from banks as the pilot progresses.

NACHA’s CEO Search

We also spoke about the search currently underway for McEntee’s replacement. The new CEO will have big shoes to fill: McEntee has been at NACHA for 20 years, and watched over a dramatic rise in both volume and capabilities at the network. According to McEntee, his successor will have the same challenge he has always faced: getting banks to work together, so that each bank individually, and their customers, can benefit from the use of what is now the only major bank-owned electronic payments network.

Retailers announce ACH decoupled debit programs

Retailers announce ACH decoupled debit programs

(2/12/2009)

Road Ranger, Quick Track, Guppies on the Go and Certified Oil are among the latest convenience retailers to partner with National Payment Card Association, the association said. Under the arrangement, the retailers accept ACH decoupled debit cards that carry significantly lower transaction fees than traditional credit or debit cards, the association said. The National Payment Card Association payment system processes transactions through the Federal Reserve Automated Clearing House (ACH), resulting in lower merchant fees and a self-funded loyalty program that provides immediate savings to consumers, according to a press release dated Feb. 11 and posted on the association’s Web site (nationalpaymentcard.com). Specifically, the program benefits retailers by helping them shift the costs normally associated with the interchange fees credit card companies normally charge on each transaction to the National Payment Card Association lower cost, fixed transaction fee. The merchant can then use some of the savings between the two to change customers’ payment behavior by passing some of that savings along to them. “Even when the economy was healthier merchants were being squeezed by high transaction costs, so in our current state the need for a lower cost, more manageable solution becomes ever greater,” said Joe Randazza, president of National Payment Card Association. “Our programs capitalize on the lower cost ACH settlement platform, which can create a significant savings for the merchant and a self funded loyalty program that provides an incentive for consumers. It’s truly a win/win for both.” The transaction is debited from the customer’s account and is processed through the Federal ACH System that handles billions of transactions per quarter. The merchant settlement is the next business day. The system is cheaper, costing only a fraction of what most retailers normally pay in merchant service fees, because the funds come directly from the consumer’s bank account, removing the middlemen in the credit card and debit card networks altogether. National Payment Card Association first introduced ACH decoupled debit in June 2006. Since then, numerous retailers have partnered in the program, including MTG Management in Austin, Texas, which links ACH debit to a Driver’s License, and Flash Foods.

Debit Cards

Debit Cards Propel What Growth There Is for MasterCard And Visa

(May 1, 2009) Despite the economic downturn and softening volumes, MasterCard Inc. put in a “solid” first quarter, Robert Selander, MasterCard president and chief executive, said early Friday.

“Our volumes have been impacted by significant headwinds, such as slower cross-border travel, lower gas prices, and an appreciating dollar,” Selander said at an analysts’ conference call. “But our business model remains resilient as we continue to benefit from the secular shift from cash and check to electronic payments.”

MasterCard’s total U.S. debit and credit card purchase volume for the first quarter totaled $192 billion, a 6.8% drop from $206 billion in 2008’s first quarter. U.S. purchase transactions rose 2.5% to 3.33 billion from 3.25 billion a year earlier.

Debit helped limit losses in dollar volume. U.S. debit volume rose 5.3% to $79 billion from $75 billion in 2008. Debit purchase transactions were up 10.8% to 1.95 billion from 1.76 billion in last year’s first quarter.

In contrast, the 1.39 billion U.S. credit card purchase transactions represented a 6.7% drop from 1.49 billion last year. Credit card purchase volume also dropped to $113 billion in the first quarter, down 13.7% from $131 billion a year earlier.

MasterCard’s U.S. credit card base shrank 14% to 239 million from 278 million in 2008’s first quarter. The U.S. debit card base increased 9.5% to 127 million from 116 million a year earlier.

Net income for the first quarter dropped 17.8% to $367.2 million from $446.9 million, due primarily to the effect of volatile currency markets, Selander says. The economic downturn, including rising unemployment and declining retail and travel sales, also contributed to the lower earnings, he said. Meanwhile, Visa Inc. reported earlier this week that U.S. debit dollar payment volume exceeded that of credit for the three months ended Dec. 31. Previously, though U.S. debit transactions have surpassed that of credit for several years, total purchase volume on credit remained higher on credit than debit because of credit’s higher tickets.

