Debit Cards and Rewards
The demise of debit card rewards program have been greatly – well, make that slightly – exaggerated
The government’s response to the financial meltdown in 2008 was years in the making and an extremely controversial piece of legislation that passed on a strictly party line vote. One component of the sweeping Dodd-Frank Act, which President Obama signed into law in 2010, is now thought of as the death knell for debit card reward programs.
Inserted into Dodd-Frank Act at the last minute, the so-called Durbin Amendment, named after its sponsor, Illinois Senator Dick Durbin, capped the fees banks can charge retailers when customers purchase something with a debit card. The Durbin Amendment capped at 21 cents the fee banks are allowed to charge retailers when a customer swipes a debit card. Earlier, banks charged an average of 44 cents per transaction. Banks complained that the new limit would cost them billions of dollars, which is certainly true, and in response began to institute a variety of new fees on checking accounts and rolling back their rewards programs to compensate for the lost revenue. (You can take a look at the full Dodd-Frank Act / H.R. 4173 at the following link, but be warned: this is an 848 page PDF file and it may take a while to load, especially if you are on a slower connection. http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf)
Contrary to the protests, though, not all debit card rewards programs are extinct. Here are a few that are still kicking:
Cash Back Lives
Unlike so much of the jargon used in the financial world, this is a program that does exactly what it says. You get a small percentage of your purchase amount credited back to your bank account. However, there are some limitations. This bonus is applicable only if you purchase at participating retailers. Ally Bank, Beneficial Bank and PerkStreet Financial offer cash-back rewards programs. For example, the online bank PerkStreet offers 1% cash back on most purchases and 2% if you purchase from select online retailers, including Amazon, Target, BestBuy and Wal-Mart.
Points and Prizes
As much as people love to get cash back for purchases they have to make anyway, earning a few extra bucks doesn’t feel at all like getting a present. Many debit card issuers understand that there’s more of a thrill when your use of their card actually earns you something tangible, like a meal at a restaurant. That’s why banks and credit unions reward their customers with points for everything from carrying high balances to making minimum deposits to, of course, using their debit cards.
These rewards programs are straightforward: use the debit card to earn points, which can then be redeemed for a variety of different prizes. For instance, at the time of this writing, Chase has the Disney Visa debit card, which offers deals such as a $50 credit toward Disney Cruise Line vacations and a 10% discount at select Disney Resort restaurants. Logix Federal Credit Union’s debit card reward points that can be used on electronics, round-trip travel on any major airline, gift cards and even adventures like hot air balloon rides and whitewater rafting.
With all the protests banks were lodging about the impact of the Durbin Amendment, you may wonder how banks can still afford to offer rewards. It’s simple. The Durbin Amendment does not apply to banks that have less than $10 billion in assets. So, smaller banks are not affected.
Don’t Rush In
Keep in mind that rewards programs are not offered by banks out of selfless altruism. No, banks promote these reward debit cards because they make the bank money. As with so much in the personal finance universe, that is accomplished through fees. Most debit reward cards come with fees. For example, Bank of America’s annual fee for its Alaska Air debit rewards card is $30. Don’t forget that there is no such thing as a free lunch. Rewards programs are aimed at making accounts more attractive; they don’t make the account fundamentally better.
So, when opening a debit card account, make sure that the basic features of the account fit your needs. Don’t rush into an account just for the rewards program. Otherwise, your fees could easily surpass your rewards — and where’s the reward in that?