When Congress threatened to cap the interchange fees that banks collect on debit card transactions, the industry argued that such a move would force it to kill off its own debit rewards programs. As it turns out, the demise of those programs might inconvenience consumers but it is unlikely to deal banks much of a financial blow.
A bank that offers a rewards program typically earns a gross profit of $73 per active debit card per year. That compares with $63 for each account that offers no rewards, according to data from Aite Group LLC. Experts say these figures illustrate only an incremental boost to the bottom line. The industry offers debit rewards as a way to encourage consumers to use their cards, though their influence may be limited.
"Rewards don't have as much of an influence on consumers in selecting debit [cards] as they do on credit [cards]," said Patricia Hewitt, the director of the debit advisory service at Mercator Advisory Group in Maynard, Mass.
Banks fund the majority of rewards programs from interchange fees. These fees come to about $3.7 million per 100,000 rewards card users annually, according to Aite Group. That's 16% more than banks generate from no-reward debit card accounts.
"In the grand scheme I don't think [the financial impact of debit rewards] is that significant," said Madeline Aufseeser, a senior analyst with Aite. There is more value to rewards' impact on customer loyalty and extending the lifetime of relationships, she said.
In December, the Federal Reserve Board proposed capping debit interchange fees at 12 cents per transaction, down from an average of 44 cents.
"The only way they [banks] can keep a debit rewards program at that interchange level is if they are willing to lose money on the debit card product," said Bill McCracken, chief executive of the payments consulting firm Synergistics Research Corp.
Many large banks have already eliminated portions of rewards programs in anticipation of interchange cuts. Some indicated a delay or change to debit rules could alter their plans.
Rewards are valuable to banks in building customer satisfaction as well as profits, said Orlando Hanselman, an education programs director at Fiserv Inc.
A failed bill by Sens. Jon Tester, D-Mont., and Bob Corker, R-Tenn., would have given regulators six months to study the potential effects of interchange fee-cut rules.
They would have then had another six months to rewrite the rules to protect small banks, which were exempt from the legislation but argued that they would have been indirectly harmed.
Banks are now pushing the Fed to boost its initial cap above 12 cents. They may also seek to use litigation to water down or delay the rules, industry observers say. Even so, portfolio analysts said the failure of the Tester bill to pass has all but put the final nail in the coffin of debit rewards programs as they currently exist.
Hewitt and other analysts were hesitant to say what level of interchange would entice issuers into keeping debit rewards programs in place.
Many banks are likely to swap out existing programs for merchant-funded ones. These involved retailers covering most or all of the cost of programs in which cardholders earn discounts or rebates by using their cards to make specific purchases. With many programs retailers also pay banks a fee when consumers make use of offers, which gives banks an opportunity to replace some lost revenue.
Regions Financial Corp. uses a merchant-funded rewards system from Cardlytics Inc. of Atlanta that uses previous transactions to present offers to cardholders online. At Regions, the system is still in operation, despite a freeze on enrollments in its other rewards program.
JPMorgan Chase & Co. stopped issuing debit rewards cards to customers in February. Shortly after, it began notifying existing customers that it was ending the program for them, too, two days before the caps are set to take effect.
In April JPMorgan Chase executive Ryan McInerney told American Banker that the bank would call off its plan if Congress passed legislation to delay the Durbin amendment.
Spokespeople for JPMorgan Chase and other banks that have already made changes to rewards programs, including Wells Fargo & Co., Regions, SunTrust Banks Inc. and U.S. Bancorp, did not discuss their specific plans for the programs after the Tester bill's bid to delay interchange cuts fell short last week.
"We're going to wait and see what the final rule looks like," Evelyn Mitchell, a spokeswoman for Regions, said last week.
The Birmingham, Ala., banking company announced in March that it was ending enrollments of new customers into its Relationship Rewards program, which allows participants to earn points on signature-based debit card transactions and other activities.