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Downside of debit card rewards

By Marcie Geffner · Bankrate.com
Wednesday, July 28, 2010
Posted: 8 am ET

There's a lot to like about bank debit cards: They're convenient. They don't involve a balance or interest expense. They look cool, and they come with rewards for frequent use.

Points, airline miles, cash back or even "Disney Dream Reward Dollars" can be yours if you sign up for the right plan and remember to swipe your debit card when you buy goods or services, according to Bankrate.com's 2010 Exclusive Debit Card Rewards Survey.

We all want rewards, right? Of course, we do.

But debit card rewards programs have a downside as well.

For starters, the programs have rules, restrictions and fees, which average about $25 per year. That means you have to earn at least that much in points, miles or cash back just to break even on the program.

What's more, banks don't offer debit card programs just to attract, retain or reward their customers. They offer these programs to encourage customers to spend more and process more transactions through their accounts. That's good for the bank because every time that customer swipes that card, the merchant has to pay the bank a processing fee. And one way or another, that fee comes out of all our pockets in the form of higher prices. The more rewards we earn, the more we pay for them.

Worst of all, debit cards are exactly like credit cards in one key respect: They're plastic, and we all know that "plastic money" encourages us to shop more and spend more because it doesn't seem real. Sometimes, we even refer to plastic as if it were real money as in "pay with plastic" or "Do you accept plastic?"

Unlike cash, plastic disconnects us from the value and cost of money. That's part of plastic's cool factor: It lets us spend without having to actually think about our financial situation.

Dollar bills and coins don't have a reward program, but nor do they have rules, restrictions, annual fees or processing fees. And they aren't plastic money.

So are the convenience and rewards of debit cards worth those downsides? Or would most of us be better off financially if we just said no to any more plastic money?

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3 Comments
Marcie Geffner
August 02, 2010 at 6:06 pm

Good comments, thank you Eri and Debra. Certainly there are a lot of variables to consider and certain situations in which credit, debit or cash makes the most sense.

Eri
July 28, 2010 at 11:53 pm

I disagree with some statements made in this article. I know of many banks that offer rewards without any fees. The article refers to a $25 annual fee to have a rewards debit card, but I see no reference to that claim. From my experience, most banks that offer rewards do so to attract and retain customers, as well as to lower their processing costs for cash, checks and other paper form of payments.

If a certain bank charges you to have a rewards program, then you haven't really done your homework to find those that do not. And there are many that do not.

And, it is true that banks earn a fee from the merchants when a debit card is used instead of a check or cash, but that income is earned by the bank whether there is a reward program or not. The fee is not applied only when rewards are present, therefore it is false to blame the debit cards with rewards for the fee in the first place. Logically, the way I look at it, the merchants are paying for a guaranteed form of payment, which they value. The bank is taking some of the money earned and sharing it with their customers. Sharing value with your customers doesn't hurt them or their bottom line. It simply makes them worth it, and ties them deeper into their banking relationship.

While I completely understand that the consumer always pays, I find it delightful that many banks are choosing to give us something back from that which we are paying for anyway.

Debra James
July 28, 2010 at 11:55 am

I know the article is about debit cards, but I am going to mention credit card use for rewards, because they are closely related. I use my debit and credit cards for just about everything, because of the rewards. I also pay off the balance every month, and make sure I have funds in my banking account to cover my purchases. Now, I would go back to using cash for a lot of in-person transactions if the merchant gave a discount that was equal to or greater than the reward given for using the card. Unfortunately, I, like a lot of people in this country, do a lot of online shopping, and most of those transactions will be executed with a card of some form; it's too convenient and provides more consumer protections in the event there is a problem with the product. Even if a merchant were to accept PayPal to allow customers to pay with cash, that will incur a fee for the merchant, and probably not provide the customer an opportunity for a discount. I think that the smaller brick-and-mortar merchant will benefit the most with offering discounts for cash payment, e.g., coffee shops, sandwich shops, pharmacy/convenience stores, etc. However, big-box and online stores will probably still see most transactions, especially for large-ticket items, processed with plastic. I know that I wouldn't buy a large-screen TV with cash even with a discount, because I get a price guarantee and extended warranty with my credit card.