Bank President Paints Grim Picture of Reward Checking's Future

A few readers forwarded me an email that was sent out today by the president of Royal Banks of Missouri (Thanks!) The intent of the email was to prepare customers for future changes on their reward checking accounts. According to the email, the changes will be required due to the future Federal Reserve regulation that will cap debit card interchange fees. I reviewed this Federal Reserve proposal in this December blog post. Here's an excerpt from this email:

On July 21, 2010, the Congress passed and the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). One of the provisions of Dodd-Frank is that the Federal Deposit Insurance Corporation was required to review debit card transactions and the fees being assessed by banks on the merchants accepting the cards.

Recently, the FDIC released their initial thoughts on reducing debit card fees to 7-12 cents per transaction. While this may seem like a good thing for consumers, it is not a good thing for you as a Majestic Account owner. Royal Banks of Missouri (Bank) used the debit card fee income to help offset the high interest rate we have been able to pay you on your Majestic account. Given that our income will be almost totally eliminated and, it is quite possible that the Bank will lose money on each debit card transaction, a fundamental change to all of our Majestic Accounts will occur when the current proposal becomes law.

Currently, the Bank is studying numerous ways to help offset the elimination of the debit card income. While we have not finalized any plan, I am compelled to inform you that there will be significant changes in the structure and interest rate paid on all existing Majestic Accounts.

I anticipate that we will be finalizing our changes sometime in March/April. The Bank will provide you with at least 30 days notice on any structural changes and one weeks notice on any interest rate change.

One issue that wasn't discussed in the letter is that the debit card fee caps are suppose to only affect banks with at least $10 billion in assets (Royal Banks of Missouri is under $1 billion). Visa has already said it will support a two-tier fee system. Nevertheless, as shown in this letter, there are worries that the new regulations will still affect the small banks.

One reader just emailed me about his correspondence with a small bank which said its processing is done by a large bank (over $10B in assets), and therefore their debit fees will go down 90%. This type of issue is likely part of the reason why the Credit Union National Association (CUNA) has been against this regulation. The president of CUNA expressed concerns about how this regulation might have unintended effects on credit unions:

Since its introduction in the Senate, we have raised grave concerns that the Interchange Amendment lacked any enforcement mechanism for the small issuers’ exemption and that there is no guarantee the payment card networks will operate a two-tiered system the exemption necessitates for small issuers.

I think it's going to be a while before we know the true effects of this regulation. Nevertheless, the worries about its impact are currently another headwind for reward checking.