NEW YORK Debit card rewards may survive in an era of regulated swipe fees, but they will have to be funded differently, according to some analysts.
That reality was reinforced twice in the last few weeks first when a federal judge ruled that the two-year-old price cap on debit swipe fees must be lowered, and again when a Boston start-up that had been offering consumers a generous package of debit rewards went out of business.
Both developments also made clear the heyday of cash-back rewards that rely on swipe fee revenue is past. The future of debit rewards which have long helped fuel deposit growth for many banks will hinge on the banks' ability to generate money by steering customers to specific retail partners, according to American Banker, an affiliate of Credit Union Journal.
PerkStreet Financial, which on Aug. 12 announced its plan to shut down, had hoped to lure customers away from attractive credit card rewards offers. "We are obsessed with finding more ways to put more cash back in people's pockets," chief executive officer Dan O'Malley said in a 2010 interview with American Banker.
Customers signed up online for a PerkStreet-branded checking account. Because the accounts were held at partner banks with less than $10 billion in assets, PerkStreet had a leg up over large banks that were subject to the 24-cent cap on debit card swipe fees. And the firm's branchless business model provided additional cost savings. But countervailing factors eventually proved fatal.
Year after year of low interest rates made it difficult to make money from checking accounts. Also, there were drawbacks to being a start-up incumbent banks had a built-in deposit base, so PerkStreet had to be more generous with rewards to attract business. "It's such a knife fight to acquire customers," O'Malley said in 2012.
Last year PerkStreet stopped offering 2% rebates for customers with at least a $5,000 annual balance. Now the company is shutting down after failing to secure additional funding from investors.
For all intents and purposes, "they're an online bank basically trying to dive into a space that's already incredibly competitive," Aleia Van Dyke, a payments analyst at Javelin Strategy and Research, told American Banker. "And it's hard to make a lot of money in that space."
CEO O'Malley blames his company's demise largely on regulatory uncertainty and volatility in the banking industry. "The environment of the last several years just made it very, very hard to build a company," he says.
Ever since the passage of the swipe fee price cap as part of the Dodd-Frank Act in 2010, bankers have been looking to rebuild debit rewards using revenue from partnering retailers, rather than the diminished pool of interchange fees.
That shift could be hastened by the recent federal court ruling. The decision is subject to appeal, but assuming it is upheld, it would require federal regulators to cut the 24-cent swipe fee cap for large banks by half or more.
