Death of Debit Card Rewards May Actually Benefit Consumers

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.”

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