Abstract
NEW RESEARCH REPORT BY MERCATOR ADVISORY GROUP
This report evaluates the recent emergence of this new and possibly disruptive
technology in the financial services industry, decoupled debit.
Decoupled debit is an alternative based ACH debit card solution that utilizes
two existing systems that are well defined in the financial services industry
but were not designed to work in combination with each other, the ACH network
and the branded payment networks such as MasterCard, Visa, NYCE, etc..
Intermediate service providers use the "man in the middle" approach to switch
the consumer from their bank issued debit card to a debit card issued by the
intermediate service provider effectively decoupling the consumer DDA from the
FI debit card. The consumer' s card transaction is performed and settled
online over the branded payment networks between the merchant and the
intermediate service provider but is settled with the consumer' s FI using the
offline ACH network.
The "decoupling" of the consumer funding DDA and traditional FI card issuer
allows the intermediate service provider to capture the interchange income
from the card transactions which, in the traditional model, would normally go
to the FI. A decoupled environment is shown graphically in the attached
figure.
This report is 29 pages long and contains 8 exhibits.
The decoupling of the card issuance and the account holder does not come
without added risk. New risks such as account validation, which have not been
inherent in the aforementioned payment systems, must be managed with a whole
new approach. The decoupled debit platform also requires a great deal of
heavy lifting to implement. But thanks to Tempo Payments, who has recently
unbundled their proprietary decoupled debit platform, there may be more
players in the market sooner than later.
Patty Hayward, Senior Analyst of the Debit Advisory Service for
Mercator Advisory Group and the author of the report recognizes the impact
decoupled debit may have in the industry: "The fear of the unknown is
palpable in the financial services industry with the uncertainty of how the
decoupled debit platform will affect the competitive balance of interchange
and consumer loyalty within today' s traditional debit card model. There are
two options FI' s can pursue to protect themselves from this potential
disruptive technology."
The report reviews a number of decoupled debit products that are available in
the market today which have traditionally focused on the merchant, reducing
interchange costs and enhancing consumer rewards. The decoupled debit concept
is not new to this market; and it hasn' t been accepted because of inherent
challenges in the system. Consumer adoption and data collection are two key
elements to any product' s success and has been a difficult problem to overcome
in the decoupled debit products to date. Unlike the Pay-by-Touch or Tempo
Payments products the Capital One and PayPal' s MasterCard branded decoupled
debit products provide a more consumer-centric approach to the concept with
broader merchant acceptance. In addition, Capital One adds higher than usual
rewards for a debit card program.
Highlights of the report include:
- An examination of the decoupled debit process from transaction origination
through settlement.
- How the transaction flow of the traditional debit product differs from the
new decoupled model.
- An overview of the advantages and challenges related to decoupled debit.
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