Yesterday, Wells Fargo & Company (WFC) announced its plan of scraping debit card rewards program for its existing customers, effective October. Previously, in March, Wells Fargo halted the program for its new customers.
This is an attempt on Wells Fargo’s part to reduce its losses from the cap on debit-interchange fees, as proposed by the Durbin Amendment. The change includes stand-alone programs as well as those where customers have combined their debit and credit card into a single program.
For every swipe of a debit card, the related bank charges a fee to the retailer. The bank then shares this amount with its card partners, such as Visa Inc. (V) and Mastercard Incorporated (MA). The charged amount is called interchange fees.
The banks generally award points to customers for carrying high balances, using card for payments and making minimum deposits. Wells Fargo offers programs that provide cash back, travel and merchandise awards as well as gift cards as rewards, when customers redeem their reward points.
Wells Fargo’s present debit card users earn 1 reward point for every $4 spent through the card and up to 16 points for every $1 spent online at select retailers. To earn reward points, the customers pay an annual fee of $12, which would no longer be charged once the program ends.
According to the Federal Reserve’s data for 2009, on average, banks charge a retailer 44 cents per transaction as interchange fee. Though the amount seems small, the extensive use of debit cards totals to a solid $16 billion for the industry every year. Effective October 2011, the Fed implemented a limit on debit-interchange fees at 21 cents per transaction and an additional 0.05% of the purchase price to cover up the cost of scam protection.
Since July 19, JPMorgan Chase & Co. (JPM) has also stopped offering reward points to its existing debit card users. Besides, the company has halted the reward program for its new customers since February 8.
Apart from Wells Fargo and JPMorgan, SunTrust Banks Inc. (STI) also followed the same suite. The company also affirmed that points already earned by the users would expire on January 1, 2012.
Last week, Wells Fargo stated that, starting October 14, it will charge customers in Georgia, New Mexico, Nevada and Oregon a monthly fee of $3 for using a debit card.
JPMorgan has already imposed a $3 monthly fee on its debit cards and a $15 fee on its checking accounts earlier this year in some of its operating areas on a trial basis. The company has also stopped issuing debit rewards. The tests runs are still in progress.
JPMorgan has also contemplated a limit of $50 to $100 per transaction on customers’ debit card along with other major banks including Citigroup Inc. (C) and Bank of America Corporation (BAC). Moreover, BofA has already raised its ATM fee to $3.
Basically, these banks are in the pursuit of a recovery route from their lost debit card fees. Wells Fargo alone would salvage $200 million in losses from the debit card fee. However, if implemented nationwide, it would affect as many as 40 million customers of the company.
Therefore, the banks’ spree of loss recovery is ultimately defeating the actual purpose of the new laws as the cost-shift cycle is eventually being passed on to the consumers.
Currently, Wells Fargo retains a Zacks # 3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MASTERCARD INC (MA): Free Stock Analysis Report
SUNTRUST BKS (STI): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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