Drop in Debit Card Interchange Revenue and Effect on Reward Checking
The recent reward checking rate cuts may not be just due to the awful interest rate environment. There are reports that debit card interchange revenue has fallen for small institutions. According to this Washington Post article, credit unions saw the first-ever decline in interchange revenue in the third quarter of 2012. This is due to the routing and exclusivity provision to the Dodd-Frank Act that took effect last April. It gives merchants more choices in how they process the transactions, and in summary, it drives down costs.
Each time you make a purchase with a debit or credit card, the merchant is charged an interchange fee, and a portion of that fee is paid to the bank that issued the card. I've heard that interchange revenue that small banks receive averages around 1% of debit card purchases. So if you make $500 in purchases with your debit card, your bank will receive around $5 from interchange fees. The bank can then use part of this interchange fee for rewards back to the customer, like high interest rate on the checking account.
The Durbin Amendment of the Dodd-Frank Act took effect in October 2011. This put a cap on debit card interchange fees for large banks. Small banks and credit unions were exempt from this cap. It appears that this exemption has spared small banks and credit unions from lower interchange fees. However, they are being affected by the routing and exclusivity provision.
This is another headwind for high-yield reward checking accounts. It may explain why we have been seeing many rate and balance cap cuts in the last month. It also may discourage banks and credit unions to launch new reward checking accounts. When we do see new reward checking accounts, the balance caps are often under $25K. Balance caps of $15K and $10K have become much more common. The balance cap is the maximum balance that qualifies for the reward checking account's top rate.
High-yield reward checking accounts have provided savers an alternative to internet savings accounts over the last five years. There's more work involved with reward checking due to the debit card usage requirements, but this extra work can be worthwhile when reward checking accounts offer high rates with reasonable balance caps. As reward checking rates come closer to internet savings account rates and as balance caps are reduced, there will be a point where the extra work won't be worthwhile.
Searching for the Highest Reward Checking Rates
You can find reward checking accounts available in your state by using our reward checking table. You can also use the table to find reward checking accounts available nationwide. Refer to this post to learn how to use the table.
To learn more about reward checking accounts, please refer to my post 10 Common Traits of High-Yield Reward Checking Accounts.