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Introducing Hybrid Payment Cards: Appealing to customers will these smart cards change your business?

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October 01, 2010
Hybrid Payment Cards
Michael L. Kasavana, Ph.D., NCE, CHTP - kasavana@msu.edu

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Settlement at most hospitality businesses can be accomplished through the use of cash, check, credit card, debit card, gift card or third-party (bill to) arrangements, each of which will impact the cash flow of the business slightly differently. The latest innovative settlement platform however, may not be transparent to property managers as cardholders opt for a hybrid payment card. Targeted at consumers who typically rely on multiple credit cards and debit cards, as well as seek transaction-based rewards, the hybrid card was introduced this summer.

A hybrid card allows a cardholder to select transactional settlement on a pay now or pay later basis given the nature or value of a purchase. Using predetermined thresholds for payment activity, the hybrid card functions as a single payment media with linkage to multiple payment accounts. Pay now transactions, for example, function similar to a debit card sale in that payment is accomplished through connectivity between the hospitality business and the guest’s specified deposit or checking account (source of funds). Pay later transactions are processed as credit card sales with typical deferred payment programming. The hybrid card promotes the concept of coupled credit technology with decoupled debit technology, a developmental format that is expected to evolve into an international standard given the level of cardholder convenience. Additionally, the credit and debit transaction capabilities of hybrid payments may have a significant impact on efficient financial management in the hospitality industry.

Operations
The typical consumer is largely unaware of the financial ramifications of paying for goods and services by cash, check, credit or debit card. Faced with so many settlement choices, consumers tend to primarily consider the personal benefits of each payment instrument and choose accordingly. For credit cards, consumers likely think most about the benefits of deferred payments and the possibility to earn rewards, cash back, frequent flier miles or other enticements. For debit cards it may be the avoidance of carrying an outstanding balance or the efficiency of electronic funds transfer activity. What most consumers do not know is that the decision to pay by various credit or debit cards often invokes different merchant fees, acquisition and processing costs, and consequently a shift in how business is conducted.

By contrast, a hospitality merchant is often acutely aware of the effects of guests’ method of payment settlement decisions. For the privilege of accepting credit or debit cards, the hotel or restaurant must pay bank and card association fees that are proportionate to the dollar value of a transaction. The hospitality merchant’s bank then pays a proportional interchange fee to the consumer’s card-issuing bank. As a result, merchants tend to mark up retail prices for all consumers in an attempt to recoup the fees associated with electronic payment sales. With hybrid cards, the cost of business becomes more difficult to anticipate or determine, as processing fees will be handled as credit card (pay later) transactions despite the fact some will be resolved as debit card transactions (pay now). The possible confusion from electronic transaction manipulation emanating from hybrid payment programs may be more costly than current operations.

Payment Concept
Technology has extended the reach, scale and velocity of every transaction in the hospitality industry settlement chain. Online debit transactions, for example, differ from offline debit transactions that are generally processed akin to a credit card transaction. Within the variance of complexity, it’s easy to lose sight of the basic relationship between the guest and the hospitality merchant. A hybrid card combines credit and checking payment functionality on a single card, creating an easy-to-manage payment solution that gives consumers greater financial control. The cardholder can pre-determine payment preferences for card transactions by dollar amount, type of transaction or both, through the issuing bank Website. Hybrid payment programs are an all-in-one solution that provides cardholders the ability to pay from multiple accounts linked to a main account. A hybrid card basically empowers the consumer with more control and convenience than alternative payment cards. 

How it Works
The patent-pending TSYS HybridSM Card combines credit and check payment functionality on a single card, thereby creating a manageable payment solution that gives the cardholder greater financial control. TSYS is first company to bring to market a solution that is well suited to consumer cashless spending habits. With the hybrid card, cardholders establish transaction preferences for pay now or pay later either by merchant category, transaction amount or category and amount. For example, a cardholder can select a Website option that directs all transactions at a particular merchant (e.g. Hilton, Hyatt, Marriott, P.F. Chang’s, Cheesecake Factory) or merchant category (e.g. air travel, lodging, foodservice, entertainment, etc.) to be settled on a pay now basis regardless of dollar value. When such a transaction is posted to the hybrid card, settlement will automatically invoke immediate transference of funds from the cardholder’s designated deposit account to the merchant’s account. Alternatively, a parameter may be selected that allows transactions greater than a particular dollar amount (i.e., $250) to be posted to a credit card account for deferred payment. Such specificity means transactions of less than the specified amount (<$250) will automatically be treated as debit transactions and handled on a pay now plan. A combination of preferences can also be delineated such as having all air travel transactions greater than $500 be placed on a credit card for subsequent reconciliation.
 
Currently all hybrid payment card transactions are processed as credit card sales. Hybrid processing is applied to the transaction after it is posted as a credit card transaction. Settlement is then accomplished according to cardholder preferences through an automatic process that generates offsetting transactions to linked deposit account(s). Customers can define or redefine preferences and manage transactions through a Web application integrated at the card-issuing bank Website. Each cardholder takes responsibility for creating and managing a unique set of priorities. Hybrid card preferences are stored on the cardholder’s master account.

