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All other things being equal, it seems to me that the merchants will want to move to payment solutions that go direct to the customer’s payment account. This mean incumbents have to innovate and deliver genuine value-added services to stay in the loop.

There was a discussion about decoupled debit at a meeting I was in last week. The context is not germane to this post, but I referred someone to a super piece about Target’s decoupled debit payment scheme that I’d seen in American Banker. It makes the central point that decoupled debit isn’t only about the cost to the retailer but about the overall purchasing experience, including offers and rewards. If it was only about costs, the decoupled debit proposition would be under some pressure.

Store-branded debit cards were supposed to die after price caps on swipe fees took effect in 2011, since one of its major advantages was that it allowed retailers to avoid paying the hefty interchange fees that banks were charging. Those fees have fallen sharply over the last two years. Yet Minneapolis-based Target is showing that under the right circumstances, store-branded debit cards can still work for retailers.

[From Target Card Tests Future of Store-Branded Debit – American Banker Article]

Target are not the only people who think that this is true, although in an odd way they might be a key reason for stimulating the sector, and not because of their (considerable) success in persuading customers to use the Target Red product but because of their rather famous Target data breach. Remember, when the Target data began sloshing through the interweb tubes, a clear media message was that scheme cardholders were vulnerable, but Target’s own cardholders were not.

National Payment Card Association’s merchant-branded decoupled debit cards may be part of an industry-wide solution to preventing the next Target breach.

[From 2014 – Will The Target Breach Kill Branded Debit Cards? | PYMNTS.com]

I was not joking about the success of the product, by the way. It has been incredibly successful. It’s something like 20% of the volume already in the early-adopting stores and set for further growth.

Consumers who have a Target debit card increase their spending by an average of 52%, according to a presentation the company made last year. In the second quarter of this year, sales on the debit cards surpassed sales on Target’s credit cards for the first time, according to the company..

[From Target Card Tests Future of Store-Branded Debit – American Banker Article]

Now, I suspect that this success has not gone unnoticed in a number of boardrooms, both in financial institutions and retailers.

some experts believe that store-branded debit cards will be part of the strategy employed by the Merchant Customer Exchange, or MCX, the fledgling consortium of retail chains that is looking to challenge the traditional electronic payments system.

[From Target Card Tests Future of Store-Branded Debit – American Banker Article]

The mention of MCX is interesting. Obviously there are all sorts of different models that MCX could adopt for its nascent payment scheme, but many observers focus on the direct-to-bank debit solution as the most likely nudge the mass market.

The MCX white knight, many think, is store-branded debit products, also known as decoupled debit.

[From Commentary – MCX and the Giant Payments Networks: A Payments Fairy Tale | PYMNTS.com]

I saw Dodd Roberts (from MCX) give an update on the scheme down in Melbourne recently, and he identified five drivers for MCX from the retail community.

  • Customer experience.
  • Consistency of solution.
  • Security.
  • Data.
  • Flexibility.

He also talked specifically about payments as critical success factor, and about how to address (as they see it) the “payments imbalance” and the “efficiencies for issuers and merchants”, saying that  MCX are going to deliver a mobile commerce app that will deliver a better shopping experience on a secure platform that safeguards “stakeholders’ interests” and implements a “balanced, competitive payments ecosystem”.

We continue to believe the funding sources for MCX’s wallet are a combination of private-label credit, decoupled debit, and stored value (i.e., gift cards), rather than traditional (credit card) accounts… Merchants seem hopeful that the ACH system will move closer to real-time authorization, but acknowledged that scenario is likely a good 3-4 years away.

[From Retailers’ Mobile Wallet Seen Delayed To 2015; Apple Boost? – Investors.com]

Now, the payment incumbents, such as Visa and MasterCard, are not stupid people — in fact they are very clever people — and they can read the newspapers just as well as me. There will be a new cost floor emerging as the merchants use mobile phones, apps and customer experience to drive consumers to choose ACH over alternatives (“Pay with your Tesco and get double points” is an easy proposition for them and the transaction is indistinguishable from a normal debit transaction tot he average consumer). Therefore, the advantages of using scheme credit and debit will have to come from value-added services that deliver something to consumers and merchants alike, otherwise they will be nudged out of the loop.

Unless… Here’s a thought experiment. What if the schemes decided to disrupt themselves? What if the schemes developed their own decoupled debit proposition that used “hard” tokenisation and the internet instead of plastic cards, chips and proprietary networks? I mean, I know Christensen is somewhat unfashionable this week, but he has point doesn’t he? They could call it super debit or turbo debit or something. Couldn’t they?

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