Debit cards continue to be the card of choice for many consumers when it’s time to pay for purchases. The lure of rewards, such as cash back or airline miles, is no doubt responsible for much of that trend, but perhaps consumers also appreciate not receiving a fat credit card bill at the end of the month.

For Bankrate’s Fall 2007 Debit Card Study, we surveyed the five largest banks and the five largest savings institutions in the nation’s top 10 metropolitan areas.

What Bankrate surveyed
  • Annual fees charged simply to use the debit card.
  • Point-of-sale fees for signature or PIN-based transactions at the cash register.
  • Whether the card offers a rewards program.
  • Type of rewards offered.
  • Annual fee for enrolling in a rewards program.

Among the changes since our previous debit card study was released in the spring is that one of the two banks that charged an annual fee just for having the debit card has dropped its fee. Bank of the West in San Francisco has dropped its $1-per-month fee that was charged any month in which the card was used. Firstrust Savings Bank in Philadelphia continues to charge $24 annually for the privilege of using its card. It now is the sole institution in our survey that charges such a fee.

And none of the 100 institutions surveyed charges a point-of-sale fee when the customer signs for the purchase. Wells Fargo in Los Angeles and San Francisco dropped its $1-per-month charge that it imposed on signature purchases during our last survey.

Customers who prefer to use their PINs when shopping have often been discriminated against by card issuers, who make less money on PIN-based transactions due to the interchange fee structure. Most issuers require signature-based transactions if purchases are to qualify for rewards. In other words, they want you to select “credit” instead of “debit” when using the debit card. Additionally, some issuers, albeit fewer and fewer, try to discourage PIN use by imposing a fee.

Wells Fargo bucked that trend by tacking on a $1-per-month charge in Dallas and Houston when a PIN-based purchase is made. The bank had already been imposing that fee in Los Angeles and San Francisco.

Only three of the 100 institutions surveyed don’t offer debit cards, the same as in our last survey. Forty-five of the institutions offer rewards; 52 don’t. Most of the savings institutions surveyed do not offer rewards programs.

Rewards may cost you

If you want to participate in a rewards program, you may have to do more than make purchases. Most programs charge an annual fee for better benefits. For example, with Citibank’s Basic AAdvantage, a program with American Airlines, customers pay an annual fee of $25 in exchange for earning one mile for every $2 spent. Citibank’s Premium AAdvantage program has a $65 annual fee, but customers earn one mile for every $1 spent. You’ll have to decide if the rewards are worth the fee.

With the restrictions typically imposed on airline miles, you may find yourself with a lot of unused miles. When applying for a rewards program, see if there is a way to use up, or burn, points for miles that you’ll probably never use. It could be something as simple as the ability to get magazine subscriptions or gift cards.

“At the end of the day you feel somewhat jilted if you don’t get to use those (mileage points),” says Brian Riley, senior analyst at Needham, Mass.-based TowerGroup. “I feel that way with gift cards when I end up with $1.72 at the end of it. I just don’t feel that I got my value. So at least with point-burners it keeps you engaged in it.”

What you get for free

Not all rewards programs carry an annual fee. Citibank’s ThankYou Network grants points based on the number of Citibank banking products and services that you use. The points can be used toward purchases made at over 300 retailers. Bank of America’s Keep the Change program rounds your purchases to the next highest dollar and transfers the difference from your checking account to your savings account. The bank matches the savings for three months and then contributes 5 percent per year.

While the debit reward options for consumers are better than ever, industry analysts say there’s plenty of room for improvement.

“Consumers are inundated with different loyalty programs, so they’re forced to make a choice,” says Bruce Cundiff, senior analyst at Javelin Strategy & Research in Pleasanton, Calif. “I choose the AA program, somebody else chooses United Airlines or a cash-back program or a catalog points program. We’re reaching this point where there’s a need for further innovation and looking at loyalty beyond just a rewards program.”

Rewards free of your bank

Cundiff cites Bank of America’s Keep the Change program as one that shows some innovation beyond the basic points program. Another evolution is the decoupled debit rewards card, which will broaden the landscape. Decoupled debit rewards cards can be linked to any bank account, as opposed to the standard debit card, which is linked to a checking account at the bank that issued the card.

Capital One is leading the way and expects to have a decoupled MasterCard debit rewards card widely available in the near future. Gwenn Bezard, research director for banking and payments at Boston’s Aite Group, says this card could be a significant improvement for consumers.

“There’s a huge difference between the rewards programs of credit cards and debit cards. The actual value received by the customer is 64 cents for every $100 spent with a credit card, while the value received for a debit card program is 10 cents. The actual value that a customer will receive (with the Capital One MasterCard) is expected to be between 40 cents and 60 cents. That’s four to five times higher than the typical debit rewards card.”

The card will, as Bezard puts it, walk, look and feel like a regular debit card. The difference is the customer won’t have a checking account with Capital One. Instead, funds for purchases are pulled directly from the customer’s primary checking account, which could be with any institution. The money comes out of your account once a day and the customer can track individual transactions on the Capital One Web site.

“The notion of moving your checking account is a hassle. The fact that this card links to your existing checking account regardless of bank and then also offers rich rewards based on debit purchases we think is a win,” says Capital One spokeswoman Pam Girardo.

Individual retailers may take advantage of this format by teaming up with other companies that offer a cheaper way to process card transactions by omitting the Visa or MasterCard connection. The retailer issues the customer a debit card that’s linked directly to the customer’s checking account. The card can be used at thousands of stores but the customer receives reward points when making purchases at the retailer whose logo is on the card.

See the full results of the Fall 2007 Debit Card Study and our detailed look at debit card rewards programs.

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