Will Debit Card Rewards Become a Perk of the Past?

Banks are still struggling to regain their footing from the financial collapse and resulting Great Recession. As profits shrink and expenses expand, the biggest banks in America are shedding thousands of jobs, cutting lobby services, shutting down branches and trimming -- or eliminating -- debit card rewards. Is it just short-term penny pinching or long-term cost cutting?

The Impact of the Durbin Amendment

Banks aren't just reeling from slim profit margins and low interest rates, but also rising costs from expanded compliance rules and other regulations. The Durbin amendment, passed with the Dodd-Frank Act, that took effect in 2011 has drastically lowered "swipe fees" -- the revenue banks collect on purchases made with plastic.

Consumers are paying more for banking and seeing the elimination of free checking accounts and debit card rewards programs, says Sam Fabens, spokesman for the Electronic Payments Coalition, a group of banks, credit unions and payment card networks. And merchants, who gained from the reduction in swipe fees, aren't sharing the windfall with customers.

"Retailers promised that they would pass their $8 billion annual handout from the Durbin amendment on to consumers, but it hasn't happened," Fabens says. "And as banks lose revenue, many consumers have seen new fees or lost services like free checking. As is so often the case, one industry asked Congress to weigh in on its behalf, claiming it had to do with average Americans, but instead it was the consumer who lost."

Are the Perks Really Perks?

Evan Hutchinson, a business consultant and financial coach in Ames, Iowa, thinks rewards points -- at least in the case of debit cards -- are on the way out. But he says they're little more than an illusion anyway.

He gives airline miles rewards as an example: "If you have a debit card that awards one point for every $2 spent, you have to spend $25,000 to get 12,500 miles -- 12,000 miles is the absolute bare minimum redemption rate offered on one-way flights in the United States, and is really almost impossible to find due to blackout dates and restrictions.

``To get to 25,000 ... the customer has to use the debit card for $50,000 in purchases,'' Evans says. ``Most customers that banks market these reward cards to would never be able to obtain that kind of spend in a reasonable amount of time. Banks are counting on the customer mentality of 'I should use my debit card, I'm earning points towards a free flight' -- when in fact the 'free flight' may never come due to the extraordinary low amount of miles rewarded on each dollar."

His advice: Forget debit card rewards.

"When choosing a debit card, get whichever one is free and stick with it," Hutchinson says. "If you are wanting to get decent points or rewards, a credit card offers a better deal."

A Move to `Relationship' Accounts

Count Dean Nolan among those on the debit rewards deathwatch. The Saylent Technologies vice president has worked with banks, payment networks and processors for more than 20 years and has an insider's view on the issue. His Franklin, Massachusetts-based company helps financial institutions attract and retain customers.

"Stand-alone reward debit cards are a dying breed due to the changed economics introduced into the debit industry with the Durbin legislation," he says. "That said, debit cards are still highly desired by many consumers, and customer usage of debit cards is a desired behavior for banks."

A checking account with high debit card usage frequently signifies that the account is the customer's primary relationship product with the bank, Nolan says, adding that leading banks have refocused their marketing efforts from rewards debit cards to "relationship checking accounts." These offer customers a bundled benefit or incentive based on desired behaviors -- such as using a debit card, engaging in online or mobile banking and replacing paper statements with the electronic variety.

"It's not uncommon for financial institutions to see [customer] retention levels that are two times higher for relationship checking accounts than for standard checking products," he says.

Mending the Broken Model

James Robert Lay, CEO of CU Grow and a consultant who has worked with more than 400 North American financial institutions, particularly credit unions, says he believes debit cards with rewards "will be on their way out soon."

He adds that debit cards, even without rewards, will also become a thing of the past, joining bank branches as phaseout targets for cost-cutters.

"We will see this happen as new financial services continue to pop onto the scene like Simple, Moven, Mint, PayPal and Google Wallet," he says. "Banks and credit unions have enjoyed the interchange fees from this model, but the traditional banking model is broken. Fees in the future will come from digital channels.''

Like Nolan, he says rewards programs must evolve to include personalized benefits based on a consumer's spending behavior.

So as debit card rewards go the way of tellers, consumers can look forward to more customized perks driven by the way they interact with their bank rather than how much they spend.

Hal M. Bundrick is a certified financial planner and former financial advisor and senior investment specialist for Wall Street firms. He writes about personal finance and investing for NerdWallet.