Some Thoughts re: Capital One's Decoupled Debit Card

Capital(ism) One (on One)

© Broox W. Peterson 2007

Capital One’s recent announcement that it would roll out a co-branded/affinity debit card that would accumulate awards from spending and could be settled from any demand deposit account at any institution has raised some eyebrows – and some new questions. What can or should the financial institutions holding these accounts do about this? Are there any potential legal implications?

There are several possible responses by account holding institutions. They could:

• Charge fees for these debits to the account holder (which would no doubt be an endearing move!).
• Offer a more attractive rewards program than Capital One’s, although this would not compete with Capital One itself since Capital One does not have many current depository accounts, hence its program. Also, Capital One claims “patent pending” for this concept - although, since Visa banned these kinds of products back in the 80’s, this may be a fairly narrow patent if it issues, because the basic idea is not novel.
• Prohibit these debits. ACH-blocked accounts are common practice - particularly for business accounts, but there is a difference of legal opinion as to whether only certain debits can be blocked rather than all debits. The issue revolves around whether a valid Return Reason Code would be required for returning only selected debits.
• Place transaction limits on these types of debits (but how to enforce, see above)
• Petition regulators to ban the practice on safety and soundness grounds - for instance, on the basis of bifurcation of authorization and settlement control processes. However, the risk of insufficient funds is on Capital One, not the depository institution, and, presumably, they have figured how to manage this risk.
• Ask NACHA to place restrictions, such as preventing aggregation of small transactions. But, of course, there are no bad ACH transactions to NACHA (or to the ACH side of a bank for that matter).
• Ask the card associations to ban these programs, or tinker with interchange fees to compensate the account-holding institution.

Are there any potential legal rationales for discriminatory treatment of these debits by account-holding institutions? Perhaps:

• Some believe that depository institutions have the right to reject any item (but see above about differences of legal opinion on this).
• Extensive ACH debits involving a third party payment program like this render the account relationship one with different economics requiring different pricing? (OK, but would probably justify only fee to recover increased cost).
• These programs free-ride on the depository bank's burden of maintaining deposit accounts (systems, exceptions, providing customer service, etc.) (OK, but again, this would probably support cost-recovery fee at most)
• Funneling of large volume of transactions through one preauthorized debit arrangement (instead of monthly debit) could affect customer goodwill towards depository institution. Depositors will likely be confused and upset if a transaction does not settle due to lack of authorization against the account balance at time of transaction and will probably call the depository institution first. Since the debit to the account would have been rejected, customer service representatives will likely not have any information to assist with. This would be another reason for the depositor to dislike their bank, and could be a legal rationale for some action.

Is any of this realistic or likely to happen?

• The depositors who will be attracted to Capital One’s program are probably some of the best customers of the depository institution.
• The depository institution risks losing its depositor to another institution if it discriminates against these debits, unless it can offer an equally attractive alternative. On balance, it is difficult to see why a depository institution would risk losing its depositor and potentially other relationships by discriminating in some way against these debits, although (with all affection, I’m just a lawyer.

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