Wachovia to Customers: Choose Credit

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If you had a choice, would you help your credit card issuer make more money off merchants?

Many customers would not, as card issuers are generally seen to be the bad guys. That’s why Congress passed the CARD Act in 2009: To restrict practices that lawmakers, regulators, card users and consumer advocates considered abusive, like raising interest rates on existing balances.

This summer, another measure, the Dodd-Frank Wall Street Reform and Consumer Protection Act, gave retailers more freedom to offer customers incentives such as discounts to use their debit cards instead of credit cards. Merchants pay smaller fees for debit transactions than for credit card purchasers, but the contracts they sign with card issuers had long prohibited them from offering such incentives.

Now Wachovia, a unit of Wells Fargo (Stock Quote: WFC), is fighting back against the reforms. In a recent mailing to its debit card customers, the bank offered incentives to get customers to designate “credit” as the payment method, even when using a debit card.

Most debit cards can be used either way, though both approaches draw on the customer’s checking account to pay for the transaction.

When you order a debit transaction, you use a pad to enter a personal identification number, or PIN. Make the same purchase as a credit transaction and you sign the credit slip just like you would with a credit card. Behind the scenes, the transactions are handled by different systems.

A Wachovia spokesman was candid about why the bank is pushing credit transactions. “Most issuers prefer customers to use credit because most merchants pay higher interchange rates” for credit transactions, said Lisa Westermann, assistant vice president for public relations at Wells Fargo.

Merchants pay more for the “convenience” of using the credit-clearing system, she says, and experts say fees on credit transactions typically run around 2%, while debit fees usually fall well below 1%.

Apparently, not enough merchants feel that convenience is worth paying so much for, so Wachovia has appealed directly to its customers by offering 500 “bonus points” for customers who consistently choose credit transactions.

Bonus points are not especially valuable. It takes 2,300 of them to earn a $25 movie theater coupon, according to Wachovia’s website. In that scenario, a point is worth just over a penny, roughly $5 for the 500 that the bank has offered in the deal.

To get this $5 benefit, the Wachovia card user has to designate “credit” on at least 43 purchases in November, according to the bank. Paying bills with the debit card counts as well, as does using the card for online or phone purchases, since these are all credit transactions by default. As the Wachovia mailer warns, “purchases you make using your Personal Identification Number do not earn points or count toward this offer.”

Customers who really like reward programs come out ahead by choosing the credit option all the time, not just during special offers like Wachovia’s. But unless you use your card for big business expenses, it can take a long time to earn enough points for something truly valuable like an airline ticket.

In the meantime, the merchant will rack up bigger costs, some or all of which will be passed on to customers. If the vendor offers a lower price for purchases on the debit option, the customer benefits immediately, without having to accumulate a pile of nearly worthless points.

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

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