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Candice Choi

New regulation prompting a transformation in debit card reward programs

By Candice Choi
Associated Press / August 27, 2011

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NEW YORK - Debit card rewards aren’t dead yet. They’re just undergoing a transformation.

Several major banks in the past year ended or scaled back their debit rewards programs. They’ve cited a new regulation that will soon curb the revenue they can squeeze from checking accounts.

To compensate, a few banks have already started teaming up with retailers to offer revamped programs that reward customers for spending at specific stores - merchant-funded rewards.

The migration away from traditional rewards programs - where customers typically earn a set cash back rate on all purchases - is a response to the changing business environment. Starting in October, a regulation will cap the fees banks can collect from merchants whenever customers swipe their debit cards.

The basic goal of merchant-funded rewards is to encourage customers to spend at specific stores. But the programs can vary so it’s important to understand the terms when shopping around.

Chase rolled out a program last week to replace the traditional cash back rewards it ended earlier this summer. The new version offers customers varying cash back offers when shopping through the bank’s online mall, which has more than 600 retailers.

At online bank Ally, the rewards work more like the daily deals offered on such sites as Groupon and LivingSocial. For example, customers can currently get $5 back for a purchase of $50 or more at Target.com. The most that can be earned during the promotion period is $5, no matter how much is spent.

It should be noted that these rewards programs may not be as broad in scope as you might expect. Ally’s program was introduced last month and offers deals at 23 retailers so far. And some of those deals - such as 1-800-Flowers and Fandango Online - may not be businesses you regularly patronize. The bank says it’s working to bring more retailers on board.

Still, one of the upsides of these new rewards programs is that you’re typically automatically enrolled. So even if you didn’t know your bank offers a discount at a particular store, your account would be credited if your purchase qualified.

Banks want to keep checking account customers happy with rewards. But that’s not the only reason they’re offering these new rewards program.

Retailers pay the banks a fee or share a portion of the profits whenever customers act on an offer. This is expected to help banks offset the loss in revenue from swipe fees.

The financial research firm Aite Group estimates that banks will reap in $1.7 billion a year in revenue from these merchant-funded rewards by 2015.

So even if you prefer the traditional rewards program, merchant-funded programs may soon become the industry norm, according to Alex Matjanec, founder of MyBankTracker.com

Candice Choi writes for the Associated Press.