Reduced debit swipe fees may hasten shift to phone payments

The "mobile wallet" is coming, a smartphone application that consumers can use to tap their deposit accounts at checkout, bypassing the current card system. (AP photo)

The era when you could get a little gift back every time you swiped your debit card may be coming to an end - and the brave new world of mobile payments may be ready to replace it.

Last year, Congress ordered the financial industry to get ready for a substantial reduction in interchange fees - the price a merchant pays each time a customer swipes a debit card and the source of revenue that paid for those debit card rewards. In December the Federal Reserve recommended that Congress slash swipe fees by more than 70 percent, to 12 cents per transaction.

Banks were livid at the recommendation, which promised to erase millions of dollars from their bottom line, and they pledged to fight it. Wayzata-based TCF Financial takes that fight to court next week, trying to overturn the new law on constitutional grounds.

But some of the nation’s largest institutions - including Wells Fargo Bank - indicated they are ready to move on, announcing in the last two weeks that they would stop or curtail the rewards programs that they have used to boost debit card usage.

Those banks’ willingness to drop rewards is an acknowledgement that the programs did their job, said Jerry Rossow, a bank marketing consultant in St. Paul.

“People have already adopted debit cards,” Rossow said. “They’re comfortable with them.”

Young consumers have grown up in an electronic, card-based world, he said, and for many older consumers, the rewards program worked. “You tell people that they’ll use the card five times in a month and get a price reduction on something else and they’ll start doing it. It’s an easy habit to form.”

Payment data tell the same story. Debit card usage grew rapidly during the last decade: Transactions reached 37.9 billion in 2009 - half of them from a checking account. Paper checks made up just 30 percent.

Rossow, who advises community banks, said small banks probably will continue debit rewards for a while. Under the federal rule changes, banks with under $10 billion in assets will be allowed to charge a higher swipe fee on debit card payments. Meanwhile, industry representatives for community banks and credit unions have said that they think the marketplace will end up forcing their members to match the lower fees the large banks charge.

For the rest of the story, visit: http://finance-commerce.com/2011/04/reduced-debit-swipe-fees-may-hasten-shift-to-phone-payments/