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.

Currently, the leading online high-yield savings and 1-year CD rates hover slightly above 1.00% APY. Meanwhile, rewards checking rates are roughly 3.00% APY.

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.

Read: Fed Raised Debit Swipe Fee Cap to 21 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.

Follow Simon in the MyBankTracker.com Community and on Twitter: @simonzhen.

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  • Anonymous

    The best possible ending to this story would be the elimination of rewards checking. As long as reward checking exists, their will be more incentive for banks to become a middle man between you and the guy running your local corner store. Yes we need these banks so that we can use our debit and credit cards and that’s it, the swipe fee should just charge the operational costs. These swipe fees are getting out of hand and only mean that banks will be taking a larger chunk out of the transactions you make on a daily basis, and retailers will just pass this swipe fee down to consumers therefore raising prices.

    The only people who benefited from this are the people who were the bankers who implemented it, and the public who were savvy enough with their finances to capitalize off of checking reward high interest and cash back accounts before the government did something about it. The United States is a nation of consumers spending their government paychecks. We need to realize that every time we spend money and every revolving cycle of transactions has money just being siphoned off by banks and corporate managers. Therefore making the rich richer while the poor get rid of their savings accounts for these con artist checking accounts that only encourage spending so they can charge another 44cents in swipe fees.

    • Simon Zhen

      Certainly, another way to put it. Reverting to a primitive form of banking would surely cut down down on consumer confusion and bring back transparency. Unfortunately, that tends to result in less bank profits, which banks try so hard to avoid.

      • Anonymous

        Something is wrong when “savings” accounts give 1%, but somehow you can get 3% interest on a checking account that encourages spending. I think these reward checking accounts are certainly ethical, but they are counter-intuitive. Kasasa, a service that offers rewards checking through various community banks atleast offers a savings account as long as you link it with their high rewards account. The savings account usually has lower interest than the checking account but at least it segregates your money so that you avoid spending it. Perhaps they shouldn’t be labeled the way they are. People will try to use them as savings accounts to get the high interest (I would), but with the minimum transaction requirement, some less disciplined people will probably eat away at their savings.

        I recently graduated having studied econ and finance and am looking for a good place to start saving money (whenever i find a job) semi-long-term. I would consider one of these reward checking accounts but I feel that they won’t be around much longer, or at least not appeal as much as they do right now. As you said, rates and benefits are already decreasing. I will probably just go the route of keeping a savings account, getting bonds, and funneling all of my purchases through a cash back credit card which I would pay off every month.

  • Gabe

    You’re missing a correct description of the new network exclusivity rules.  

    The way the Fed implemented durbin requires that there only be ONE network per authentication method (Sig and PIN).  That means two unaffiliated networks on the card, but only ONE per authentication method is required. Why does that matter?  Because the CONSUMER not the merchant picks “signature” vs. “PIN”.  That means that the consumer picks their network (since only one network is required per method).  That means the merchant can’t effectively low cost route.  That means small FIs (<10B assets) should not see any short run impact to interchange provided their networks support the 2 tier interchange system.  And the networks have every reason to do so since many of the networks customers are indeed small FIs. In the long run, you'll see the shift from signature to PIN accelerate (because now the merchant can encourage PIN – or penalize sig based on your perspective).  You might also see some networks loading their cost structure into the fees they charge smaller FIs such that the networks can subsidize their business from the fatter interchange fees that the small guys can still charge the merchants.  So small FIs will see some margin compression. That stuff will take years.  Additionally, even though REWARDChecking-style accounts do generate more interchange revenue than traditional free checking accounts when you measure it in $Dollars$…on a % basis, (because the REWARD accounts have a lot more revenue drivers and significantly lower operating costs due to tech adoption), interchange is actually a much lower % of total REWARDChecking profit than it is of traditional Free Checking.So the end of REWARDChecking – not likely.The end of Free Checking – almost certainly.