Decoupled Debit Could Have Prospects for New Growth As Merchants Take Another Look

Decoupled debit programs may yet yield rewards for merchants, especially as they 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 Mercator Advisory Group Inc.

Decoupled debit is not a new concept. Companies such as Capital One once offered, beginning in 2007, a decoupled debit card that consumers could associate with a checking account held at other financial institutions. Target Corp.’s RedCard soldiers on as a decoupled debit card and 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 more organizations like the appeal of decoupled debit, suggests Sarah Grotta, director of the debit advisory service at Maynard, Mass.-based Mercator. There are two major reasons for that, she says.

“There is real interest among merchants to circumvent the [payments] networks when they can,” Grotta tells Digital Transactions News.  “They’re looking for opportunities for potential costs savings.”

Decoupled debit uses the automated clearing house network, which typically is less expensive than using 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 enticement of decoupled debit is the prospect of engendering loyalty among consumers using such a program, she says. Target, she 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,” Grotta 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, and said, as of July, 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 that are accustomed to how payment cards operate, with one issue being that 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, she 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 debit 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.