Debit card rewards programs — the ones that offer free travel, merchandise and cash back — could soon be as hard to find as a free bag of peanuts on an airplane.
"Debit cards are more popular now than credit cards," notes Gerri Detweiler, personal finance adviser for Credit.com. "Some people are really trying to rack up those rewards, and those rewards may not be there pretty soon."
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If you want to join the debit rewards program at Wells Fargo, you'd better get moving. The bank will stop enrolling new customers April 15. The bank already stopped enrollments at former Wachovia branches last week.
"We have not yet made any final decisions yet in terms of earning points," says Ed Kadletz, executive vice president and head of debit cards for Wells Fargo. "We do plan to support redemption throughout 2011."
Chase will end its program this summer. Cardholders cannot earn any more points after July 19. The bank says points already accrued will not expire.
In September, PNC bank stops its debit rewards for customers with free checking accounts.
What's going on here?
Banks and credit unions are preparing for new federal rules that are scheduled to take effect this summer that will dramatically reduce the profit they make from processing debit card transactions. These so-called "swipe" or "interchange" fees are paid by the merchant every time someone uses a debit card. Right now they average about 44 cents per swipe.
For years, consumer groups and retailers have argued that these fees are exorbitant and need to be regulated.
"These are hidden fees," says Travis Plunkett with the Consumer Federation of America. "But there's no free lunch. So if merchants are paying excessive fees, eventually those costs are passed through to consumers in the form of higher prices."
Last year, Congress responded. The Dodd-Frank Wall Street Reform & Consumer Protection Act requires the Federal Reserve to look at these interchange fees and limit them to what's "reasonable and proportional" to the cost of that transaction.
In its initial proposal the Fed suggested dropping those fees dramatically to 12 cents. Financial institutions say at that rate they'd lose money processing debit card payments.
"If they are limited to 12 cents per transaction I think we will see more banks cut their debit card rewards programs," says Bill Hardekopf, CEO of lowcards.com. "Banks will always find a way to make up for lost revenue, and it usually will be at the expense of the consumer."
Banks and credit unions believe the Dodd-Frank Act is flawed and the Fed's fee cap is misguided. They say price controls are a bad idea.
"We can't have the government come in and set prices at a level that's substantially below cost. That's not a workable model," says Wells Fargo's Kadletz. "Prices should be set by the marketplace in a way that reflects the risk and the service that's being offered."
The Electronic Payments Coalition (which represents banks, credit unions, Visa and MasterCard) calls the Fed's debit card rule "anti-consumer" and is lobbying to have it stopped. Spokeswoman Trish Wexler says the proposed rate cap "will absolutely result in consumers paying more to own and use a debit card."
Banks and credit unions may do more than eliminate debit card rewards programs to recoup the lost interchange fees. Wexler tells me some financial institutions are considering a per-swipe charge. Others are talking about setting limits on the amount of a debit card purchase, as little as $50 or $100.
"This would limit the amount of risk they'd be exposed to in a transaction," Wexler explains. "Because 12 cents per transaction does not allow for fraud costs or the risks a card issuer takes on."
A recent study by the financial services consulting firm Speer & Associates predicts bank customers will pay more for checking accounts (new fees and higher balance requirements) if the interchange fee is capped.
"Based on experiences in other countries, consumers will be the overall losers in the long run from the changes currently proposed," the report states. "Consumers will be required to adjust to new deposit account fee schedules, higher balance requirements, lesser rewards programs and similar revenue-generating or cost-controlling initiatives."
This isn't a done deal yet
The Federal Reserve Board was supposed to release its final proposal for the new interchange rules on April 21. But last week, Fed Chairman Ben Bernanke sent a letter to Congress telling lawmakers the Board will not make that deadline because of the "extraordinary volume" of comments received — more than 11,000.
In its comments, the Consumer Federation of America told the Fed it could harm consumers if it sets the interchange fee unrealistically low. CFA's legislative director, Travis Plunkett explains the group's position this way:
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"Allow the banks and credit unions to be compensated for their actual costs of providing people with a debit card. Otherwise, they're going to make up the difference by hitting customers up for higher fees."
Some members of Congress are trying to derail Dodd-Frank. Sen. Jon Tester, D-Mont., and Rep. Shelley Moore Capito, R-W.Va., have introduced bills that would delay the interchange rule for two years.
The co-author of Dodd-Frank, Sen. Barney Frank, D-Mass., said Tuesday he would support congressional action to postpone the Fed's deadline for issuing its rule.
My two cents
I think there's a good chance interchange fees will be regulated, although this may take significantly longer than July. The Fed needs to get this right, or it could do more harm than good.
Government price controls are rarely a good solution to any problem. But in this case, consumers don't know the interchange fee and merchants are forced to pay it, unless they want to risk a cash-only business. There is no competitive marketplace at work here. Only regulatory action can prevent financial institutions from gouging their customers — both merchants and debit cardholders.
By the way, it might not be so bad if debit rewards programs disappeared. These programs are basically designed to encourage bank customers to make signature debit purchase rather than use a PIN. Signature transactions cost merchants more and are less secure than PIN-based purchases.
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