NACHA Rule Targeted at Cap One’s Decoupled Debit Card, Sources Say

A clarification of a rule regarding transaction aggregation, announced last week by NACHA, was driven chiefly by banks that intended to hamper a new PIN debit card being introduced by Capital One Financial Corp., sources tell Digital Transactions News. The new card, which came to light late this spring (Digital Transactions News, June 7), has stirred controversy among banks because it allows McLean, Va.-based Cap One to market debit cards to customers of other banks in much the same manner as it and other banks market credit cards. Because the product relies on the automated clearing house for settlement, cardholders do not have to have an account with Cap One. But now, by preventing issuers of ACH-based debit cards from bundling transactions for entry into the ACH network, the NACHA rule clarification raises costs for Cap One and might also create operational headaches for the issuer as it is forced to reprogram systems that had been designed for aggregation, sources say. These sources add the effort to get the rule clarification through NACHA stemmed from banks that want to protect demand-deposit relationships with customers. None of the sources who spoke to Digital Transactions News would name the banks behind the effort. “It's banks getting together to try to shut [the new card] down,” says Gwenn Bezard, research director at Aite Group LLC, Boston. “It won't shut it down, but it adds costs.” NACHA, the Herndon, Va.-based organization that writes the rules for the ACH, last week announced that transactions that require settlement to payees within 14 days may not be aggregated (Digital Transactions News, Nov. 28). This affects primarily transactions linked to point-of-sale debit cards that are PIN-protected but rely on the ACH for settlement. Cap One is far from the only issuer of such cards. They have been issued for years by supermarkets as proprietary cards, and over the past few years a San Mateo, Calif.-based network called Tempo Payments Inc. has issued ACH-based PIN debit cards on behalf of merchants. Tempo says the rule has no effect on its operations as it has never aggregated transactions. Though sources say aggregation has been part of Cap One's plan for its debit product?often referred to as a “decoupled” debit card because it severs the traditional tie between the issuer and the demand-deposit account backing the card?it remains unclear to what extent the financial-services company has been using the practice. A spokesperson for the company refuses to comment on how Cap One is processing transactions, calling the matter “proprietary.” She adds, however, that “we intend to comply with [NACHA's] rules.” It's also unclear how many cards the company has issued so far, and how many transactions it has processed. “There's no significant volume going on yet,” says Aite's Bezard. Losing the ability to aggregate would boost transaction costs for Cap One, as it would have to pay ACH origination fees on each discrete transaction performed by a cardholder in the course of a day rather than for bundles of payments from the same cardholder. These fees run from a quarter of a cent to three-tenths of a cent per item, so the immediate impact on small volumes may not be significant. But the impact could magnify as volumes build. “It adds up,” says Aite's Bezard. Another source close to the matter says the rule interpretation will also force Cap One to reengineer at least some processes that had been designed to aggregate debit transactions. Officials at NACHA deny the rule clarification was aimed at Cap One. “This will have an impact on Capital One's product,” says Elliott C. McEntee, NACHA's chief executive. “They wanted to aggregate.” But he tells Digital Transactions News the rule clarification was broadly conceived and could have an impact on several entities. “This interpretation doesn't just affect Capital One,” he says. “In our discussions, Cap One obviously was brought up, but we looked at [the aggregation issue] for any debit card that would be used” on the ACH network. The impetus for clarifying the rule came from an inquiry from a bank not on NACHA's board that had been receiving aggregated transactions and wanted to know whether they were permitted and under what code they should be entered, McEntee says. The decision to disallow aggregation within the 14-day window arose from concerns that originating banks or other consolidators following the practice were not collecting merchant names and other specific information for each transaction that would be necessary to manage network risk. McEntee adds that the discussions with NACHA member banks did not include talking about Cap One's card as a competitive threat to banks. NACHA members and staff, he says, are mindful of the antitrust implications that could stem from such discussions. Indeed, Aite's Bezard says the move by banks against Cap One is ill-advised legally. “I don't think they should push that button too far,” he says. “They are taking a chance of an antitrust suit.”