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Rewards Junkies May Turn to Smaller Banks for Perks

The Federal Reserve has proposed capping the bank interchange fee for debit card transactions at 12 cents. Photographer: Matt Staver/Bloomberg
The Federal Reserve has proposed capping the bank interchange fee for debit card transactions at 12 cents. Photographer: Matt Staver/Bloomberg

Jan. 19 (Bloomberg) -- Lucie Shell, an 84-year-old retired secretary in Crewe, Virginia, uses the rewards she earns by swiping her debit card for gift certificates for family.

Shell, whose account is at Benchmark Community Bank, based in Kenbridge, Virginia, may not have to worry about losing her debit perks, unlike some customers at larger banks. That’s because Benchmark, which has $417 million in total assets, will be exempt from a cap on debit “swipe” fees or interchange that takes effect in July. The limit will apply to banks and credit unions with $10 billion or more in total assets.

Visa Inc. and MasterCard Inc., the world’s biggest payment networks, set rates charged to merchants when consumers use debit and pass that money onto the banks that issue the cards. For larger banks, a cap of a flat 12 cents instead of the average 1 percent of the purchase amount means about $12 billion in lost revenue, and a possible end or restructuring of debit rewards.

“Debit rewards are going to be extinct for big banks,” said Craig Maurer, an equity research analyst in payment processing and specialty finance with brokerage firm CLSA in New York. “And if they somehow stay around, it will only be with significant changes.”

At Shell’s bank, Benchmark Community, which is about 50 miles from Richmond, debit-card users earn one point for every $3 spent in signature purchases. Interchange fees are higher for transactions customers sign for compared with transactions for which they enter a pin number. Shell said she took advantage of the program to send her brother a $50 gift certificate for Christmas that “cost her nothing.”

10 Cents Back

For 3,000 points, which equals $9,000 in purchases, customers can get a $50 gift certificate to restaurants or retailers such as Cheesecake Factory Inc., Starbucks Corp. and Inc. They can also redeem 7,000 points, which takes $21,000 in spending, for $100 in cash and use 58,264 points for a three-day cruise on Carnival Cruise Lines.

“We plan on maintaining that,” said Mike Walker, chief executive officer of Benchmark. “We feel like it’s a key part of our program.”

At Manitowoc, Wisconsin-based Bank First National, which has $802 million in total assets, debit users earn one point for every $2 they spend in signature transactions. Customers can redeem points for cash, gift cards or merchandise.

Debit Use

First Community Bank in Bluefield, Virginia, pays customers 10 cents for every debit-card purchase they sign for. The bank, with $2.3 billion in total assets, has “no plans to change or eliminate” its debit rewards program, said CEO John Mendez. The bank pays an average of $12,629 a month in credits to the accounts of customers with debit rewards. Accounts are only offered to people who live in nearby states.

U.S. consumer spending with debit cards climbed 8 percent in 2009 to $1.45 trillion according to the Nilson Report, an industry newsletter in Carpinteria, California. The average transaction was about $38 in 2009, according to Patricia Hewitt, director of debit advisory services at Maynard, Massachusetts-based Mercator Advisory Group.

The Dodd-Frank legislation that overhauled the financial industry last year mandated setting a cap on debit-card swipe fees to help merchants who said they were powerless to negotiate rates with the payment networks. The Federal Reserve has until April to decide what the cap will be before being implemented July 21, 2011.

Less Viable

Debit interchange fees totaled $16.2 billion in 2009, according to a document outlining the Fed’s proposed rules. Coupled with the estimated $5.6 billion in losses annually from a separate regulation that requires consumers to opt in for overdraft protection, debit perks, such as points, miles and cash back, have become less viable in many cases, said Beth Robertson, director of payments research at market-research firm Javelin Strategy & Research in Pleasanton, California.

The third largest debit-card issuer as of 2009, JPMorgan Chase & Co. in New York, will stop issuing debit rewards cards on Feb. 8, according to spokesman Tom Kelly. “The change in regulation is reducing interchange so much that we’ll lose money on most debit-card transactions,” he said. Existing rewards programs will continue for now, said Kelly.

