The Perks of A Debit Card - How they are Changing

The Perks of A Debit Card - How they are Changing

With pending legislation threatening to cap the transaction fees banks can collect from debit card purchases, large banks are pulling back on the rewards. However small banks may have an ace in the hole and benefit.

Most consumers are familiar with a debit card.  In many cases it is more important than the starter check package.  One gets their card in the mail, calls the number on the back, removes the sticker, signs the back and then has immediate access to their funds.  Many cards come with reward programs, like for every five dollars spent one gets a point.  Reach 5,000 points and get a free toaster.  Recent legislation is shaking up the debit card world.

In 2009, U.S consumer spending via debit cards rose to $1.45 trillion.  The average debt transaction was about $38 - $44.  Consumers simply like using their plastic to make purchases.  While one would think that the credit card companies would cringe at the thought of people using a debit card versus a credit card, it's not the case. The credit card companies along with the issuing banks back debit cards, so they are getting paid per transaction as well.

What does differ between debit and credit cards is that in a credit situation, only the credit card company gets money per transaction.  With a debit card, the issuing bank gets a fee.  However, following the now infamous collapse of 2008, the Dodd-Frank legislation proposed in congress calls for a cap on debit card swipe fees.  The deadline to formally determine this cap rate is April 2011.

The goal of the legislation is to limit the fees charged small businesses. Debit card swipe fees directly impact small business revenue, and this trickles down into a loss of hours for employed workers or the lack of funds to hire more, thus adding to the stagnant employment situation.

Currently the average fee is about $0.44 or 1% of the transaction. The proposed fee is $0.12 per transaction. Banks argue that limiting this fee will cause them to lose revenue and they will have to make it up by raising other fees (i.e. ATM fees) to cover the lost revenue.  Some may decide to not issue debit cards.  

Yet, all banks (and credit unions) are not created equal.  The debit card legislation is focused on banks with $10 billion or more in total revenue.  Banks like JP Morgan Chase and Bank of America are far above that threshold which may be one reason that on February 8, 2011 they stopped issuing debit rewards.  They realize they will probably only get about 25% of the fees they were getting before the cap was proposed.  However, this ten billion level opens the door for the local and regional banks, most of which fall well below that amount.  They may still charge 1% of the cost of the transaction.  As they will not be subject to the cap, they can offer perks to not only retain customers, but also attract those from larger banks. 

Ironically, banks would still prefer that consumers use a debit card verse a credit card, because 12 cents or 44 cents is still money in their pocket (and out of the retailers).  However at 44 cents there is much more of a push.  That's why it's hard to see debit card rewards programs or debit cards going entirely away. But if this new legislation passes, look for the best debit card deals from the local bank down the street.

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