Will the Durbin Amendment Kill Decoupled Debit Cards?

Decoupled debit cards are a relatively recent financial innovation, but because of the Durbin Amendment, these consumer-friendly products are on their way out. Normally, a consumer has a debit card linked to his or her checking account–a third party can handle payments processing, “decoupling” the debit card from the corresponding bank account.

For example, a customer can have a checking account at Bank X that doesn’t have a debit rewards program. Another payments company, Y Payments, can insert itself between the customer and Bank X. When the customer pays for a transaction, Y Payments pays the merchant and pockets the debit interchange fee.

Bank X then deducts the funds from the customer’s checking account and pays Y Payments over the ACH network. Y Payments makes a profit off of interchange revenue, and uses some of the revenue to give the customer better debit rewards.

However, a major player in the decoupled debit card industry recently announced that it would wind down its operations. San Mateo, California-based Tempo Payments had partnered with HSBC, Capital One, Discover and others to offer branded debit cards that earned rewards with different retailers and nonprofits, from CVS to Greenpeace.

Many retailers benefit from the ability to issue debit cards, which allowed them to increase customer loyalty while assuaging worries about the line of credit associated with store credit cards. But Tempo, the frontrunner in decoupled debit cards, is closing its doors.

Decoupled Debit Initially Met with Resistance, Reservations

When decoupled debit cards took off in 2008, banks were less than thrilled. They worried third-party providers would intercept their interchange fees, while still leaving them liable for fraud.

Industry publication Digital Transactions called the cards “controversial,” while American Banker noted the products “may not be a particularly welcome innovation from banks’ point of view, since it reduces their transaction fees.”

However, they noted, it would likely be a net gain for the consumer as banks step up their rewards programs to compete with third parties. Community banks would probably face severe pressure to plump their rewards even though they lacked the means to do so, fretted bankers.

Two banks eagerly dove into the decoupled debit market. Capital One hoped to start a program, but it never survived the early stages. “[Decoupled debit cards] were initiated as pilot programs and they’ve run their course. That’s it,” said a Capital One spokeswoman.

The payments industry was abuzz with rumors that CapOne bowed to pressure from banks angry about the threat to their interchange revenue. The other bank, HSBC, was an early investor in Tempo. Their early eagerness faded, and they were replaced by a First Bank Discover card.

After Up-and-Down Years, Tempo Bows Out

Tempo Payments, formerly Debitman, spent its roughly eight years in existence growing in fits and starts. Seemingly every time a heavyweight bank came on board, mere months would pass before the institution decided the endeavor was unprofitable.

Tempo only began to hit its stride in 2008. Financial regulation dealt the killing blow: The Durbin Amendment limited swipe fees to around 24 cents a transaction, down from 44. While the amendment exempts institutions with assets under $10 billion from the cap, the bill contains an exemption within the exemption for decoupled debit cards.

No matter the size of the issuer, decoupled debit would be subject to the swipe fee cap. “An issuer of decoupled debit cards [such as Tempo]…would not qualify for the exemption … regardless of the issuer’s [such as HSBC’s] asset size,” emphasized the Federal Reserve.

“We’re a casualty of the Durbin amendment,” said Tempo CEO Mike Grossman. “Even though the bank with which we work has less than $10 billion in assets, we’re not able to take advantage of the exemption that’s in the Durbin amendment.”

Banks, though former critics of decoupled debit, were quick to decry Tempo’s exit as the latest casualty of the Durbin Amendment. A recent article in American Banker began, “First it was free checking. Then it was spending rewards. Are decoupled-debit cards the next casualty of the Durbin amendment?”

“When you impose price controls, a lot of things happen,” quipped Grossman.

Decoupled Debit Soldiers On

“Decoupled debit is not dead,” counters Joe Randazza, CEO of National Payment Card Association. Another third-party intermediary between a bank checking account and a consumer’s debit card, NPCA sees swipe fee reform as an opportunity. On average, they charge merchants around 15 cents per transaction, well below even the post-reform debit swipe fee.

Because of the Durbin Amendment, credit cards are vastly more profitable to banks. The institutions are employing nearly every tactic they can to lure customers to credit cards, rolling out unheard-of signup bonus along the lines of the Southwest Airlines credit card 2 free roundtrip flight offer.

Randazza sees this as an opportunity. Merchants want to pull customers toward debit just as much as banks want to push them toward credit, so retailers may be more eager to offer branded debit cards. NPCA is already partnered with a host of merchants, from Jiffy Mart to Murphy USA.

Randazza is confident that his company can weather, and even profit from, financial regulation. “Since 2004, we really have been swipe-fee reform,” he says. “We’ve always been the 15-cent transaction model and we’re able to make a fair and reasonable profit.”