By Brandes Elitch
CrossCheck Inc.
In addition to its acclaimed wineries, Sonoma County is known for its microbreweries, which produce craft beer. Recently, it was pandemonium at the annual release of Pliny the Younger from Russian River Brewery. Pliny is a triple India Pale Ale (IPA) that is sold only at the brewery for just two weeks a year. People fly in from all over the world for this event.
The beer is served in 10-ounce pours at $4.50 each, and limited to three per customer. In 2012, it was rated by the people who do such things as "the best beer in the country."
Because you have to stand in line for hours to get in the door, RRB posts rules, such as: "If you have a compelling reason for not waiting like everyone else, you will have to take that up with the 300 folks behind you. Good luck with that!"
Some people who don't like to stand in line for three hours to get a beer suggested that RRB just make more. The owners responded, "We don't want partners and we don't like debt." So people wait their turn.
Just like the annual Pliny madness, alternatives in payments are a good thing. One example is decoupled debit, which came into existence in 2008. Back then, it seemed to have great promise, but it never really took off.
Tempo Payments Inc. made a good run at it, but it claimed it was done in by the new pricing mandated by the Durbin Amendment to the 2010 Dodd-Frank Act. Tempo worked with South Dakota-based First Bank & Trust to issue cards branded by Discover Financial Services and MasterCard Worldwide.
In the decoupled debit model, a third-party processor/program manager provides the consumer a rewards debit card to use at certain merchants such as gas stations, convenience stores, pharmacies and groceries.
The processor signs up the retailers, who fund and provide the rewards. Retailers gain the advantages of a loyalty program, without the aggravation and expense of running their own store cards. The consumer's bank - where the checking account is hit with an automated clearing house (ACH) debit - doesn't issue the loyalty cards, so it derives no revenue from the transactions.
I recently learned about a new approach by National Payment Card Association, which both issues and processes merchant-branded decoupled debit cards. When a consumer swipes a card, the transaction is routed directly to the processor. These are PIN debit cards, never signature debit cards.
When a transaction goes through a card brand network, the processor collects the debit interchange fee for the issuer (pre-Durbin, about 44 cents, post Durbin, about 24 cents); when it doesn't employ such a network, the processor sets its own fee.
I am a believer in a low-cost, low-risk, loyalty-based payment system, and this has all the requirements - in theory. You would think the Durbin Amendment would have put an end to decoupled debit, but the NPCA can thrive on the post-Durbin pricing caps - even at 15 cents per transaction.
Just recently, NPCA launched a program that allows consumers to pay for gas and in-store purchases using mobile phones (card swipe is still supported). Consumers download the mobile app or pick up cards at retailers.
Once the checking account information is verified, consumers can swipe the cards or launch the SmartPay app when filling up. The app automatically locates the gas station where they are and allows them to turn on the pump via cell phone. This was recently rolled out at Cumberland Farms, a chain of convenience stores.
How can NPCA make the numbers work? First, the retailer is saving on interchange fees; for example, if a business pays 2 percent on a $60 transaction, that would be a $1.20 savings. The merchant can use this savings to help offset the cost of the rewards program, and of course the retailer gets a lift from the loyalty card usage.
In the case of Cumberland, when consumers use their loyalty cards, they save 10 cents per gallon. That seems like value enough to motivate most consumers to sign up for the program.
What is particularly interesting about this is the mobile app. It was built by Cumberland, and it employs three NPCA patents. One covers certain methods of carrying out mobile-based transactions (8,205,791) and the other two cover certain methods of carrying out open-loop, ACH, decoupled debit transactions with a cardholder at a retail site (7,793,829 and 7,988,040).
This is a killer app for a few industries that involve recurring transactions. You have to buy gas and go to the grocery store every other day. As Frank Hayes wrote on StorefrontBacktalk, "Grocery is one of the most price-sensitive areas of retail, so if a pure-play grocer can cut shelf-tag prices by 2 percent, that's an advantage over Walmart.
"In grocery these days, anything that offers an edge over Walmart looks a lot like a life raft. And because pure-play grocers were part of the interchange lawsuit, while Walmart, Target, Macy's and the National Retail Federation were not, grocers were the ones at the table hammering out the settlement, even though it will affect all retailers who take payment cards."
The handling of nonsufficient funds intrigues me. The ACH doesn't hit until the next banking day, so that means nobody knows when the consumer is pumping gas, whether the money in the demand deposit account (DDA) the next business day will cover the transaction. With a fill-up on some large SUVs costing $100, this is not a trivial question.
NPCA's model is to use a vendor that does two re-presentments, and if that fails, goes to collection. The vendor lives on the return item fees, roughly $25 per return item. Making these numbers work is a matter of statistics.
If the average purchase is, say, $30, and the average return item fee is the same, it's likely that at some point (say the beginning and middle of the month, when paychecks are issued) there would be at least that much in the DDA, unless it was closed, of course.
Nobody can collect on a closed account, and it is just too expensive to try to collect something this size with a traditional collector. I live in the check guarantee world, and I know many consumers would willingly sacrifice a credit score for $100 worth of gas. I also know that collections is a tricky business.
As I have said before, all payments begin in the checking account, even the check to pay for the credit card bill. To collect effectively, you must live in the world of the Uniform Commercial Code and 200 years of banking law, not the NACHA - The Electronic Payments Association rules and regulations or Reg. E, a consumer protection statute.
Two other recent developments are affecting the debit space. One is that the debit card issuers are taking a somewhat leisurely attitude toward Europay/MasterCard/Visa (EMV) migration deadlines.
You may recall that the liability shifts for parties that are not compliant by the 2015 deadline. Both credit card and debit card issuers have to figure out how to support chip and PIN, or chip and signature, or even both of them, as well as how to deal with offline PIN authorization.
Second, confusion exists regarding how debit network routing will unfold. The Durbin Amendment requires that merchants be given a choice of networks to use.
Meanwhile, Visa Inc. has introduced its own product, called PIN Authenticated Visa Debit, for merchants to use Visa to route Visa card PIN debit transactions.
Some of these developments remind me of why the Durbin Amendment came into existence in the first place: the federal government found that monopolistic practices had caused the debit business to be "broken."
Alternatives are a good thing. We may like wine, but sometimes we want beer. It's the same with payments, consumer choices and merchant options. Decoupled debit is now a viable alternative for certain merchants.
The rules have changed, but there is always room for an alternative that makes the merchant more competitive. Unlike a triple IPA, you won't risk a hangover either.
The question is, how will you, as an ISO or merchant level salesperson, adjust to these changes, and how will you explain the alternatives to your merchants?
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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