Does your debit card have a rewards program? Be prepared to kiss it good-bye.
That’s the likely upshot from the Federal Reserve’s proposal, issued Thursday, to limit the amount of money that stores and other merchants are charged each time a customer pays for a transaction with a debit card.
In theory, merchants could pass this new savings along to customers — savings that could be significant over time. Currently, debit-card fees average 1% of a transaction, according to Bloomberg. The Fed says that debit-cards have become the nation’s most popular form of noncash payment, used in 35% of transactions which don’t involve currency.
But a more immediate impact is likely to be on debit card rewards programs, which banks are preparing to cut back on because of the profit cut they’d suffer from the new rules. (The proposed limit on these fees, which consumers don’t see, is 12 cents per transaction, down more than 70% from the current average, according to The Wall Street Journal, of 44 cents.)
In fact, in anticipation of rules imposing these lower fees, Chase disclosed last month that it would be phasing out its debit rewards program in February, and would
cease cut back on its practice of waiving checking fees for customers who made at least five debit card purchases per statement. Other banks are expected to implement similar changes — such as placing a higher processing or penalty fee on checking accounts — now that the specific restrictions have been announced.
Banks “are going to have to make up for this substantial loss of revenue by raising rates and fees in other areas,” says Bill Hardekopf, CEO of LowCards.com, a consumer resource site for credit card information.
Complicating the situation somewhat is that prepaid cards and smaller banks — defined as those with less than $10 billion in assets — are exempt from this cap. (Only 105 of the nation’s banks, according to recent figures, have at least $10 billion in assets; though they amount to fewer than 2% of all banks, they account for 75% of total assets.) While the nation’s largest banks dominate debit-card reward programs, it’s possible that smaller banks, if they’re still able to collect the larger transaction fees from merchants, could keep their own debit-card reward programs running, or start up new ones. “It’s certainly worth checking out,” says Hardekopf. “Small banks do have some leeway here.”
It’s not immediately clear, however, how many of those smaller banks do have debit-card reward programs in place already. Curtis Arnold, founder of credit card review site CardRatings.com, based in North Little Rock Arkansas, says he doesn’t have hard numbers on the proliferation of these programs at smaller banks. But, he says, “pretty much all” of the local banks do have debit card reward programs. “I know all of them don’t have $10 billion in assets,” he says.
The Fed has until mid-April to finalize the new debit-card restrictions, which will take effect in July 2011.