Decoupled Debit Goes Mobile As Closed-Loop Card Processor Pushes Wallets

National Payment Card Association is out to prove the obituaries for decoupled debit were, as the saying goes, exaggerated. Not only does the company have 4,000 gas stations accepting its PIN-based debit cards, it expects a major petroleum vendor will begin accepting debit transactions through its platform on a mobile wallet within three to four months, according to Joseph R. Randazza, chief executive and president of the 8-year-old, 17-person firm.

That could be just the beginning of NPCA’s migration to mobile. “We have been selected by several petroleum merchants to be their mobile-wallet provider,” Randazza tells Digital Transactions News. “We’ll announce them in the next several months.”

The Coconut Creek, Fla.-based company’s mobile venture is based on a patent it was awarded last week that covers the funding of a mobile wallet from a U.S. checking account via the automated clearing house network. NPCA’s cards, which double as loyalty and rewards vehicles, link to the cardholder’s checking account via the low-cost ACH system. They are decoupled in the sense that the merchant issuer is not the same entity that holds the cardholder’s funds. About 200,000 consumers carry the cards, which are mostly sponsored by petroleum marketers, though grocery stores will be going live on the platform soon, Randazza says. “We live and die by decoupled debit,” he says.

NPCA charges the merchant a flat 15-cent fee per transaction and offers guaranteed payment with next-day settlement. Merchants are responsible for funding rewards. There is also an upfront, one-time authentication fee to the merchant of 44 cents per consumer enrollment. By contrast, a Federal Reserve study in 2010 found the average debit interchange rate for a bank-issued card, before markup by the acquirer, to be 44 cents per transaction.

The Fed’s rules implementing the Durbin Amendment’s debit-interchange caps were seen as a death knell for decoupled debit. Indeed, at least one firm, Tempo Payments, was shuttered because it saw the new law cutting its revenues in half. The amendment appeared to wipe out much of decoupled debit’s pricing advantage for merchants compared to conventional debit cards.

But the Fed very explicitly made its rules apply only to decoupled cards that rely at least in part on bank networks like Visa and MasterCard. Most of NPCA’s cards are closed-loop vehicles, though some transactions route through the Pulse EFT network, invoking the pricing caps. Randazza says the amendment may have helped NPCA by pushing banks to promote higher-cost cards to recoup lost interchange income, making NPCA’s pricing look even more appealing to merchants. “I might be the only guy who sent Dick Durbin a Christmas card,” jokes Randazza, referring to Richard Durbin, the Illinois senator who lent his name to the Dodd-Frank Act amendment containing the now famous debit card restrictions.

With the mobile venture, merchants will be able to offer the NPCA transaction capability as a funding option on a digital-wallet app and offer inducements to customers to adopt the option. Merchants will also garner data on cardholder visits and purchases, along with e-mail addresses and phone numbers for promotions. Merchants adopting the wallet with ACH funding will gain a “first-to-market” advantage, Randazza says. That, he predicts, will lead to the wallet becoming a “necessity” for merchants that don’t want to lose business and also want to cut transaction costs.

Observers like the idea of including an ACH option in a mobile wallet, but aren’t so sure widespread merchant adoption will follow as quickly as Randazza projects. “It’s a step in the right direction,” notes Beth Robertson, director of payments research at Javelin Strategy & Research, Pleasanton, Calif. Grocery and gasoline retailers, she says, will be especially interested in controlling transaction costs because of thin margins. But “they may not be ready” for a mobile wallet, she argues.

“Wallets will grow,” adds Rick Oglesby, a senior analyst at Aite Group LLC who follows mobile payments. “I do think merchants will be compelled to accept mobile wallets, but that’s 24 months out.” At the same time, he says, “I don’t think cards are going away in my lifetime.”