One of the biggest banks in the world put its foot down on a popular and rapidly growing debit card perk, rewards points. Why the resistance? It might have something to do with new Federal Reserve rules.
The announcement came at the BancAnalysts Association of Boston conference on Nov. 4, where Charlie Scharf, JPMorgan’s (Stock Quote: JPM) director of retail financial services said that the company will phase out its debit rewards program by Feb. 2011.
Industry analysts expect the Federal Reserve to issue new rules on debit interchange rates by the end of the year, and Scharf says those rules could curb debit card revenues. The new legislation is tied to the financial reform bill’s “Durbin amendment,” named after Sen. Richard Durbin (D-Ill.).
The amendment directs the Fed to enact new rules to establish “reasonable and proportional” debit card interchange rates for U.S. banks with more than $10 billion in assets. And the amendment calls for the new rules on interchange rates to be in place by July 2011.
Banks are dead set against this, however. TCF National Bank, which bills itself as the nation’s 10th largest Visa debit card provider, is suing the federal government over the Durbin amendment, claiming the rule exempts thousands of smaller banks who are now free to charge retailers the current debit card interchange rate and recover all of their costs, plus a profit. That, bank lawyers contend, results in an uneven playing field that penalizes big banks like TCF.
"It is unprecedented for Congress, or any regulatory agency, to mandate a fee charged in the free market that not only denies a reasonable rate of return on investment but actually requires the rate to be lower than the incremental cost of providing the service," said William A. Cooper, Chairman and CEO of TCF Financial. "Furthermore, the amendment affects only 1% of the nation’s banks, giving thousands of unaffected banks an unfair competitive advantage."