Analysts and consultants agree that a cut in debit interchange income will lead to a corresponding cut in the value of rewards that cardholders can earn, a smaller pool of offers from which they can choose and higher program fees.
And retailers are likely to face pressure from issuers to shoulder more costs for rewards programs. Should the merchants balk, banks may not just overhaul some debit rewards programs — they may eliminate them outright.
If "there's downward pressure on interchange, issuers … either need to reduce the value of rewards earned by the customer or they need to do some sort of repricing to make up for the shortfall," said Josh Gilbert, a senior manager with First Annapolis Consulting in Linthicum, Md.
JPMorgan Chase & Co., Wells Fargo & Co., Toronto-Dominion Bank, BB&T Corp. and other debit issuers declined to comment for this story, saying it was too early to discuss whether they plan to revamp their rewards programs if the Fed, as is widely expected, decides to reduce debit interchange rates.
Merchant-funded offers, such as those that enable a cardholder to earn a larger number of points or discount for purchasing from a specific retailer online or in person, are one way issuers could support rewards programs.
Merchant offers have become more common in recent years in retailers' efforts to drive traffic to their websites and stores.
"If a bank can direct business toward a merchant and work on their behalf to increase volume, then the merchant would be willing to pay some amount of money in the form of an offer to the consumer to attract that new business," said Lars Holmquist, the chief marketing officer for Vesdia Corp., a merchant network provider in Atlanta that works with retailers, loyalty program managers and banks.
"This sets up a more attractive economic arrangement that is a quid pro quo where the issuer works to bring business to the merchant and the merchants supply them with an attractive offer to the issuers' cardholders," Holmquist said.
Other ways banks could maintain debit rewards programs include limiting them to customers who use multiple services with a bank, or offering better programs to cardholders who enroll in online bill pay or direct deposit, said Mark Flamme, the director of the Midwest banking practice in the Chicago office of West Monroe Partners, a consulting firm.
Several issuers already have rewards tied to bill payment and other transactions, according to a recent "Bank Monitor Report" from Corporate Insight Inc. that looked at 31 checking account and debit card rewards programs offered by 12 companies.
For instance, a Capital One Financial Corp. checking rewards program offers customers 10 airline miles every time a customer uses online bill pay with the ability to earn up to 100 miles per month, according to Corporate Insight's report.
Flamme also said banks might offer cash-back rewards in the form of prepaid debit cards, which could then become another way for issuers to generate additional interchange revenue when the cards are used.
An agreement this week by conferees finalizing the financial reform bill all but guaranteed that a proposal to give the Federal Reserve authority to set debit interchange fees will be included in the bill. The proposal, which Sen. Richard Durbin, D-Ill., added to the Senate version of the reform bill, would enable the Fed to set "reasonable and proportional" debit rates.
