The Rise of Alternative Payment Types: Private Label ACH Cards

Payments Leader

Posted on July 3, 2014


Today’s retailers are under immense pressure to increase profits, while reducing costs at the same time. This scenario isn’t isolated to retailers, but the increased competitive pressures retailers are putting one another, are further compounded in the ongoing fight between merchants, financial institutions and the networks on interchange fees. As a result, many retailers are exploring new payment technologies that allow them to escape costly fees, while still building and maintaining customer loyalty. From the rebirth of decoupled debit cards to new intrusive currencies such as Bitcoin, many merchants are actively investigating new payment options, many of which have strong incentives and rewards features built-in to steer consumer behavior. For purposes of this article, we will focus on Private Label ACH Cards.

How They Work

Also known as closed loop debit and decoupled debit cards, private label ACH cards are not issued by a bank or a credit union. Instead, they’re issued by a retailer or another third party to create an exclusive payment relationship between the holder and the provider. However, the foundation of this newer payment type is the checking account, of which the user grants access to the retailer. Therefore, each time a user makes a transaction with the associated card, money is drawn from his or her checking account and processed as an ACH, thus bypassing the payment card networks altogether. Although holders are only able to use the cards to make purchases at the store which provided it, they have great incentive to do so, thanks to discounts and other reward program offerings that are earned with each qualifying purchase.

Several Benefits

From a consumer’s point of view, private label ACH cards offer an easy way to enjoy higher value rewards at a preferred retailer. From a merchant’s point of view, these cards provide a better ROI by the circumvention of more costly interchange fees.

Several major brands have used private label ACH cards to improve their margins. Target’s REDcard has proved especially lucrative for the retailer. As of last fall, the REDcard boasted an annualized volume of about $6 billion, accounting for 10 percent of all Target sales. By offering 5 percent discounts to all REDcard holders, the company successfully increased its overall revenue by inspiring greater customer loyalty. According to Target executives, REDcard holders typically spend up to 50 percent more once they receive their cards, a statistic that’s left other merchants eager to follow Target’s lead.

In a similar effort to engage customers with exclusive loyalty programs, more and more companies are implementing private label ACH card rewards programs. Nordstrom offers extra services and reward points to its debit card holders, while Shell offers a 2 cent discount per gallon of gas for consumers who fuel up using the company’s Shell Saver Card. While some companies have enjoyed greater success than others, most have seen an increase in consumer loyalty, while increasing the bottom line.

A Growing Trend and Potential Threat

As major corporate retailers demonstrate the benefits of private label ACH cards, other companies are jumping onboard. Numerous retailers are using payment alternatives in their quest to lower overall costs. This should be no surprise considering the ongoing strife and legislative turmoil between retailers and financial institutions. As the market evolves, more and more payment alternatives and disruptors will creep-up due to reasons above and many more. If consumers see increased value and additional incentives with any of these rising new payment types, as illustrated by the success of Target’s REDcard, then financial institutions and merchants alike will have to face this new reality. And though there may be tangible benefits for those directly in the value chain, the risk of further disintermediation in the payments ecosystem will remain. For the next spotlight of this series, we’ll take a closer look into rewards as a currency in a similar view.

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Payments Leader

Payments Leader from FIS provides insights on credit, loyalty, fraud and emerging payments strategies through blog posts from our industry experienced authors.