Decoupled debit – Threat to credit unions, bonus for merchants
Merchants are always looking to reduce the cost of payment acceptance without inconveniencing shoppers. A few have found a solution in decoupled debit cards, which offer a significantly cheaper alternative for the merchant since payment bypasses the traditional payment rails, and instead uses ACH (the automated clearing house) for payment from any of the shopper’s bank accounts. Whereas a merchant would typically pay its processor a 3% fee for the cost of processing a bank’s card, the fee to a third-party provider to handle the ACH is 0.8% and is capped at $5 and larger merchants can get even lower rates.
A decoupled debit card is “issued” by a department store or gas station for use only at the particular merchant and is not connected to (that is, decoupled from) any specific credit union or bank. Target, by far the biggest example of decouple debit cards with their successful REDcard, also found two other major benefits, loyalty and increased spend. Target offers shoppers an instant 5% cash back, which keeps Target shoppers coming back again and again. More importantly, Target found that REDcard shoppers increased their shopping carts by 50%, according to Sarah Grotta, director of debit advisory at Mercator. Spend on REDcard contributes over $8.9 billion in volume annually, accounting for 12.1 percent of all Target sales.
These merchant-specific decoupled cards, which are also known as closed-loop debit, or private label ACH cards (because they use ACH to draw from the consumer’s account), have found their way into other verticals as well, primarily gas stations. Cumberland Farms rewards users of its decoupled debit program with a 10-cent per gallon discount. The loyalty of its users has been proven over the span of 4 years during which $2 billion has been processed over Cumberland’s decoupled debit program, returning $75 Million in rewards back to its customers. Using the CITGO Debit Plus Card grants Citgo customers an instant, 1% discount on all purchases—both at the pump and in-store. The Speedy Rewards Pay Card from Speedway works like a typical rewards program, with points earned for purchases in-store or for fuel, and rewards can be redeemed for merchandise or in-store discounts – this at a time when many debit card issuers are dropping rewards on debit.
There’s another cost savings benefit to merchants for getting more consumers to use their closed-loop debit cards – chargebacks. Since these cards settle via ACH instead of needing an authorization like credit or debit cards, the transactions are not reversible. While there are no chargebacks, most merchants do offer a dispute process.
Decoupled debit represents a threat to credit union and bank debit issuers, replacing interchange income from what would be a debit or PIN transaction with an ACH transaction that costs the credit union or bank to process. If decoupled debit were to gain a foothold in grocery stores and other high-volume categories, it could have a serious impact on debit income for debit card issuers. For now, decoupled debit is not exhibiting rapid growth and has found success only in a few niche categories, but remains an area to watch.