For thoroughness, monthly hybrid cardholder statements include all transactions posted to a credit card account, as well as transactions paid through linked deposit accounts, and are segmented by payment preference as specified on the transactional preference webpage. Such consolidated reporting provides unparalleled control over multiple accounts and source of funds. Hence, while hybrid cards appear to function like a traditional credit card from application process through purchase, authorization and settlement, the preferential features and networking of multiple accounts differentiates this media. Exhibit One contains a sample webpage containing an explanation of hybrid features for cardholders.

A hybrid card account can have up to three checking accounts and two savings accounts linked for debit payment resolution. Should a specified deposit account have insufficient funds to cover the value of a pay now transaction, the transaction will automatically be moved to a deferred payment schedule (i.e. the backup is a credit card account). As stated earlier, the cardholder can set preferences for posting transactions to various accounts using a browser (see Exhibit Two). Transactions are processed to allow consumers to post (carry a credit balance) or pay (transfer funds from a deposit account) depending on what is best for the cardholder. Credit, checking and other deposit accounts may be used for payments, creating a flexible consumer-directed financial strategy.

Preferences
The hybrid card is a credit card with capabilities that allow the cardholder to determine purchases to be paid now and those that can be paid at a later date. Tech-savvy and traditional customers alike can set preferences for posting transactions to their various accounts using their Web browser. Transactions are conducted to allow consumers to carry credit balances or pay now from their deposit or other accounts depending on what works best for them. Credit, checking and other deposit accounts may be used for payments, creating a consumer-directed way to manage household finances.

Linked Accounts
A hybrid card account can have up to three checking accounts and two savings accounts linked to its payment mechanism. Payment preferences are established prior to transaction either by dollar amount or purchase category or both. For example, a guest may decide that any purchase of $100 or less should be paid now from a deposit account (similar to a debit card transaction), thereby directing that purchases over $100 be placed on a credit card for later payment. Similarly, purchases related to travel can be paid from a specific savings account created to function as a dedicated vacation account. As purchases related to travel are incurred (e.g. airfare, hotel, rental car, etc.), they are paid from the vacation (savings) account. Additionally, the account holder could discriminate between travel spending of $50 or less to be paid now, with all other charges being placed on a credit card for later payment from the savings account.

Benefits
The payment arrangements for hybrid cards are built upon a pre-arranged dynamic set of business rules (including merchant identification, expense category, transaction value and other factors). Using a Website to specify transaction characteristics, a hybrid account can be configured by the cardholder to determine which transactions will be posted to a revolving line of credit (credit card) and which would be immediately settled from a deposit account (debit account). The cardholder may use the card-issuing bank’s Website to designate transaction criteria to discriminate between payments at the time of purchase. Some preferences will trigger electronic funds transfers and some with payment deferred to a later date. Unlike standard banking practices, a hybrid card has the ability to connect payment plans on a single aggregated account. The cardholder has the ability to program the hybrid card to make decoupled debit a feature not normally available with a credit card. The benefits of the hybrid card to the cardholder may include:

  • Cardholder receives the benefits of a credit card and debit card without having to carry or select among multiple payment media (top-of-wallet advantage).
  • Cardholder can benefit from card-based rewards programs whether transactions are pay now or pay later. The higher interchange rates earned permit a greater level of reward than is associated with a traditional payment card.
  • Cardholder can manage transactions by predetermining which should be posted to an account and which should be paid immediately.
  • Cardholder has benefit of controlling line of credit while also minimizing amount of debt given ability to decide what, when and how to pay it.
  • Cardholder gains enhanced cash management by establishing criteria for automatically pre-selecting transactions to pay now or later.

On the negative side, hospitality management may object to hybrid card adoption if it is perceived that hybrid cards move transaction volume from traditional debit cards to higher cost rewards-based credit cards. This is a development that the industry must monitor as escalating card processing fees often produce undesirable results. The Automated Clearinghouse (ACH) is a nationwide electronic funds transfer network which enables participating financial institutions to distribute electronic credit and debit entries to bank accounts and to settle such entries automatically, without outside intervention. Recent ACH regulatory changes may render hybrid cards as more appealing to consumers.

Transactions
The recent introduction of the hybrid card, from a technical perspective, represents an innovative decoupled debit application; one first made popular about three years ago by PayPal (online format) and by Capital One (card format). In fact, depending on how it is ultimately deployed, the new hybrid card has even greater potential than its predecessors given newly incorporated expansive features. Technically, a decoupled debit transaction involves a deposit account being linked to another bank’s payment card that is used at the point of sale. The funding will ultimately be drawn from the other bank’s deposit account via an automated clearinghouse (ACH) debit entry. The card issuer provides an immediate authorization response to the hospitality merchant, and must do so without the benefit of knowing the status or balance of the deposit account (the ACH system lacks such capability). A low cost overnight batch process is used to perform the funding phase of a hybrid transaction.