No. 1 Bank of America Corp. based in Charlotte, North Carolina, introduced new accounts earlier this month where users pay fees unless they do things such as keeping minimum balances and making regular deposits. If the final rules that are issued look like the draft, there’s “no question” that it will affect how Bank of America and other issuers price deposit and payment services and what features and benefits are included, said Joe Price, head of the company’s consumer-banking operations.

Limited Perks

One of the debit rewards programs currently offered by Bank of America is the NASCAR debit card, which offers 1 point for every $4 consumers spend.

It’s premature to speculate on the financial impact of the interchange cap, said Lisa Westermann, a spokeswoman for San Francisco-based Wells Fargo & Co., the second largest debit-card issuer.

There were 130 million consumer checking accounts as of June 30, 2010, and 58 million of them were with the 29 largest retail banks with $50 billion or more in assets, according to Moebs Services, an economic-research firm in Lake Bluff, Illinois. By the end of 2010, 5 million checking accounts left those 29 banks, based on estimates from Moebs.

If larger banks do maintain some debit rewards, they may make changes including offering limited perks only to the wealthiest customers and requiring more spending or larger deposit balances to attain rewards, said Hewitt of Mercator. They may also end cash-back programs because they’re the most expensive and charge fees for use of debit cards, she said.

Two-Tier System

Some smaller banks and credit unions have said the new interchange regulation may restrict their ability to offer debit rewards if payment networks Visa and MasterCard offer a lower interchange rate for all merchants to simplify processing. They’re also concerned that merchants would pressure consumers not to use debit cards issued by smaller banks and credit unions.

“We think smaller institutions will be discriminated against,” said Randy Smith, chief executive of Randolph-Brooks Federal Credit Union in Live Oak, Texas.

Visa, based in San Francisco, told clients Jan. 6 it would support a two-tier debit interchange system, which would set different rates for banks that are exempt from the legislation and those that aren’t.

Separate Schedule

“We expect to have a separate rate schedule for exempted institutions and products at the time of implementation,” said Will Valentine, a spokesman for Visa in an e-mailed statement. MasterCard in Purchase, New York, is still evaluating the possibility of a two-tier system, according to James Issokson, a spokesman.

Debit rewards won’t be the only reason consumers switch to smaller banks, said Mercator’s Hewitt. Customers generally choose banks because of their terms and conditions, not because of debit rewards, which are considered an added bonus, Hewitt said.

That contrasts with credit cards, which are often selected because of their associated rewards. A September report from Javelin, which specializes in financial services, found that when selecting a new card, a consumer’s decision is based primarily on annual fees, interest rates and rewards.

Credit-Card Interchange

It’s still too early to know if merchants will pass their savings from lower interchange fees to consumers, said Gail Hillebrand, a San Francisco-based attorney for Consumers Union. Where merchants are based and what kind of business they’re in will determine how competitive they have to be with pricing, Hillebrand said.

In 2002 the Reserve Bank of Australia capped interchange fees on credit cards. A 2008 study by the central bank found there was “no concrete evidence” that the cap had led to lower prices for shoppers.

Gray Taylor, an Austin, Texas-based consultant for the National Association of Convenience Stores in Alexandria, Virginia, said shoppers are more likely to see savings on groceries and gasoline than on higher-end merchandise.

The payments industry has escaped attempts to regulate credit-card interchange fees, which average about 2 percent of the purchase, saying banks need the fees to compensate them for the risk of lending money. It’s possible credit-card swipe fees will be capped eventually, yet the limit won’t be as low as it is for debit, according to Hewitt of Mercator.

Community Banks

That means credit-card rewards won’t be in jeopardy as much as debit perks, especially since banks won’t want to lose high spending cardholders who are hooked on their credit-card rewards, said Ben Woolsey, director of marketing and consumer research at Austin-based

Consumers may also begin considering community banks or credit unions because of their different product offerings, fewer fees and personal level of service, said Tony Plath, a finance professor at the University of North Carolina at Charlotte.

“A lot of consumers have become aware that there’s a difference between big and little financial institutions,” Plath said. “That will help keep some community banks in business.”

To contact the reporter on this story: Elizabeth Ody in New York Alexis Leondis in New York

To contact the editor responsible for this story: Rick Levinson at

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