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If the Durbin Interchange Amendment proceeds as most people expect, some time in July 2011 will mark D-Day, or “Durbin Day,” a date this summer when the Federal Reserve begins capping interchange fees for debit card use.
There are a few other changes that we’ll also see, which will affect debit and credit card customers. First of all, retailers will now be permitted to place legal minimums (say, $10) on credit card transactions. Additionally, retailers will be permitted to offer discounts and incentives for paying with debit or cash rather than credit cards.
Proponents of the Amendment believe it will help small businesses compete with the Wal-marts of the country. Debit card interchange fees are traditionally lower than credit card fees, but most people — due to the convenience and the rewards programs, which offer points or cash back for credit but not debit transactions — choose to use their card as a credit card when they have the choice.
Businesses like Wal-mart have negotiated lower interchange fees for credit cards than Mom-and-pop stores. The Durbin Amendment could, theoretically, even the playing field for small retailers by encouraging customers to use their debit card and saving small businesses money.
The higher interchange fees for credit cards help fund the rewards programs for the most part. (Does it surprise you to learn that it’s actually retailers, not the banks and credit card companies, are paying for rewards?)
In today’s instant gratification society, though, given the choice between a 1% discount at the register, immediately, or earning even 3 to 5 % rewards points to be redeemed at a later date, people are more likely to take the 1 % discount. If it’s a choice of 1% rewards or a 1% discount, the answer is a no-brainer.
An End to Credit Card Rewards?
So, does Durbin mean an end to credit card rewards programs? We posed this question to top banks and credit card issuers and none acknowledged the connection between lost revenue and an end to, or reduction in, credit card rewards.
A likely scenario, however, is that credit card issuers will look increase the perceived value of rewards programs without increasing their costs. Trends toward mobile rewards, shopping apps designed to help you manage your rewards more easily, and rotating rewards categories (which actually average out to about 2% back in all spending categories, year round, for most customers), won’t cost more, but will give customers the perception that your credit card company is taking care of its rewards customers.
Additionally, we may find credit card companies pushing more merchandise-related rewards, which, through retail partnerships, cost banks less than giving cash back. You may find there’s a lot more value in redeeming your points for a gift card from a popular retailer like Best Buy or Amazon than in getting a statement credit or a check.
We may also expect subtle changes. For instance, right now, 5,000 points may get you $50 cash with most rewards programs. Imagine those 5,000 points being worth only $25. Or, when you make a purchase, it could take $2 to accrue one point.
Time to Decide
The important thing to remember is that Durbin isn’t finalized yet and there’s plenty of time for things to change before July. Even then, banks will probably wait to see how customers react to the change: Are more people abandoning their rewards cards in favor of PIN transactions?
How credit card companies react to the Amendment in terms of their rewards programs may well be decided by the way customers change (or don’t change) their spending behavior in reaction to the law.