Will debit rewards suffer cutbacks, too?

By Benjamin Salisbury

The interchange fee cap that took effect in March 2015 had experts concerned for the future of credit card rewards, and with good reason. At least one credit card issuer -- Capital One -- has already reduced the perks available on its cards.

Interchange fees, which are the fees issuers charge merchants for processing plastic transactions, were capped at 0.3% of a purchase's price for credit card purchases and 0.2% for debit cards, under an agreement between the European Commission, Visa and MasterCard. As predicted, the first means of recuperating those costs was the decline of credit rewards.

Possible effect on debit programmes
But what about debit rewards? The UK government has been attempting to open up the current account market by promoting more competition. This has led to a number of new entrants into the market such as Virgin Money and Tesco Bank. debit-rewards

And debit use is growing. According to a February 2015 report form the
UK Cards Association
, debit card spending is rising even faster than credit
card spending. The report states that between February 2014 and February
2015, credit card spending only rose by about £0.4 billion, while debit card spending rose by £2.3 billion.

All of this growth and competition in theory might suggest that banks
should be offering more rewards to try to attract and keep customers. But the interchange fee cap means banks will also be looking to recoup costs and one way is to cut reward programmes.

Andrew Horne, a spokesman for the UK Cards Association, says each
bank will have to make its own decision on debit rewards. "Different
companies will make completely different decisions on the future of their card rewards based on their own commercial model and strategic objectives," says Horne.

Since the interchange cap is even lower for debit than it is for credit, there's a possibility that debit rewards will take the same plunge as credit rewards, and that debit fees may even rise. Many rewards programmes are partly funded by monthly fees, so the impact could be greater on rewards attached to free accounts.

"The introduction of the cap will most likely see any rewards on free current accounts removed as well as monthly fees increased or reward programs scaled back," Tristan Hugo-Webb, author of the 2015 U.K. Debit Rewards Landscape Review, said in an emailed response to questions.

Hugo-Webb believes the cap could undermine the benefits that greater competition has brought to the UK banking current account sector because "reward programmes are one of the few key elements that can allow banks to differentiate themselves. With reward programs being removed or scaled back it definitely undercuts the benefits of competition."

See related: Debate continues over what new fee cap means for you

Published: 2 June 2015