With the October 1 implementation of the Federal Reserve’s 24 cent cap on debit card interchange fees fast approaching, Wells Fargo recently became yet another issuer to make fundamental changes to its debit card offerings in anticipation of industry-wide revenue losses estimated at roughly $9.4 billion, according to a WalletHub study.
After announcing in March that it would cut debit card rewards for only new customers, Wells Fargo now says it will discontinue debit card rewards altogether, following in the footsteps of Chase and SunTrust. The change will take effect in October.
While this trend might be distressing to the many consumers who are used to receiving rewards points redeemable for cash, gift cards and electronics as a result of making certain transactions (including both purchases and deposits) or maintaining high account balances, it should not come as a surprise, according to WalletHub’s CEO Odysseas Papadimitriou.
“The writing was on the wall as soon as the Durbin Amendment became law in July 2010,” said Papadimitriou, who founded WalletHub—a leading credit card comparison website—in 2008. “It was obvious the major banks weren’t just going to lie there and take the financial hit, and a simultaneous debit card rewards decrease and fee increase was the logical reaction.”
Indeed, in addition to cutting debit card rewards, both Wells Fargo and Chase have been testing $3 monthly fees for customers who make purchases with their debit cards. Other banks, such as SunTrust and Regions, have also tied monthly fees to debit card use in order to compensate for interchange fee losses.
But, according to experts, high fees and less attractive rewards aren’t the only changes we can expect as a result of the Durbin Amendment.
“Next, we’ll see an industry-wide shift toward a new breed of prepaid cards,” said Papadimitriou. “Once basically the sole domain of people who couldn’t qualify for a checking account for one reason or another, prepaid cards are going to replace checking accounts altogether for many consumers. After all, if you can live without the ability to write paper checks, why not follow the rewards as well as escape the fees?”
Prepaid card interchange fees were not regulated by the Durbin Amendment, which means banks retain the ability to charge merchants whatever they’d like whenever one is swiped. They can therefore pass some of these unrestricted earnings along to consumers, as was once the case with debit cards.
Prepaid cards are also basically checking accounts without the paper checks, so consumers will not have to sacrifice much if they make the switch. Prepaid cards allow for direct deposit as well as online bill pay and can easily be used to make purchases anywhere Visa or MasterCard is accepted.
It therefore appears that the Durbin Amendment will not serve its intended purpose—to provide some financial relief for merchants and thereby lower the prices of goods for consumers. Rather the dynamic between banks, merchants and consumers will largely remain the same. Banks will apparently continue to determine their own swipe fees, and consumers will still reap rewards from basic checking functions and make purchases via plastic at merchant locations. One of the only changes appears to be the type of card with which you will make these purchases.
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