Decoupled debit is designed to unbundle a debit card from a checking account. Until now, decoupled debit cards have been conceived as a new and separate card product, running on a signature debit network with appropriate rules. The hybrid card offers a flexible set of associated tools designed to allow card issuers to offer consumers access to several different credit and deposit accounts from a single card. Using hybrid settlement capabilities to enable issuers to attach cardholder checking accounts to credit cards also provides a means for cardholders to earn credit card interchange on debit transactions. This is an innovative concept that may become problematic from a business perspective. Debit transactions masquerading as credit card transactions present a unique regulatory situation that may deny a hospitality business from receiving lower interchange rates.

Another concern is that hospitality companies will not know the extent to which credit-decoupled debit applications are applied to guest payments. As described earlier, the transactions settled to hybrid cards are processed similar to standard credit card transactions, meaning that hospitality merchants, participant banks and card networks likely are unaware of final disposition of accounts receivable. It appears only the hybrid card issuing bank and the cardholder will be privy to the funding account to be used for a given transaction. Given the history of litigation over debit card identification and pricing, there is much uncertainty in the financial community over voluntary, or mandated, disclosure that might accompany the future use of hybrid cards.

Large hospitality businesses may stand to lose the most if hybrid card programs successfully shift existing debit transaction volume to a decoupled model of the hybrid program. In several markets outside the United States, the use of a single card to provide access to linked accounts is not unique. The fact other countries tend to rely on a singular point of access to multiple accounts, however does not mean that the transactions and account interoperability are similar to the hybrid model – they are not.

Developments
The hybrid card preference structure also enables the cardholder to set purchase alerts that initiate a text message to the user’s cell phone when a purchase is greater than a specified dollar amount. The alert mode most likely will initiate a trigger for the user to track a transaction and alter the original preference (i.e., change from a pay now to a pay later status) or adjust the threshold for concern. Additionally, under consideration are electronic (P2P) transactions. Person to person transactions involve payments from one person to another. Such transactions may soon be available so that interpersonal money transfers can be accomplished online (or via mobile phone) as a linked account within the hybrid functionality.

Summary
Consumers can manage personal accounts, make payments, track spending and shop across the Web. The hybrid card is basically a credit card that has special capabilities that enable the cardholder to gain control over payment schemes (pay now or later). The consumer can predetermine payment preferences by dollar amount, type of transaction or both. A cardholder’s established preferences are stored at an issuing bank Website and applied to purchases to determine what to pay and what to post, and from which linked account. There are a lot of alternate payment programs in the marketplace, but the hybrid card is the only one-card-does-it-all solution. A rewards program is often the driving force for determining which card the consumer will apply to purchases. This is even more important than trying to encourage a specific behavior with a payment card. With a hybrid card there is less risk of lack of funds, as items, that cannot be paid for now despite preference settings will remain on the account for subsequent payment.

Michael Kasavana, PH.D., NCE, CHTP, is a NAMA professor in Hospitality Business for the School of Hospitality Business at the Michigan State University. He can be reached at kasavana@msu.edu.

©2010 Hospitality Upgrade
This work may not be reprinted, redistributed or repurposed without written consent.
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Benefits to a hospitality business may include:
  • Transactions are assessed a credit card level of interchange regardless of whether the transaction is immediately paid (debited) or posted (credit).
  • Given credit interchange in most merchant (hospitality business) categories is significantly less than signature debit interchange. This can be an advantage.
  • Credit card processing may provide an enhanced level of risk management to the decoupled debit issuer since such transactions are subject to credit risks.
  • A cardholder agreement might use the revolving credit line to backstop the risk of failed debits – PCI compliance should be inherent in all transactions.

 

TSYS Innovation
Considered one of the largest and most enterprising card processors globally, TSYS (pronounced tee-sis) is committed to innovation as demonstrated by the recent introduction of two new electronic payment card products. The hybrid card that allows credit card holders to elect to pay now or pay later from multiple linked accounts connected to a payment media. TSYS also introduced a private-label card that can be redeemed for specific products, tracking the bar code data and allowing the issuer to specify which products can be bought with the card, which has obvious social disbursement applications.

 

Article Terms:

Automated Clearinghouse (ACH) - a nationwide system that processes electronic batches of credit and debit transfers. The ACH enables funds to be debited from a customer’s bank account and deposited into a merchant’s account.

Credit card - deferred payment media normally issued by a bank that allows a cardholder to purchase goods or services from a merchant on credit (with float).

Debit card – immediate settlement media that requires that an associated deposit account have the funds to cover a transaction on deposit.

Hybrid card - a unique payment media that enables a cardholder to pay now (debit card functionality) from a linked account or defer payment to a later date (credit card account).



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