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Another debit rewards program falls

By Claes Bell, CFA · Bankrate.com
Tuesday, August 23, 2011
Posted: 11 am ET

Five months after closing its debit rewards program to new customers, banking giant Wells Fargo announced this week it's ending debit rewards programs for existing customers.

From Blake Ellis at CNN Money:

Beginning in October, customers who are already enrolled in the issuer's debit card rewards program will no longer receive points for making debit card transactions.

In most debit rewards programs, points are awarded to customers for actions like spending, carrying high balances and making minimum deposits. Customers can then redeem the points they collect for cash or gift cards or even electronics.

Wells Fargo customers currently receive a point for every $4 they spend using their debit card, and up to 16 points for every $1 spent online at select retailers. In exchange, the bank charges a $12 annual fee. Once the rewards program ends, customers will no longer be charged the annual fee, and they will still have access to points they have earned.

This is just the latest in a series of high-profile shutdowns of debit rewards programs. SunTrust, PNC Bank and Chase, as well as numerous smaller institutions, have all killed off debit rewards programs this year.

Like the other banks mentioned above, Wells blamed the debit interchange fee cap established by the Durbin amendment and set earlier this year by the Fed for making the program unprofitable:

"We made this decision due to new regulations that limit the amount of money merchants pay financial institutions for processing debit card transactions," a Wells Fargo spokeswoman said. "The new cap doesn't cover all the costs associated with offering debit cards, including processing, administration and fraud."

This line of reasoning makes a lot of sense. After all, what's the point of trying to encourage customers to make debit purchases if banks' take on those purchases is capped by law? Between the Durbin amendment and the Fed's crackdown on lucrative overdraft programs, there's no doubt retail banks are facing some serious limitations on how much money they can make on providing checking accounts to your average Joe or Jane.

But I think there's probably more to this story than just new regulations. Between rock-bottom loan rates and tepid loan demand, the banking industry as a whole just isn't all that profitable right now. Absent these regulatory changes, I think banks, even healthy ones like Wells Fargo, would be looking for ways to cut back on overhead and increase profit margins.

On top of that, thanks to continued fear and uncertainty in global markets, banks are sitting on a record-setting mountain of checking account and savings account balances without any good place to invest them. They don't really need customers breaking down their doors right now with a bunch of unprofitable checking account deposits, so they're not going to work as hard to attract them with things like free checking and debit rewards.

So while banks would obviously prefer a world where none of these new regulations existed, they do provide a convenient scapegoat for a bunch of unpopular changes to customers' accounts that banks would probably have good reasons to make anyway.

What do you think? Would banks be discontinuing rewards programs and adding fees even if they weren't facing these regulatory changes?

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4 Comments
Johnny Wheeler
August 23, 2011 at 4:22 pm

WFargo charging me a monthly fee for using my own debit card was the last straw for me, so ridiculous. I found a great alternative visa debit card Akimbo Card, no charge to use or sign up and connects directly to your existing bank account, really recommend googling it I love it.

Mario
August 23, 2011 at 2:33 pm

If debit card "rewards" have to go in order for the smaller businesses to not be strangled by transaction fees from banks, then so be it. Debit card rewards were a nice feature, but never necessary for me.

Doug Radish
August 23, 2011 at 1:21 pm

The Banks were never funding the rewards program. It has been the merchants. With the cap of the transaction fees, the rewards program was now going to cut into the profits of the bank, thereby initiating all the cuts in the rewards programs.
Frankly, as a merchant who pays the transaction fees, I am happy to see them go.

Bill McDermott
August 23, 2011 at 12:55 pm

I think banks are taking a deep look inward and attempting to find ways to cut costs. 80% of a bank's profit comes from lending activity. If it's soft, banks look to cut people first and unprofitable segments second. Wells Fargo is also experimenting with charging debit card fees to users in Georgia.