Mercator Blog

Merchants Looking to Tie Loyalty to a Payment Product May Find a Solution in Decoupled Debit
Date: March 8, 2017
Sarah Grotta
Director, Debit and Alternative Products Advisory Service
In the history of card payments, merchants have never before had as much control over the way they accept payments, the way they manage cardholder verification, and the way transactions are routed. The rise of interchange expense and processing costs, major data breaches, the challenging migration to the EMV security standard, and the evolving roles of online and mobile commerce have educated merchants to the inner workings of payments and the role that payments acceptance plays in their business. Merchants have parlayed their expertise into an informed and organized industry force that has brought about some significant legal and regulatory wins that have provided the merchant industry with greater payment choices and improved pricing.

With the newfound operational freedoms and lower interchange rates, merchants have been emboldened and have become a more cohesive industry when voicing concern about issues that are important to them. Part of the message that merchants are expressing is greater independence from the card networks. Merchants are dependent on the card networks for the majority of their payments, but they are sometimes at odds with the direction and the rules implemented by the global networks. The migration to the EMV standard promoted by the global networks with a liability exposure attached for merchants who chose not to comply is a one such example. Merchants in the U.S. collectively spent billions of dollars to upgrade to EMV, all while voicing concerns that the objective of a more secure transaction environment would have been better served through other means such as end-to-end encryption and enhanced authentication.

And then there’s the money. Merchants have been vocal about the amount that they pay to the networks, acquirers, and processors even after the implementation of the debit card interchange caps. Merchant Advisory Group, a merchant advocacy organization, contends that card fees or swipe fees are the second greatest expense after labor costs for many businesses. This was the impetus for Chase Commerce Solution, which licenses Visa’s back-end processing capability but doesn’t incur network transaction fees. This allows Chase to have greater control over pricing to its merchants, and where transactions occur between a Chase Bank cardholder and a Chase merchant, circumvent the networks altogether.

Decoupled debit is another product solution that allows merchants to take purchase transactions outside the boundaries of the card networks and use ACH to debit consumers’ checking accounts for their purchases. This reduces processing costs substantially, and the cost savings can be used to fund rewards to customers and attract new business. For some retailers the incremental business that the rewards piece offers is greater than the transaction processing savings. Decoupled debit has been in existence for over a decade but in light of the current environment of better educated merchants, a sharpened focused on fostering customer loyalty in a difficult retail environment, competitive pressure to add rewards to developing mobile solutions, and a “mad as Hell” attitude towards the global card networks, decoupled debit is positioned for a renaissance.

Learm more in this research on decoupled debit, its benefits for merchants, and the threat it poses to bank-based debit.