Sunday, April 20, 2014
Inquirer Daily News

Debit-card reward points, RIP?

After months of threatening, two of the nation's megabanks have pulled the trigger. Wells Fargo and JPMorgan Chase say they will no longer offer debit-card rewards points to new customers. Good riddance.

Debit-card reward points, RIP?

After months of threatening, two of the nation's megabanks have pulled the trigger. Wells Fargo and JPMorgan Chase say they will no longer offer debit-card rewards points to new customers.

Is this a serious loss? The banking industry wants you to think so, and has been pushing back hard against the Federal Reserve's proposal that could limit debit-card fees to a flat 12 cents per transaction. The same two megabanks have also floated the idea of limiting debit-card transactions to $50 or $100, according to this industry blog.

Plainly, a lot of money is at stake: The Federal Reserve says the cap would cut debit-card transaction fees by 70 percent - or by amounts estimated as high as $25 billion a year.

But here's the thing the banking lobbyists want you to forget, as they try to persuade the Fed or Congress to undo the portion of the Dodd-Frank financial reform that requires debit-card fees to be "reasonable and proportional" to the costs of transactions: It's your money they're playing with.

Remember? That was the point of banks' promoting debit cards as an alternative to cash, checks and credit: You could use a plastic card to make a payment directly from your bank account - with no credit risk to the bank (or to you) and less of the hassle associated with cash and checks.

Gradually, banks worked with Visa and MasterCard to corner the market, drive out more-secure PIN-based systems, and ramp up debit-card transaction fees. A few years ago, flat fees prevailed. Now banks and Visa or MasterCard take a fee that's partly based on a percentage of the transaction, just as they do with credit cards.

To keep you happy, some banks offered some customers credit-card-like rewards points. They skimmed transaction fees of 1 to 2 percent, and rebated part of it back to some account-holders. The rest of the cash flow boosted their extraordinary share of the nation's corporate profits, which the federal Bureau of Economic Analysis put in context last week in the BEA's latest report on gross domestic product and profits:

Domestic profits of financial corporations increased $57.7 billion in the fourth quarter, compared with an increase of $34.6 billion in the third. Domestic profits of nonfinancial corporations decreased $10.1 billion in the fourth quarter, in contrast to an increase of $0.3 billion in the third.

As the Wall Street Journal's Kathleen Madigan put it in the Real Time Economics blog, "After rising like the Phoenix, the financial industry now accounts for about 30% of all operating profits. That’s an amazing share given that the sector accounts for less than 10% of the value added in the economy."

Bank managers are hoping you'll forget where those debit-card rewards come from - from the cut your bank takes on each of your purchases at the gas station, the grocery, the drugstore, and wherever else you swipe your debit card. You're paying for the rewards yourself, or benefiting from a transfer payment from other bank customers who don't insist on rewards. But don't kid yourself: those inflated transaction fees are boosting the costs of every business that accepts debit cards, and are reflected in their prices.

Besides, if you really covet the rewards points, there's an easy alternative: Use a rewards credit card, and pay it off scrupulously each month with the cash you're not debiting from your checking account.

Don't cry for the banks, or the lost rewards. It was a sucker's game all along.

Jeff Gelles Inquirer Business Columnist
About this blog

Jeff Gelles, who writes the Inquirer's weekly Consumer 14.0 and Tech Life columns, takes a broad look at the marketplace of goods, services, and ideas.

Reach Jeff at jgelles@phillynews.com.

Jeff Gelles Inquirer Business Columnist
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