On Monday, Bloomberg reported that JPMorgan Chase & Co. (JPM) had started notifying its debit card users that they would not be able to garner rewards point after July 19. It is an attempt on the company’s part to reduce its losses from the projected cap on debit-interchange fees, as proposed by the Durbin Amendment.
For every swipe of a debit card, the related bank charges a fee to the retailer. The bank then shares the amount with its card partners such as Visa Inc. (V) and Mastercard Inc. (MA). The charged amount is called interchange fees.
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 it to a solid $16 billion for the industry every year.
JPMorgan’s present rewards program was free and open to every cardholder who had a checking account. The debit card users earned 1 reward point for every $5 spent compared with 1 reward point for every $1 spent for credit card users. To earn rewards point faster (4 points for every $5 spent), customers had to pay an annual fee of $25.
In December 2010, the Fed had proposed a limit on debit-interchange fees at 12 cent per transaction effective July 21. This represents about 73% decrease from the previous average, draining huge revenues from the industry. For JPMorgan, such a limit is expected to result in annual losses of about $1.3 billion.
JPMorgan has started mailing letters to its customers, who participate in its Chase Ultimate Rewards program, stating these changes. Also, from February 8, the company has stopped the reward program for its new customers. However, the existing customers will continue to earn rewards through July 19, and the points accrued through that date would not expire.
The Fed’s proposal to slash interchange fees was mainly an effort to resist banks, such as JPMorgan, from earning super-normal profits. This attempt was backed by the noble intention of trickling this money into the market through consumers, thereby increasing consumption and ultimately fueling economic growth.
But the main purpose of such laws is defeated as the cycle of cost shift is eventually passed onto the consumers. Hence, we believe that the regulators need to perform a balancing-act in order to provide benefit to both the financial institutions and the consumers.
Currently, JPMorgan 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.
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MASTERCARD INC (MA): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
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