Debit Card Limits May Hike Credit Card Use—and Bank Profits

Published October 11, 2011

Consumers are expressing outrage that some banks are beginning to charge monthly fees for the use of their debit cards.

Regions and SunTrust banks have already levied this monthly fee, Bank of America will begin charging a fee in 2012, and Chase (one state) and Wells Fargo (five states) are testing the fee in various areas.

Bankers say their institutions are about to start losing billions of dollars annually as a result of the “Durbin Amendment” to the Dodd-Frank financial regulatory bill. Illinois Sen. Dick Durbin’s (D) amendment has effectively cut the interchange fee on debit card transactions in half. This fee is charged to retailers when a customer uses a debit card.

Charging customers to use their debit cards could help banks make up for the reduced interchange fee revenue.

Bigger Credit Card Profits

If consumers choose to go without a debit card to avoid the monthly fees, credit card usage could increase dramatically. That would be great news for banks because credit cards are a much greater profit center.

First, credit cards are not covered under the interchange fee regulations that went into effect Oct. 1—the regulations affect only debit card purchases. Although the credit card interchange fee varies depending on the volume of the retail outlet, retailers still have to pay the banks approximately 2 percent of any credit card transaction, including tax. This is much more than a bank is paid for a debit card transaction.

Second, banks will make a significant amount of additional money if consumers use a credit card and don’t pay off the entire balance on time each month. Consumers are charged a hefty interest rate for carrying a balance from one month to the next, and that interest payment can be anywhere from 10 percent to 29 percent depending on the credit card’s annual percentage rate.

More Credit Card Incentives

To further trigger this credit card usage, issuers are providing more incentives to consumers with attractive rewards programs.

According to Mintel Compermedia, eight in ten credit card offers are for rewards cards promoting points, miles, or cash rebates, up from six in ten offers in 2008.

Cash back bonuses are generous, The Chase Freedom card offers a $200 cash back bonus for new customers. The new Capital One Cash card gives a 50 percent cash back bonus on the cash rebates a card user earns each year, and a one-time $100 bonus.

Airline rewards are also plentiful. An example would be the Southwest Airlines Rapid Rewards card, which gives 25,000 bonus points after the first purchase.

The bottom line: Banks want customers to reach into their wallet or purse for a credit card to make the payment, because it likely means more profit to the bank.