Capital One Launches Decoupled Debit Cards for Merchants

Capital One's strategy begins with their long-standing expertise in credit - enabling "full spectrum" consumer credit approvals for co-brand and private label credit cards. The objective here - significant from a merchant's perspective who doesn’t want to disappoint customers - is striving for "no declines" on card issuance. Merchants want to find a way to provide a co-brand card to every customer. But since not even Capital One can approve every credit applicant, its new co-brand suite also includes debit and prepaid products – creating what they are calling a “Merchant Card Trifecta™”.

Recognizing the significant shift over the last few years from cash and check to debit spending by many consumers, Capital One's new co-brand debit cards enable a consumer to have both credit and debit cards from the same co-brand merchant and to pool rewards across the two Capital One products - with a consumer being rewarded for purchase activity on both cards in a single loyalty account. Merchant customers who are declined for or don’t want credit can be offered a standalone co-brand debit card earning the same debit rewards.

The patent-pending co-brand debit approach is quite unique and potentially disruptive, as it is based on what Capital One refers to as a "Decoupled Debit™" card strategy. Capital One enables merchants to issue co-brand debit cards that are linked to a consumer's existing bank DDA account - there's no need for the consumer to change their existing bank checking relationship. As with other emerging payment systems riding the ACH “rails”, funds will be drawn from the consumer's DDA via ACH with Capital One handling all of the risk management associated with ensuring funds are available for debit purchases on these cards. These cards are MasterCard branded - usable globally at all MasterCard acceptance locations, Maestro/Cirrus accepting ATMs and come with MasterCard’s Zero Liability protection against unauthorized or fraudulent purchases.

The “decoupled” and open-loop capabilities distinguish Capital One’s co-brand debit programs from both closed-loop “ACH cards” as well as from “banked” co-brand debit cards popular with airlines but requiring cardholders to open a checking account with the issuing bank. The former’s adoption and usage typically suffers as merchants must completely fund the consumer loyalty value proposition themselves due to the lack of funding that a co-brand issuing bank typically shares on revenue from out-of-store purchases. The latter have reportedly found limited success both because the checking account relationship is amongst the stickiest of all products to motivate a consumer to move and because no U.S. bank has a truly national retail banking footprint.

With one of these new Capital One merchant co-brand debit cards in hand, consumers can earn rewards on every debit purchase - anywhere they shop. The consumer earns extra rewards for purchases from the co- brand merchant. The co-brand partner wins because the rewards earned are redeemable only through that merchant’s loyalty program.

Having quietly tested the cards via direct marketing with their own credit card customers earlier in the year, Capital One says it now has its first co-brand debit pilot in market with in-store kiosk, internet and phone-based enrollment. It says it plans for a second merchant client to launch its pilot this summer and for an affinity client to launch in the third quarter.

Capital One believes the loyalty/rewards funding it offers merchant clients is significantly richer for consumers than that found on other debit rewards programs today – which could lead consumers to shift purchase transactions from their traditional debit cards onto this new co-branded card. If they are correct, it will be fascinating to watch the large retail banks react as the debit card market as they know it is about to be redefined.

For more information, contact Capital One Merchant Client Services via email at co-brandmailbox@capitalone.com.