With the debit card swipe fee rules finalized, small institutions face an unclear future that may threaten the appeal of one of them popular products – rewards checking accounts.
Faced with abysmal savings and CD rates, many consumers have flocked to rewards checking accounts to keep their money on a path of growth – but new regulation may make it less effective.
There is plenty of work required to earn that higher rate. Rewards checking will pay the attractive interest yield only when a customer conducts certain transactions on their account. Commonly, they have to maintain a certain balance, receive direct deposits, pay bills online, and make an estimated average of 10 debit card purchases per month.
The debit card purchases result in significant debit card interchange fees collected by banks from merchants. But, the new rules under the Durbin Amendment will place a 21-cent limit on debit card swipe fees per transaction, down from the average of 44 cents.
The Federal Reserve implemented a provision that exempts smaller institutions with less than $10 billion in assets. But, it may not be enough, as many anti-Durbin proponents have argued. Even Fed Chairman Ben Bernanke expressed concern over the impact to smaller banks, where rewards checking is most likely to be available.
“We continue to be concerned about the impact on consumers and small financial institutions from this price-fixing policy,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition, after the rules were finalized.
The debit swipe fee caps are expected to hit small banks due to “market forces.” Merchants will have the choice between processing debit card transactions through competing unaffiliated payment networks. When merchants compare costs and are driven towards lower swipe fees, the entire payment network market may slowly drift towards charging close to the 21-cent limit.
When these forces pose a threat to revenue at Durbin-exempt banks, rewards checking accounts are in jeopardy. They’ll follow the same tragic path once walked by free checking and debit card rewards programs at the big banks.
Some possible changes include lower interest rates, higher number of required debit card purchases per month, fewer ATM fee reimbursements, or the dreaded monthly account fee.
The final rules are now set to be effective as of October 1 but some banks are already anticipating the impact.
Evantage Bank, a Durbin-exempt online bank known for its nationally available rewards checking account, has announced an interest rate cut from 3.25% APY to 3.00% APY on July 21, the original date that Durbin rules were to take effect.
Northstar Bank of Texas, serving customers in Oklahoma and Texas, will cut the rate of its Velocity Checking account from 4.01% APY to 3.01% APY on July 20.
But, the worst possible ending to this story is: elimination of rewards checking entirely.
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