On Friday, Bloomberg reported that Wells Fargo & Company (WFC) would stop offering debit card reward points to its new customers. While the change will be effective from April 15 for Wells Fargo customers, it has already taken effect from March 27 for Wachovia customers. Wells Fargo had acquired Wachovia in 2008.
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. However, the existing debit card users will continue to earn rewards.
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 award debit 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.
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. In December 2010, the Fed had proposed a limit on debit-interchange fees at 12 cent per transaction effective July 21, 2011.
Well Fargo is the latest to join other banks that have stopped offering debit reward points to their customers. Since last week, JPMorgan Chase & Co. (JPM) has started notifying its debit card users that they would not be able to garner reward points after July 19.
The company is also mailing letters to its customers, who participate in its Chase Ultimate Rewards program, stating these changes. Besides, the company has halted the reward program for its new customers since February 8.
Apart from Wells Fargo and JPMorgan, on Friday SunTrust Banks Inc. (STI) also stated that from April 15, it would no longer award points to its customers. The company affirmed that points already earned by the users would expire on January 1, 2012. Though Bank of America Corporation (BAC) has not changed its debit card rewards policy, the company expects revenue losses in the range of $1.8 billion to $2.3 billion from debit card fee limits.
The Fed’s proposal to slash interchange fees was mainly an effort to resist banks, such as Wells Fargo, from earning super-normal profits. This attempt was also backed by the noble intention of trickling this money into the market through consumers, thereby increasing consumption and ultimately fueling economic growth.
However, by putting a halt to debit card reward points, the banks are only trying to recover revenues they are expected to lose. And thus, 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. 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, 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.
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WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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