What if a non-bank issued a debit card that could be used with any bank's checking account?

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June 12, 2007:   The new MasterCard debit card from Capital One Financial Corp has the potential to vault the financial-services company into the top ranks of debit card issuers and help MasterCard Worldwide swipe debit market share from Visa USA.

The Capital One Rewards Debit Card, which McLean, Va.-based Capital One is co-branding with merchants, is not linked to any accounts held by Capital One or to Hibernia Bank, which Capital One acquired two years ago. Instead, Capital One will issue the card to consumers across the country and then debit their checking accounts through the automated clearing house.

By severing the historical tie between debit cards and demand-deposit accounts, Capital One can market the card to virtually anyone with a checking account. "It's a way to get into debit cards with a national footprint," says a Cap One spokesperson.

Gwenn Bezard, research director at Aite Group LLC, Boston, sees the product as a thrust by both the company and MasterCard to win dominant positions in the fast-growing debit market. A research report Bezard issued this week was the first public airing of the new, so-called decoupled debit card, which he says is "the biggest thing I've seen in the [payments] business since PayPal in 2000. It's going to be huge."

While other companies have created ACH-based debit products, many of them co-issued with merchants, "the huge difference here is MasterCard," Bezard says. "MasterCard is no longer an association. It's a publicly traded company. They have a small market share [in debit] and want to take on Visa."

Though banks may see the new card as a threat, MasterCard's public ownership leaves it less influenced by the banks that used to control it and still control Visa, Bezard says. MasterCard claims about 30% of the U.S. market for signature-based debit. The new Capital One card can be used as either a PIN-secured or signature card.

The Capital One spokesperson says "more than one" merchant, including a grocery chain, are currently engaged in issuing the card, with "more in the pipeline." She refuses to give any names, but Bezard speculate that the company will want to partner with national chains to gain maximum marketing exposure.

A big selling point to consumers will be the card's rich rewards, which Bezard says are at least double the value offered by banks on conventional signature debit cards. Assuming 15% of the spending on the card occurs at the sponsoring merchant's stores, he estimates the card will return 46 cents in value per $100 of spending to the consumer, compared to 64 cents for typical rewards credit cards and 10 cents for other debit cards.

Rewards are highest on spending at the co-branding partner's stores. Bezard estimates this at 80 cents per $100 with 100% of spending at the partner's outlets. Merchants pay no interchange on on-us transactions, he says, allowing them to fund higher-value rewards, while interchange Cap One collects on non-partner transactions help the company fund rewards he estimates at 40 cents per $100 in spending.

This kind of incentive could push out a lot of cards. Bezard says Capital One's goal is to become a top-10 debit card issuer. Currently, it is a monoline credit card issuer, ranking among the top five in that business. The Cap One spokesperson refuses to disclose any projections the company has made for the new product.

Capital One was not the only company to make debit card news this week. Wal-Mart Stores Inc., which in March abandoned its efforts to establish an industrial loan corporation, has found another way to broaden its reach in financial services. The world's largest retailer is bringing out a prepaid debit card for customers without bank accounts, according to press accounts. The new reloadable Visa-branded Wal-Mart MoneyCard adds to other services, such as cut-rate check cashing, that the merchant already offers to its customer base, a large portion of which is low-income. The card is issued by GE Money, a unit of General Electric Co. that also issues a credit card Wal-Mart has co-branded with Discover Financial Services LLC.