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Don’t get too attached to debit card rewards

By Claes Bell, CFA · Bankrate.com
Thursday, November 11, 2010
Posted: 5 pm ET

Hope you JP Morgan Chase customers out there weren't too attached to your debit rewards cards.

From American Banker this week:

Chase last month stopped giving bonuses to bankers and branch managers for signing up debit card customers. Beginning in February, it will no longer issue debit rewards cards to new customers, Charlie Scharf, JPMorgan Chase's chief executive of retail financial services, told the BancAnalysts Association of Boston Conference on Nov. 4.

This move is likely in part a response to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which will begin setting limits on the amount of money your bank can charge retailers for processing debit card transactions.

Smaller interchange fees mean debit cards will be less profitable for banks, reducing both their means and incentive for subsidizing debit card rewards. After all, if banks aren't going to make money from your debit card transactions, they won't care much about encouraging to you to make more of them.

A new survey finds more consumers are using their debit card over their credit cards

Debit card rewards are on their way out.

On the surface, this is yet another example of consumer "blowback" from financial reform. A similar dynamic appears to be at work with free checking accounts, which have been rapidly declining in number since new rules from the Fed took effect requiring banks to seek customers' permission to include them in overdraft protection. On balance, the end of automatic enrollment in often usurious overdraft programs is probably a good thing, but the resulting erosion of free checking, either through minimum balance requirements or monthly fees, is pretty annoying.

The banks have been quick to blame all these changes in fee structures and rewards programs on increasingly stringent regulation limiting their profits. But I think a factor that often gets overlooked in all this the consolidation and attrition in the banking industry in recent years.

Since the beginning of 2009 alone, almost 300 banks nationwide have gone bust. All told, the number of FDIC-insured institutions has dropped from 8,392 as of Sept. 2008 to 7,731 as of Nov. 4 of this year. For those of you keeping score, that's a drop of 661 institutions, or nearly 8 percent.

In large markets, that might not mean that much, but in smaller markets, where the two banks that had the most branches were, say, Washington Mutual and Chase, the erosion of competition is even more acute.

For a parallel, imagine if Nissan, which has about 8 percent of the U.S. market share rapidly went out of business. In towns where there were many dealerships, car prices would probably not decline, but in towns where there were only two or three car dealerships and one of them was a Nissan dealership, competition for new car sales would decline drastically.

That reduced competition is a contributing factor you don't hear banks talking about, because it's easier to blame increased regulation when they want to do things like kill off free checking. But the current marketplace at least on the surface appears to be significantly less competitive than the one in which free checking and debit rewards cards became widespread.

What do you think? Is decreased competition playing a role in banks' "fee-for-all"? Or is Uncle Sam solely to blame?

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3 Comments
Debra James
November 16, 2010 at 2:19 pm

It doesn't take long for people to get used to something, and think that it should stay that way forever. From the 70s until the late 90s it was customary to pay for checking accounts if it was kept below a certain balance. In those days there wasn't the opportunity to avoid the fee if you had direct-deposit, or used your debit card X times per month.

Although many people in my generation and older may like the idea of having a physical checkbook, but I suspect that the more frugal bank customer will turn to online banking as a means to save on the checking account fee.