No cap on debit rewards in smaller banks – rewards junkies switch over

Lucie Shell has an account at Benchmark Community Bank at Kenbridge Virginia, and she uses her debit card rewards to buy gift certificates for members of her family.She does not have to worry about losing the debit card rewards unlike those that have accounts in big banks.The total assets of Benchmark are $417 million and the bank would be exempt from the cap on the interchange fees or swipe fees on debit cards that will take effect from July.

MasterCard and Visa, two of the largest networks, subsequently pass on the rates that are charged to the merchants when consumers swipe their cards to the issuing banks.Hence, for bigger banks, a cap of 12 cents instead of 1%of the average purchase amount.This means around $12 billion in lost revenue with a probable restructuring or end to the rewards programs.

Craig Maurer, equity research analyst, CLSA, states that debit rewards might be a thing of the past and in case they do stay around, it would remain only after some significant changes are brought about.

At the Benchmark Community, debit card users usually earn one point on every $3 that is spent on signature purchases. The interchange fees are lesser when customers use the pin for transactions and are higher when customer signs. Lucie Shell stated that she took advantage of these rewards and sent her brother $50 gift certificate during Christmas and it cost her absolutely nothing.

The consumer spending in the US using the debit cards has steadily climbed to 8% in 2009 to $1.45 trillion as per the Nilson Report, a newsletter in California. The average transaction in 2009 was around $38, according to Patricia Hewitt, director, debit advisory services.

The financial industry was overhauled last year with the Dodd-Frank legislation which had mandated setting a cap on debit card interchange and swipe fees in order to help merchants who felt they were powerless as they could not negotiate rates with any of the payment networks.The cap will be implemented by July 21, 2011, and the Federal Reserve has time until April to take a decision regarding the same.

Lisa Westermann, stated that it was premature to speculate on the cap on interchange fees and the financial impact that it would have.However, debit rewards might not be the sole reason that customers would have to switch over to smaller banks, stated Mercator’s Hewitt.

Doug Nicholas

Doug Nicholas, a financial consultant by profession with a Masters degree in International Business from Brown University, is also an ardent writer. Though he has a full time job at one of the companies listed on Wall Street, he does manage to squeeze in time to follow his passion. He puts his ideas to words in his articles related to finance and business.