If you had a choice, would you help your credit card issuer make more money off merchants?
Many customers would not, as card issuers are generally seen to be the bad guys. That’s why Congress passed the CARD Act in 2009: To restrict practices that lawmakers, regulators, card users and consumer advocates considered abusive, like raising interest rates on existing balances.
This summer, another measure, the Dodd-Frank Wall Street Reform and Consumer Protection Act, gave retailers more freedom to offer customers incentives such as discounts to use their debit cards instead of credit cards. Merchants pay smaller fees for debit transactions than for credit card purchasers, but the contracts they sign with card issuers had long prohibited them from offering such incentives.
Now Wachovia, a unit of Wells Fargo (Stock Quote: WFC), is fighting back against the reforms. In a recent mailing to its debit card customers, the bank offered incentives to get customers to designate “credit” as the payment method, even when using a debit card.
Most debit cards can be used either way, though both approaches draw on the customer’s checking account to pay for the transaction.
When you order a debit transaction, you use a pad to enter a personal identification number, or PIN. Make the same purchase as a credit transaction and you sign the credit slip just like you would with a credit card. Behind the scenes, the transactions are handled by different systems.
A Wachovia spokesman was candid about why the bank is pushing credit transactions. “Most issuers prefer customers to use credit because most merchants pay higher interchange rates” for credit transactions, said Lisa Westermann, assistant vice president for public relations at Wells Fargo.
Merchants pay more for the “convenience” of using the credit-clearing system, she says, and experts say fees on credit transactions typically run around 2%, while debit fees usually fall well below 1%.