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Decoupled credit cards could fall victim to Durbin Amendment

Decoupled debit cards recently made their way into the financial payments industry, but their life span may be short lived as they fall victim to the Durbin Amendment’s stifling effect on innovation, according to experts.

In most cases, a debit card holder’s card is linked to his or her checking account. “Decoupling” the card allows a third party to handle the payments processing from the corresponding bank account, according to GoBankingRates.com.

The decoupled debit card industry relies on interchange revenue to provide debit rewards to customers of their partner banks. Since the Durbin Amendment limits the cost of interchange fees, members in the decoupled debit card industry, such as San Mateo, California-based Tempo Payments, are forced to close operations.  The company had offered branded debit cards through partners including HSBC, Capital One and Discover.

Tempo laid off 15 of its 25 employees when the regulations came out and the remaining jobs will be cut within the next few months, according to DigitalTransactions.net.

Banks were unsupportive during the early stages of decoupled debit cards and were concerned that third party providers would cut into their interchange revenue stream.

Digital Transactions, a business publication, reported that decoupled cards were “controversial,” while American Banker wrote that they “may not be a particularly welcome innovation from banks’ point of view, since it reduces their transaction fees,” according to GoBankingRates.com.

During debate on the Durbin Amendment, however, banks sided with the decoupled debit card industry and fought Congress against regulations that would put these companies out of business.

Joe Randazza, the CEO of National Payment Card Association, said that consumers have not seen the last of decoupled debit and that the regulations actually provide an opportunity for growth in the industry, according to GoBankingRates.com. Merchants are eager to pull customers toward debit just as much as banks want to push them toward credit, so retailers may be more inclined to offer branded debit cards.

Sen. Barbara Boxer (D-Calif.) is a strong supporter of the Durbin Amendment and fought against an amendment offered earlier this year to study the effect the regulations would have on smaller institutions.

“I believe that this rule will enable small businesses and merchants to lower their costs and provide discounts for their customers, and that further study would needlessly delay an important reform,” Boxer wrote in a letter to California small business owner Mitch Goldstone earlier this summer. “Be assured that I support the Durbin Amendment and will continue to oppose efforts to repeal or undermine it.”

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