Banks Discover There's Another Reward In Debit Reward Programs-For Themselves

LINCOLN, Neb. - While credit unions are offering debit card reward programs as a means to both counter competitors and provide value to members, not every issuer has such altruistic intentions.

The American Banker, an affiliate of the Credit Union Journal, reported that Cornhusker Bank in Lincoln, Neb. launched a debit card program seeking to generate interchange income and cross-sell its customers. But in the process the $263-million bank found another benefit: increased income from NSFs.

The bank reported that income from nonsufficient fund fees rose 10% last year, to $1.1 million, and a good deal of that increase came from the fact that debit transactions doubled from the previous year, according to Cindy J. Draper, VP-retail banking and marketing.

"We're not out there saying, 'Please overdraw your account, and we'll reward you,'" Draper told American Banker. "It's just a side impact that happens when people are more active with their accounts, and they know we'll cover them."

David Furnace, CEO with Furnace, Giltner & Associates Inc., an Austin firm that administers debit reward programs for Cornhusker and other banks, said there is a correlation between debit card use and overdraft fees.

American Banker reported that his firm studied 50 banks with $50 million to about $25 billion of assets and concluded that customers who used their debit cards fewer than 20 times a year paid an average of $155 of NSF fees, while those who used their cards more than 20 times paid an average of $223. Customers who did not use their debit cards were charged an average of $40 of NSF fees a year. "That's another source of fee income at a time when banks are seeing margins squeezed and net interest income declining," he said.

Consumer groups don't agree. Gail Hillebrand, a senior attorney in the San Francisco office of Consumers Union, said her group has been receiving more and more complaints from consumers dinged with $25-plus fees for inadvertently overdrawing their accounts using debit cards for small expenses. "There's something wrong when a customer buys a $2 cup of coffee and gets charged a $25 overdraft fee," Hillebrand said. "I think the NSF fee should never be more than the amount of the overdraft."