The Durbin Amendment has helped to create a marked difference between credit union versus big bank offerings. Last October, the Durbin Amendment (an add on to Dodd-Frank) mandated that financial institutions would be paid approximately half of what it previously made on debit card swipe fees.
In the past retailers paid approximately $.44 to financial institutions for every debit card transaction, however the Durbin Amendment reduced that fee to $.21 (plus 0.05% of the transaction and possibly one extra penny if banks are within compliance of fraud prevention procedures). As a result, financial institutions trying to make up for lost income have resorted to numerous tactics, which include eliminating free checking and subsequent debit rewards programs, an increase in service charges and the creation of a more attractive credit card program (since credit cards are immune to the legislation).
While it’s no secret that big banks have been taking free checking and debit card rewards programs off the shelf for the past few months, how have credit unions been able to weather the storm, relatively unscathed?
In order to avoid penalizing smaller financial institutions, Durbin specified that financial institutions under $10 billion would earn immunity from the fee cap. The latest report notes that credit unions and small community banks currently receive a $.43 fee for debit card transactions, allowing these financial institutions to leverage free and rewards programs as a competitive advantage.
Big Bank Debit Card Rewards Programs Are Harder to Find
Financial institutions like Bank of America have discontinued popular debit card programs that allowed customers to earn rewards like American AAdvantage frequent-flier miles, leaving customers to use another card if they want any type of rewards.
American AAdvantage cardholder, Mori Mickelson told USAToday that when her frequent flier mileage program was discontinued she had no choice but to switch over to using her American Express card, which garners Starwood points. “I really miss my AAdvantage card," she says. Other banks like Wells Fargo, Chase and SunTrust have also shuttered their debit card rewards program.
Credit unions are noticing the consumer migration away from big banks and have positioned their products to entice the disillusioned consumer. Hanscom Federal Credit Union ($956 million, Hanscom AFB, MA) uses its free checking, along with flexible debit rewards program to reel in new members.
“We don’t have a lot of competition in terms of both free checking and debit card rewards,” explains Scott Post, SVP/Strategy and Delivery. “The larger banks have seen how free checking resonates with consumers so while some people can still receive free checking at a big bank, it still puts the customer on notice that there is a possibility their account may change in the future.”
Post adds that because larger financial institutions surround his credit union, recent changes have put Hanscom on prospective members’ short list. “We’ve had our rewards program since 2007, but once the regulatory environment changed, we realized that being able to offer rewards was an important differentiating factor, especially as we saw other financial institutions around us remove their programs.”
He notes that it’s not just the debit card rewards program that drives new memberships. “The member doesn’t come to the credit union only for the debit card rewards program, but for the entire relationship, including free checking,” he explains.
Relationship building is what many credit unions do best. Post says that not only can members earn points for everyday debit card spending, but also when they use their credit union credit cards. “We allow the member to also pool their rewards into one, so entire families can compile their rewards points.” Credit union Premier Checking account holders also can earn 250 bonus points per month.
“Members have access to an online system that allows them to view and manage their account, in addition to viewing the tens of thousands of items available for point redemption,” Post adds.
Suncoast Schools Federal Credit Union ($5 billion, Tampa, FL) reports an 11% increase in both sales and transactions with debit cards since fourth-quarter 2011 versus 2010. “We believe bank customers have shopped our competitive pricings and attractive products, and we believe consumers are moving their accounts to Suncoast because we offer totally free checking, no strings attached, plus rewards,” says Jon Rasmussen, VP/Card Services. The Suncoast for Schools Rewards Check Card program allows the member to earn one bonus point for every $3 in net purchases. Members can manage their account and redeem points for merchandise online.
Instead of experiencing any rapid spikes, Dane County Credit Union ($120 million, Madison, WI) is also experiencing steady program growth. “So far we are on target to have an increased interchange income compared to 2011,” says Angela Mayfield, accounting manager. “We continue to grow our program but haven't noticed any spikes or rapid increases.” Dane County Credit Union’s debit card rewards program is also point based. According to the credit union’s website, The UChoose Rewards program allows the member to earn one point for every $2 spent on eligible debit card signature purchases. Points can be redeemed anytime and are good for three years from the time they are earned.
Has Durbin Impacted Credit Unions?
“In anticipation of Durbin we did restructure our debit card rewards program,” Post recalls. “It was always very popular but we wanted to add extra rewards and flexibility by including gift cards and electronic awards such as ringtones and downloadable media but at a lower price.”
As a result, Post says that the program has opened up the possibility to bring in more people and interest has increased considerably. “We’ve seen debit card usage increase month over month. In fact the month of April exceeded what we did in December, which is typically one of our busier months.”
Suncoast Schools FCU continues to watch its checking numbers grow, but Rasmussen expresses concern with regard to the interchange rate over time. “Our interchange income is growing from the sheer volume increase in new checking accounts, however we have already seen downward pressure on the interchange rate per transaction. It is likely that the interchange rate per transaction will continue to drop as merchant transaction routing and payment networks become more competitive.”
One rumor circulating in the industry is that some retailers may try to reject a debit card from a smaller financial institution due to having to pay a higher fee. Both Post and Mayfield have not heard of this happening although Post says, “Merchants aren’t going to know the difference and the clerk in a check out lane certainly isn’t going to know. They may recognize your logo on the card but for something like that to occur it would have to start at the top.” He adds that he’s heard of some merchants deploying “sniffer systems,” but has not experienced members being turned down or reporting any problems using their debit card.
Rasmussen adds, “We encourage our members to use The Suncoast for Schools Rewards Check Card. The concept of merchants asking consumers not to use their debit cards is not new, but our members receive rewards points for debit card purchases and in return Suncoast donates two cents to the Suncoast for Kids Foundation to fund education-related initiatives in our communities.”
If you’ve seen your debit card rewards program and free checking evaporate, now is a good time to find a credit union and inquire about what they have to offer.