Wednesday, July 18, 2007
Decoupled Debit Card Poised To Shake Up Banks
by
“What’s in your wallet?” Capital One hopes its new co-branded “decoupled debit” card (with rewards) will find its way to your wallet soon, right along side one of its credit cards. What’s a decoupled debit card? In this case, it is a MasterCard debit card that can be linked to any checking account at any financial institution. Transactions are processed through the open ACH (Automated Clearing House) system. So why are banks worried?
Bottom line: Decoupled debit cards could threaten banks’ lucrative income stream. Consequently, industry experts are calling this a “disruptive” move on Capital One’s part. It’s a move that should have bankers sitting up and taking notice (and maybe even forming taskforces). Why?
Banks earn revenue on each debit card transaction (it’s called interchange income, a percent of the transaction amount). More consumers are using debit cards much more frequently, and this means a very nice recurring revenue stream for banks.
Moreover, banks often create retail banking “packages,” including debit cards, checking, savings, overdraft protection, online banking/bill pay and potentially discounted interest rates on loans.
Suddenly, the sacred debit card could be at risk, especially if a consumer decides to employ a decoupled debit card.
Winners in all of this? The consumer gets flexibility and more rewards (equal to that of credit card programs). Capital One stands to gain new card-holders and income from debit card transactions. And other merchants are ready to private-label these decoupled debit cards, such as CVS/pharmacy and financial services firm HSBC. The potential losers? Your current bank, which may see its interchange income shrink.
While the jury is still out, banks will be taking a hard look at this move. More than likely they will be ramping up the features and rewards of their current debit card program in an effort to keep their cards in your wallets.
