Wachovia, the Washington area’s largest bank by deposits, has ended its debit rewards program for new customers out of concern that a pending cap on interchange fees — what banks charge merchants for debit card transactions — will make the discounts unaffordable.
Rewards, earned from an accumulation of points received through debit card purchases, are often enabled by a percentage of the revenue from so-called swipe fees. With the Federal Reserve bent on a 70 percent reduction of the current average fee of 44 cents per transaction, a growing number of banks, including SunTrust, are terminating or their debit card rewards.
Proponents of the cap decry the move as another banking scare tactic, following ATM fee hikes and threats to impose debit card spending limits, to sway congressional support to kill the law. Financial institutions argue, however, that they are being forced to compensate for an anticipated loss of billions in revenue.
Consumers used debit cards in nearly 38 billion retail transactions valued at $1.45 trillion in 2009, according to the most recent data from the Fed. That year, banks collected roughly one percent of each sale, raking in approximately $16 billion.
“The proposal on the table for interchange rates would approximately reduce our [interchange] revenue anywhere from 75 percent to 95 percent,” said Michael Golden, Wachovia’s regional president for Greater Washington. “At the [proposed] cut rate, the fee is not even enough to cover the cost of providing the service, processing the transactions and managing the fraud element.”
Wachovia’s decision took effect March 27, with its parent company, Wells Fargo, to follow suit on April 15. Existing rewards members are unaffected, though that may change once the Fed hands down the final rules on the cap.
The agency, tasked by the Dodd-Frank Act to reform interchange fees, was scheduled to issue rules on April 21, with the law to take hold in July. Chairman Ben S. Bernanke said last week, however, the Fed will likely miss the deadline as it investigates the barrage of comments elicited by the controversial plan.
The announcement comes as the banking lobby is urging politicians to do more study before enacting the law. To that effect, Sen. Jon Tester (D-Mont.) recently introduced a bill calling for a one-year study of the fees, claiming the cap may shift costs to consumers.
Merchants say consumers are already being burdened by prices that are driven up as a result of swipe fees. If anything, implementing the cap, they argue, could draw down prices. What’s more, the money merchants save could be reinvested into their businesses and used to create jobs.
“The smallest retailers pay the highest fees [because] they don’t have the income streams to buffer any of those costs,” argued Lyle Beckwith, senior vice president of government relations for the National Association of Convenience Stores. “It’s prohibitive for small businesses.”