Debit Rules Not Set in Stone, But Rewards Cuts May Be

When a number of large banks recently upset their debit card customers by announcing cuts to rewards, they blamed the pending debit interchange cap. What, or whom, will they blame if Congress changes or delays the cap's implementation — and they don't reinstate the rewards programs?

The rules are "not yet buried and set in concrete, so there are possibilities it may be delayed or changed," said Bill McCracken, the chief executive of Synergistics Research Corp., an Atlanta payments research firm.

"If that happens … there's not an easy way to backtrack," McCracken added. "In the mind of the consumer, it will be messy."

The possibility of a delay became more realistic this week when Federal Reserve Board Chairman Ben Bernanke announced that the central bank will miss its April 21 deadline, legislated by the Dodd-Frank Act, for releasing final rules on the fees that banks earn from debit card purchases.

The Fed said it still plans to have its finalized rules out before the July deadline for their enforcement.

JPMorgan Chase & Co., Wells Fargo & Co. and Regions Financial Corp. are among the companies that have already announced changes to their debit products.

Ed Kadletz, an executive vice president and head of debit and prepaid cards at Wells Fargo, said in an interview this week that it was important to get a head start on making changes to debit rewards. But he also said the San Francisco bank was cautious about making too many changes at once.

"We thought this was the appropriate time on enrollment," Kadletz said. "This requires systems changes. You need to be communicating to all of your bankers, so we targeted April 15 as the appropriate time to stop enrollments."

Whether the San Francisco bank cuts the program for existing customers or reinstates it for new customers will likely depend on the Fed's final rules, Kadletz said.

"There still is a possibility of delay or we might see something that's different in terms of the final Fed regulations," Kadletz said. "Rather than going out and communicating with customers and saying one thing and getting a delay or final regulations that might lead us to a different conclusion, we just think it's appropriate to wait."

If banks change course and reinstate programs after any change to the regulation, it could strain their relationships with consumers by highlighting the uncertainty over the terms of their accounts.

Some of the issuers that have announced cuts have not said whether they would reinstate their programs if the caps on interchange are delayed or changed.

JPMorgan Chase was one of earliest movers on eliminating rewards. The New York bank last year announced it would stop issuing new debit rewards cards in February. It recently began sending letters to existing debit card customers saying that it was also eliminating the program for them as of July 19 — two days before the caps are set to take effect.

JPMorgan Chase explicitly blamed the Durbin amendment to the Dodd-Frank Act, which instructed the Fed to set reasonable and proportional interchange rates, for its change. Earned points do not expire.

According to a Moody's Investors Service report published March 28, JPMorgan Chase should save less than $200 million a year by cutting debit rewards. The bank has said it expects to lose $1.3 billion a year from debit regulation.

A spokeswoman for JPMorgan Chase declined to comment on its plans.

SunTrust Banks Inc. also began notifying its customers that it will stop offering rewards on purchases with one of its debit cards starting April 15. Customers will have until the end of the year to redeem earned points.

Other banks, including Wells Fargo and Regions, have confined their rewards changes to new customers.

There is an advantage to banks that blame the Durbin amendment in their customer communications, McCracken said. Early actions could inspire consumers to protest the rules to Congress.

Two bills, one introduced in the Senate and one in the House, would delay implementation of the interchange regulations. An analyst with KBW Inc.'s Keefe, Bruyette & Woods wrote in a research note this week that the Senate bill introduced by Sen. Jon Tester, D-Mont., may have more support than was originally thought.

Banks "right now are fighting a fairly complex political and public relations battle with regulators and Congress," McCracken said. "Part of lobbying for a change in the interchange rules is to get consumers' opinion behind them."

Bill Handel, a vice president with Raddon Financial Group, a Lombard, Ill., consulting firm owned by the vendor Open Solutions Inc., said banks could benefit from a marketing perspective if the caps are delayed or changed.

"If you have a repeal or delay, [you] can come back and say, 'Good news. We're able to continue to offer this,' " Handel said. "They almost get a free marketing boost from that."

However, Handel said he doubts the caps will not go into effect in some form. And debit rewards are also under pressure from other regulations, such as limits on overdraft charges that took effect last year.

That complexity creates a marketing problem in and of itself. Customers told to blame debit interchange caps for the loss of rewards programs may expect the programs to return if the caps are changed or delayed.

"Even if we are able to get some relief on Durbin in a temporary fashion, there are going to be other things that will threaten" programs, Handel said. "I think that's why we are seeing Chase … and others responding the way they are responding right now."

A December report from Mercator Advisory Group was skeptical about the long-term viability of debit rewards. In the future, it said, "the very existence of debit reward programs could be as remote as finding life on Mars."