When it comes to the effects of new financial regulation on consumers' banking perks, debit card rewards programs just might be the canary in the coal mine. According to Bankrate's 2011 Debit Card Rewards Survey, that canary is looking pretty feeble these days.
This year, the number of debit card rewards programs being offered by the banks in our survey dropped significantly, falling from 40 in 2010 to just 28 this year, a decline of 30 percent.
The decline can be attributed directly to mandated limits from the Dodd-Frank Act on the swipe fees that banks can charge merchants to process debit-card transactions, also known as interchange fees, says Marty Mosby, a managing director at Guggenheim Partners, a large investment services firm.
Those limits kicked in Oct. 1 and cut swipe fees from an average of about 44 cents per transaction to about 22 to 25 cents per transaction.
New rules dictate change
"It's all tied to the recent Fed decision coming out of Dodd-Frank about what debit-interchange fees were going to be able to be," he says. "Since those were reduced, it made debit cards less profitable, and that's why your loyalty programs are starting to get pulled back or eliminated."
Greg McBride, CFA, Bankrate's senior financial analyst, agrees. "Debit rewards programs are essentially revenue-share agreements between the cardholder and the card issuer. Now that there's less revenue that the card issuer has coming in, there's less to be shared with the cardholders themselves," McBride says.
Consumers seeking debit card rewards may find it harder to earn them, thanks to a shift in programs supported by specific merchants looking to bring in new customers.
"We are seeing a big shift in terms of how many of these offers are funded by merchants," McBride says. "They're the ones who are funding the incentives that are provided to the cardholders, and it's not so much an incentive for debit card use as it is for debit card use at those specific merchants."
And though 71 percent of debit card rewards programs remained free for enrollees, McBride expects the number charging a fee to increase as banks adjust to the new regulatory reality.
"In addition to fewer debit reward programs, I do expect that over time the programs that do remain in the marketplace will be less generous, will see a higher propensity for fees, and more of the offers will be funded by the merchants," he says.
The programs that are currently charging fees are asking for $1.50 to $10 per month, according to Bankrate's 2011 survey. McBride says that as fees spread, those enrolled in debit card rewards programs will have to do a cost-benefit analysis to decide whether they're earning enough in rewards to justify paying a fee.
Some bright spots
Bankrate's survey did find a few bright spots. Customers enrolled in surviving bank-financed programs probably haven't noticed any changes in how quickly they earn rewards -- at least not yet. The payout rate stayed fairly constant, falling in a range from 0.25 percent to 1 percent of total debit purchases, with the most common percentage staying at 0.5 percent.
Further, most offers still have no cap on the rewards you can earn, with 71 percent of programs still giving enrollees unlimited rewards, just 4 percentage points lower than last year.
The bottom line is those who really want a debit card rewards program will be able to find one. But it won't be easy, says Mosby.
"You're going to have to search out the institution that's more aggressive with that particular product," he says.
Maximizing your rewards
If you're looking to maximize your take in a remaining debit card rewards program, the name of the game is signature transactions. According to Bankrate's survey, signature transactions, which must be signed for like credit cards, are twice as likely to be rewarded as PIN transactions, in which you authenticate the purchase using your debit PIN. Nearly half of programs, 46 percent, only reward signature purchases.
That's mostly a legacy of the old swipe-fee structure, which gave banks more money for a signature debit purchase than for a PIN purchase. But it still holds true -- at least for now.
Another way program participants can max out their rewards is keeping a close eye on which individual merchants or categories of merchants are favored by their debit card rewards program.
Some programs in our survey reward gas, grocery and drugstore purchases more than other types. Others gave bigger rewards for airline ticket purchases with their debit cards. With the rise of merchant-funded programs, those distinctions could become even more important, McBride says.
And all the rewards in the world aren't worth much if they expire before you use them. While 61 percent of programs don't have any expiration date for rewards, those who are participating in programs that do should keep a close eye on that date to avoid losing out.
For the 2011 Debit Card Rewards Survey, Bankrate surveyed the five largest banks and thrifts in 10 key U.S. markets, plus the five largest credit unions. The survey was taken from Aug. 22 to Sept. 9.
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