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Cuts to debit card rewards

By Lucy Lazarony · Bankrate.com
Tuesday, February 8, 2011
Posted: 3 pm ET

Do you earn rewards each time you pay with a debit card?

Better brace yourself for some changes. Cuts may be on the way to your bank’s debit card rewards program.

A proposed cap on debit card interchange fees would seriously slash fee income for banks.  And card industry analysts expect banks to curb or end debit card rewards programs because of this decline in income.

"Since some issuers have claimed that interchange fees fund rewards programs, expect rewards from debit cards to shrink," says Bill Hardekopf, chief executive officer of LowCards.com. "Banks will likely not fund rewards out of their own pocket."

Already Chase is closing off enrollment for its debit card rewards program, according to an article by the Associated Press. The debit card rewards program will only continue for Chase customers already enrolled in the program as of Feb. 8, according to the AP article.

In December, the Federal Reserve proposed new rules to set standards for interchange fees that merchants pay to banks when consumers make purchases with debit cards.

The new rules could limit interchange fees from 7 cents to 12 cents per transaction.  The proposed cap would reduce the maximum interchange fee that an issuer receives for a debit card purchases by more than 70 percent compared to the 2009 average, according to a press release from the Federal Reserve.

The proposed rules would implement provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act and would apply to issuers that have assets of $10 billion or more.

The rules are open for public comment through Feb. 22. They take effect on July 21, 2011.

A new study from Speer & Associates, a financial services consulting firm based in Atlanta, predicts that banks will respond to a cap on debit card interchange fees by charging customers new fees and higher balance requirements on checking accounts.

"Consumers will be required to adjust to new deposit account fee schedules, higher balance requirements, lesser rewards programs and similar revenue-generating or cost-controlling initiatives," the study explains.

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