Do you now use debit cards more than credit cards? For savers who depend on the high interest rates of reward checking accounts, you probably make more purchases with debit cards. Before reward checking, I only used credit cards. I considered credit cards to be safer and I received cash back rewards. Recent security breaches in the news are showing why credit cards are safer. In terms of rewards, new regulation will likely make debit cards less rewarding than credit cards.
The latest security breach happened at the arts-and-craft chain, Michaels, which reported that stores in 20 states had tampered PIN pads at checkout terminals. According to this Chicago Tribune article:
The scope of the crime has surprised security experts and exposed the vulnerabilities of debit cards
The problem with debit cards is that money comes right out of your checking account. With credit cards, you can dispute fraudulent changes without any affect to your bank account. This ABC News article about debit card security includes a quote from Frank Abagnale, a former fraudster turned security consultant who was the inspiration for the film "Catch Me if You Can."
"I don't have a debit card. I believe it's one of the worst financial tools ever given to the American public,"
The article lists 8 reasons to worry about debit cards. The risks include losing account access and unlimited liability if you wait too long to report the fraud.
Interchange Revenue Issues
The other major issue with debit cards may impact the rewards. When you make a purchase with a debit card or credit card, the retailer pays an interchange fee of between 1% to 2% of the cost of the purchase. Most of that fee goes to the bank that issued the card, and many banks return some of that money to their customers in the form of rewards. For credit cards, cash back is the most common type of rewards. For debit cards, in addition to cash back, there's high interest rates and ATM fee reimbursements of reward checking.
The interchange fees that banks receive from debit cards are in jeopardy due to the Durbin Amendment that was part of last year's financial reform. It requires the Federal Reserve to implement caps on debit card interchange fees. That regulation is scheduled to take effect this July 21st. The Durbin Amendment exempts small institutions with less than $10 billion in assets. However, there are complications with implementing this cap, and this isn't the only risk to small institutions. One of my contacts in the industry warns that there's another part of the regulation that covers debit card transaction routing, and this part of the regulation could also hurt the interchange revenue for small institutions.
These are the reasons why credit unions are against this regulation. Both banks and credit unions have been pushing for the passage of bills in Congress that will delay the implementation of the Durbin Amendment.
The latest news on the interchange regulation is that it's likely to take effect this year. According to Capitol Hill observers quoted in this Digital Transaction article, the regulation will take effect, possibly a little late with modified caps. The legislation to delay the regulation faces a lot of headwinds for it to make it through Congress.
If the interchange regulation does take effect, it may take a little while before its impact to small institutions become clear. Nevertheless, based on the concerns from credit unions and small banks, interchange revenue from debit cards will be hurt. So this might cause banks and credit unions to cut back on their debit card rewards which would likely include lower reward checking interest rates.
Reward Checking Without Debit Cards?
It is possible that reward checking can survive even if the interchange regulation does take effect. This regulation only affects interchange fees from debit cards. It does not affect credit card interchange fees. Perhaps banks and credit unions will offer reward checking accounts that have credit card usage requirements instead of debit card usage requirements?
The company that created the reward checking model, BancVue, may have something in the works. BancVue will be involved in meetings at an upcoming banking conference, and on the agenda is the following topic: Why Credit Cards Make Even More Sense for Community Institutions, Especially To Help Overcome The Reduction In Debit Interchange. I don't know if there are complications with replacing the reward checking debit card with a credit card, but it would seem to be the perfect solution to these two major debit card issues.