However, in recent months, credit card transactions have been falling, as has the size of the average sale, according to Visa. Visa’s total $409 billion U.S. debit and credit card purchase volume represented a 1.1% drop from year-ago levels.

Credit card purchase volume dropped 6.9% to $203 billion from $218 billion a year earlier. Visa’s U.S. credit card base dropped 8.5% to 334 million from 365 million.

In contrast, dollar volume on U.S. debit cards increased 5.6% to $206 billion for the three months ended Dec. 31, from $195 billion a year earlier. Debit transaction volume rose 9.7% to 5.44 billion from 4.96 billion a year earlier. Visa’s U.S. debit card base rose 12.9% to 333 million cards from 295 million in 2007.

Net income for the Visa’s second fiscal quarter ended March 31 totaled $536 million, up 71% from a pro forma $314 million a year earlier, Visa said.

Twitter

I have registered a Twitter account achdebit. This is intended to increase traffic and content.

Sources for Payment Industry News

There are several venues where Consumers and Merchants can gain an insight into the payments Industry. The Greensheet is a publication in print and online focusing on the payments Industry. Digital Transaction News is another publication giving out information. Transaction World is yet another. And Card Forum from Thompson Financial is another Industry portal.

Payments News is an aggregator of news on the payments Industry space. Merchants can do some research and should into the Laws and issues impacting payments. As the Net profit many Retailers make is shrinking. And with the changes of Visa and Mastercard from Non Profit Corporations to For profit publicly traded companies. Pressures now exist to increase the Fees that Merchants pay, these fees are known as Interchange.

What is Decoupled Debit?

The Term Decoupled Debit emerged in 2008. Prior to that Non Card Association debit was referred to by several different names. It was called Merchant Centric Debit, ACH Debit, Non EFT Networks Debit. R. Scott Hattfield founder of Debitmann promoted the concept of a non Visa and Mastercard Debit product. That used ACH to process the funds and linked directly to a Consumer's bank account. Because the depository Financial Institution where the Consumer's Checking account resides, does not realize revenue from Debit transaction fees. It is referred to as a Decoupled or "Unhooking" of the Financial Institution and the Debit processing relationship.

Alternative payments using ACH are hot right now. And their future seems bright. But they will require Consumers support and Merchants support.

Merchant Payments Coalition

The Merchant Payments Coalition is an Association composed of Trade Associations and Merchants. Their purpose is to attempt to Lobby Congress to change the Interchange rate structure or abolish the existing system. The Issues on their website at www.unfaircreditcardfees.com articulates the issues impacting US Merchants. Despite advances in Fraud detection, Risk analysis and Predictive Risk Scoring technologies. Card Association fees continue to take an increasing percentage of the revenues generated by Merchants.

I highly recommend reading their site to understand the issues facing Merchants. The National Association of Convenience Stores is a part of this group. In 2007 I recognized as others that the current Free Market mechanisms are in fact not operating. This is due to the fact that Visa and MasterCard control 80% of the US Payments market. Their success has allowed them to set the prices to what the Market will bear.

Competition is needed. ACH offers an alternative to their services. Risk Management, Loyalty incentives, Predictive Risk scoring offers a truly viable alternative. Shell Oil USA with their Shell Saver Card, has rolled out a service in January of 2009. Blackhawk Networks a subsidiary of Safeway Corporation has a SCheck product, First Data Corporation has Connect pay a Loyalty product with ACH, Tempo Payments offers a Decoupled product, as does National Paymentcard Association. The Software and Hardware company offering Loyal Debit is in the Decoupled Debit space.

Merchants should evaluate the opportunity and take a chance on changing the paradigm in their favor. This blog is about the emerging Decoupled Debit product. And how Merchants see their part in the payments Industry. I welcome your comments.