Checking rewards: on the ropes? Implementation of the Durbin Amendment will hamper debit-based rewards. In the future, these programs will continue to exist--only with a stronger focus on enhancing customer loyalty rather than simply bolstering revenue.

• Author: Stein, Gary
• Position: Company overview

REWARDS CHECKING PRODUCTS AND PROGRAMS are intended to create "win-win" relationships among banks and their customers: Customers earn points or something of value by exhibiting behaviors that generate profit to the institution. Many programs focus on debit card use, but in recent years a number of banks have broadened and enhanced their programs beyond signature-debit usage. These expanded programs make it worthwhile for the customer to engage in all kinds of financial transactions--including debit PIN, and in some cases even check and teller transactions.

While the rationale behind the original approach continues to make sense for a lot of organizations, a number of developments are driving retail bankers to rethink their programs. Most notably, the proposed implementation of the Durbin Amendment will significantly reduce debit interchange and comes on the heels of Reg E and its impact on overdraft income. As a result, some banks have already decided that they can no longer afford their existing reward programs.

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JPMorganChase, for example, in February stopped issuing debit rewards cards. The bank is ceasing programs designed to encourage debit card use and will eventually begin to phase out its present debit-card reward programs altogether. Undoubtedly, a points program fully predicated on debit card fees would be hard to justify in an environment in which interchange rates have been slashed by over 80 percent.

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Rewards programs will adapt

The checking rewards concept is not totally dead, however. At the time of this writing, the final Durbin Amendment guidance and its impacts--and specifically, whether smaller banks will effectively get the benefit of the proposed rate exemption--are very much in question. Major stakeholders continue to analyze options, and TCP Bank's lawsuit against the Federal Reserve (over debit card interchange fees) is looming. Furthermore, banking industry lobbyists are going head to head with those from the retail industry, and while Dick Durbin is currently sticking by his bill, Barney Frank, among other powerful lawmakers, is raising significant questions about the amendment's implications.

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In addition, history suggests that bankers hawking rewards will not uniformly retreat, but rather, adapt. When Australian regulators in 2003 instituted substantial interchange limits, issuers reacted by retaining their rewards programs and instituting participation fees. What's more, merchant funded programs and other innovations are providing banks with new options for rebuilding "win-win" situations and transforming debit-based checking rewards programs.

Perhaps most significantly, though, many existing checking rewards programs were implemented to drive customer loyalty in addition to fee generation. As such, the fates of these programs will be determined by more than just Durbin-related outcomes.

For example, the Southern Community Bank and Trust's (assets: $1.6 billion), Winston Salem, N.C. offer a rewards program called UChoose Rewards, the intent of which is to help retain the bank's most profitable customers and complement the bank's Maximum Earnings Banking checking product.

Participants earn points for both signature and PIN debit transactions, and while Senior Vice President Jeff McDowell is keeping a keen eye on Durbin developments, he expects no change in strategy.

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