Death of Debit Card Rewards May Actually Benefit Consumers

NEW YORK (MainStreet) — Debit cards seem to be dying off slowly as banks make these common consumer tools more and more unfriendly for everyday Americans.

Wells Fargo (Stock Quote: WFC) is ending its debit card rewards program in October, and the bank is also testing a $3 monthly fee for debit card users in four states that same month.

Both changes are being attributed to the Durbin Amendment to the Dodd-Frank financial reform bill, which goes into effect on Oct. 1 and, among other things, imposes a 21-cent cap on swipe fees charged to merchants whenever a customer uses his or her debit card. Industry experts have long predicted that the Durbin Amendment would lead to the death of debit card rewards and higher fees for consumers.

However, Odysseas Papadimitriou, CEO of credit card comparison website CardHub.com, believes that other changes are forthcoming that will be a bit more consumer-friendly and they come in the form of prepaid cards.

“Prepaid cards were excluded from the Durbin Amendment so that they are still subject to the interchange fee that existed prior to the cap,” Papadimitriou says. As we have previously reported, prepaid cards work almost identically to debit cards but with one major exception. Since the money isn’t connected to a checking account, cardholders can’t cash paper checks. Prior to financial reforms, this payment option was largely marketed to low-income, cash-strapped or non-creditworthy people who couldn’t qualify for a traditional checking account.

Incidentally, this is what led to prepaid cards being excluded from the Durbin Amendment, as legislators hoped to spare low-income consumers from paying extra on the already fee-heavy prepaid cards. Some industry experts speculated that financial institutions would add new fees to the prepaid cards anyway as a way to recoup the swipe fees lost to the new cap on regular debit card transactions, but Papadimitrou believes that instead, banks will capitalize on the loophole in the legislation and try to attract other consumers to prepaid payment methods. 

“We’re going to see a new breed of prepaid card hit the marketplace,“ he says, citing that these cards will have little to no fees and rewards programs attached to them. “Just like with credit cards, you will have prepaid cards that are targeted to consumers with bad credit and prepaid cards that are targeted to those with good credit.”

Papadimitriou adds that there are other factors making prepaid payment options attractive to banks and issuers. For instance, since they eliminate a consumer’s ability to bounce a check, they represent a low fraud risk to banks. They’re also attractive to younger consumers who are conditioned to paying bills online and already find paper checks unnecessary.

“The more robust banks can make online bill pay, the more attractive this option will be,” he says.

The initiative isn’t without consumer interest. A 2010  study by Javelin Strategy and Research found that many consumers are increasingly using less traditional forms of payment, such as reloadable prepaid debit and gift cards.

Additionally, major banks and credit card issuers have also laid the groundwork for what Papadimitriou is predicting. For instance, Capitol One (Stock Quote: COF) has a reloadable prepaid MasterCard that is low on fees and allows for online bill pay and American Express (Stock Quote: AXP) launched its first prepaid card,  which can hold as much as $2,500 and charges no activation or maintenance fees, back in June. 

Should the trend continue as Papadimitriou is predicting, it could render the Durbin Amendment largely useless.

“It’s a very faulty legislation all around,” Papadimitriou says. “The notion that banks are nonprofit organizations that are going to lose a large portion of their annual revenue and not ask for it back in a different way is just wrong.”

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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