The Odd Decouple: Credit Unions Urged to Be Aware of Threat to Fee Income, Relationships

Credit Union Journal
December 31, 2007 | COMMENTS

Credit unions are being alerted to what some are suggesting could be a significant threat to their debit card portfolios.

At issue is the emergence of "decoupled" debit cards in which one institution issues a debit card that can link to a deposit account at another institution, taking with it not just additional marketing opportunities and relationships but the interchange income, as well, even though they will still incur certain fees.

Capital One, one of the most aggressive credit card issuers in the country as anyone with a TV or mailbox knows, is already in the market with one such decoupled card. Now at least two analysts are cautioning credit unions to be aware their members may be using another issuer's plastic to reach into their own credit union accounts.

Aite Group, a research firm, has released a 13-page report titled "The Next Big Thing in Cards: Co-Branded Decoupled Debit Cards," in which researcher Gwenn Bezard called the product offering "a direct assault against incumbent deposit financial institutions that control the DDA relationship, including Bank of America, Citibank, US Bank, and Wachovia. The threat could be significant for those institutions that have come to rely heavily on fee income that is generated by punitive charges such as non-sufficient funds (NSF) fees."

Ripple Effects

Bezard suggested that although it could take a while for the real impact of decoupling to be felt, the long-term implications aren't to be sloughed off. "We believe that Capital One's breakthrough product could have ripple effects on the credit card and debit card issuing and payment processing industry," he wrote. "Although the multi-year nature of the co-brand contracts that retailers have with their partner institutions may limit Capital One's own ability to rapidly crack into this market, we believe that the long-term prospects of co-branded decoupled debit cards are very strong."

To sweeten the deal for consumers, Bezard told Credit Union Journal that Capital One is aggressively pricing its debit rewards structure. Bezard noted that credit card rewards average 64 cents for every $100 spent, while debit card rewards generally hover around 10 cents. The Capital One MasterCard is expected to offer from 40 to 60 cents, fully four or five times higher than a normal debit card, he said.

"Debit has always been bundled with a checking account and now, bang," he said. "Consumers like rewards: most credit cards are rewards cards."

While industry experts agree that Capital One's move is a "direct assault," they are cautioning against defensive responses such as blocking accounts from ACH transfers or assessing small fees to make up for loss of transaction revenue. "If you want to lose your customers, you can assess fees. But, what good would it do?" Bezard asked, adding that one option might be for credit unions to partner with Capital One.

In Clearwater, Florida, Cassie Ricks, communications manager for Card Services for Credit Union (CSCU), said her company is strongly recommending credit unions add rewards to their debit card programs to keep their members from even considering a new card. Ricks said the main problem for credit unions is that decoupled cards will deprive them of transaction fees while still having to pay ACH fees.

"The best way to combat the issue is with rewards," Ricks said. "Obviously charging (fees) is not the credit union way. In the end it's going to be cheaper. It's coming and it's going to affect your members. It is your account and you should get the revenue."

Ricks pointed to a recent Visa study that found 42% of consumers would change their accounts if they were to get debit card rewards. "So if you just incent them a little bit, they already have that relationship with you," she said.

In San Antonio , Randolph Brooks Federal Credit Union isn't waiting to see how any of its 255,000 members respond to such offers. The $2.6-billion credit union took CSCU's advice to heart when it launched its "Freedom Check Card" that pays out 10 cents per transaction whether by a PIN or signature purchase.

Randolph Brooks Federal Credit Union's vice president of card services Sally Pyrc said that since launch of the debit rewards program in February, members have embraced it. "We knew that Capital One was going in that direction. We could see the writing on the wall. We had to do something," Pyrc said.

Go Shopping, Get Paid

Marketing vice president Tracy Hennigan said the card's theme of "Go shopping, get paid" is targeted at the 18- to 34-year-old segment of its membership. Debit card users get free checking, free cards, plus the 10-cent per transaction payout. Members can go online to watch their cash rewards accrue, with funds available in January 2008. Pyrc and Hennigan said the campaign has been so successful that it's become well known in the community. Pyrc told Credit Union Journal that when she attends a night-time class she's enrolled in, her classmates cheerfully tell her how much money they're set to receive.

Created In House

Pyrc said RBFCU's debit rewards program was created in house, and that the only additional budget needed was for the marketing support. Randolph Brooks will analyze the full impact of the program in 2008, but already has said it will continue the rewards next year.

In McLean, Virginia, Capital One spokesperson Pam Girardo noted the company has been diversifying its product line for years, and the decoupled card program was part of a larger strategy to reward consumers while also expanding nationwide without being forced to put a retail outlet on every street corner.

"We're looking to deepen our relationship with our customers. We were really just looking for a way to give consumers rewards where they didn't have them before," she said.

This article originally appeared at www.cujournal.com and is reprinted with permission.