How do decoupled debit cards work?
Decoupled debit cards differ from standard cards because they aren't issued by regular banks and credit unions, and they use the ACH system to make payments. Retailers, charities, and companies can create their own cards that make payments from checking accounts in order to cut processing costs or build affinity among members. Small town retailers may even create associations that donate a portion of the fees (which are lower than standard interchange costs) to designated nonprofits.
One early experiment in decoupled cards was done between Capital One and a supermarket chain. There was a rewards program associated with the card, which was branded with MasterCard. Retailers can associate cards with customer checking accounts, and can issue the cards at their discretion. In reality, the entire system is more similar to e-checks than card processing, given that the ACH system is used.
Mobile payment apps are seen as a new channel for decoupled debit payments, since the ability to deduct money directly from a checking account by using a smartphone app has appeal to many stores that may not want to pay added fees imposed by banks and middlemen. A direct Automated Clearing House relationship means that some debit cards would not need Visa, MasterCard, AMEX, or Discover logos to process the transaction, so the associated fees and markups would disappear as well. This would once again make debit card rewards programs profitable, after their disappearance following implementation of financial reforms in the wake of the 2008 financial crisis. Part of this is the reduced swipe fee cost. Advantages of the decoupled business model also include the fact that retailers get a lot more information about their customers, and can offer conveniences like savings on fuel or groceries. All of the information gathered can be sold, or brokered, and if you think this is an invasion of privacy then you are probably not aware that major banks and processors are already doing this.
Limitations of Decoupling
Some limitations to the the decoupled card scenario involve overdrafts and regulatatory questions. The ACH system is not as instantaneous as the standard bank-related transaction verification process, so there is a greater potential for overdrafts to happen on these cards. From a regulatory standpoint, the Durbin Amendment put a dent in decoupled cards in 2011, but it is still possible to stay within regulations and maintain a profitable card presence with this model.