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A Quiet Revolution in Debit Cards

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Tired of stuffing a rewards card and a debit card into your wallet? This summer, you could get a card that does both.

Offered by a tiny Florida company, the new card could wreak havoc with some of America’s largest banks. It also could also allow merchants to avoid the issue of interchange fees, a billion-dollar industry and the subject of a huge and expensive debate right now in Congress.

Here’s the idea: Starting this summer, a new generation of debit cards will be available directly from retailers. The cards will bear the retailer’s logo. When consumers use the card to make purchases with that retailer, they receive points that can be redeemed for future purchases.

There’s nothing new about retailer rewards cards. What is new about the forthcoming debit cards is the freedom they allow—they can be used to make purchases at just about any store, not just one retail chain (such a card is called “open loop” in the debit business). Rewards points, however, are limited to the issuing retailer.

Also new: The consumer decides which bank account the card is attached to. Until now, debit cards have been offered only by banks, and linked to checking or savings accounts at issuing institutions. In this case, the card exists separately from any dedicated bank account. Consumers choose which checking or savings account should be tied to the card, and they can change accounts at any time.

“It’s a loyalty card and a payment card all in one,” says Danny Portal, Executive Vice President of the National Payment Card Association, which is developing this new offering.

[Resource: Credit.com’s Consumer Guide to the Proposed Debit Interchange Rule]

Consumers will apply for the card from retailers, who in turn will get them from the association, which is actually a small company in Coconut Creek, Florida. The company will manage the transactions, and act as a go-between with Western National Bank, the cards’ issuer.

So consumers get the convenience of a single piece of plastic that acts as both a loyalty card and a payment card in one, which they can use to rack up reward points at a favorite store. Nevertheless, because this kind of card is brand-new, it’s especially important for consumers to educate themselves before signing up.

“Just make sure you read all the fine print,” says Beverly Harzog, Credit.com’s credit card expert. “Make sure you know if there are any fees, and read the details of the rewards program.”

There’s a bigger bet in play here, too. For years, retailers like 7-Eleven have complained about interchange fees, paid by merchants every time a consumer swipes a debit card at the checkout counter. The fees pay for the swipe machines and the back-office payment network that runs them. For more information about these fees, check out this recent piece on Credit.com.

Generated by the Visa and MasterCard networks, money earned from such fees grew from $20 billion in 2002 to $45 billion in 2007, according to a report by the Government Accountability Office. Most of it is divided between the card networks and major banks, which use it to subsidize their own free checking programs, according to a report by the Boston branch of the Federal Reserve.

That forces retailers to raise prices on everything from groceries to gas, thus eating into their profits and hurting consumers, says Mallory Duncan, attorney for the National Retail Federation.

“These fees are skyrocketing, and that hurts everybody,” Duncan says.

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Last summer Congress passed the Durbin amendment, which cuts interchange fees from an average of 44 cents per transaction to a maximum of 12 cents per transaction. Banks are retaliating with a major, expensive lobbying push to postpone or overturn the rules. The House and Senate have both responded by introducing bills that would delay Durbin amendment implementation.

“The retailers don’t want to pay their fair share of this system,” Trish Wexler, spokeswoman for the Electronic Payments Coalition, which represents banks and the credit card networks in this fight, told Credit.com.

If it takes off, the National Payment Card Association’s new debit card model could play a major role in the struggle over interchange fees. If the banks succeed in postponing or overturning the Durbin amendment, and interchange fees stay at their current levels, the new cards could give retailers a way to undercut the banks, since the association will only charge a flat fee per transaction that is close to the 12-cent limit set by the amendment. “It gives merchants the ability to really own the payment mechanism, says Portal.

The cards may be less appealing to retailers if the Durbin amendment goes into effect as-is, since the difference in transaction fees would be less pronounced. But even then, a debit card like this would give merchants the chance to put a branded card into more consumers’ wallets.

Image: Luis Argerich, via Flickr.com

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