Chase, the retail banking
unit of JPMorgan Chase, is to scrap its rewards scheme for new
debit card customers from February.

At the same time, Chase will
eliminate debit card usage as a way for new customers to avoid
paying its monthly checking account fee.

Chase has been among the most
vocal of US retail banks to criticise the financial reform bill
designed to lower debit card interchange fees – the so-called
Durbin amendment.

The regulations form part of
an overall financial reform bill, which became law in July,
designed to give the Federal Reserve (Fed) the right to limit
interchange fees on debit card transactions – traditionally viewed
as a stable and reliable source of revenue for banks.

One likely consequence of the
legislation is US banks placing an increased emphasis on prepaid
cards.

Speaking at an investor
presentation on 4 November, Chase retail financial services CEO
Charlie Scharf said: “It will likely have negative consequences for
consumers and set a bad precedent for business. We will be
appropriately paid for the services we provide.”

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Chase has already stopped
paying bonuses to branch staff for signing up new customers to its
debit rewards programme.

Scharf added that the
legislation threatened:

• A transfer of value from
  lower mass market consumers to merchants;
• Higher banking costs for
  lower mass market consumers;
• Some portion of lower mass
  market consumers exiting the banking system; and
• Potentially less innovation
  and functionality in banking services.

A report from card comparison
website Cardhub.com said US debit card issuers could lose up to
$9.1bn in fees – around $18.35 per debit card – if the Fed halves
interchange fees.

Bank of America (BofA)
anticipated this loss back in August, estimating that its revenues
could decrease by $1.8bn to $2.3bn as a direct result of the
regulations beginning in the third quarter of 2011 – nearly an 80%
drop.

Major US retail banks,
including Citi, BofA and Chase, have already responded to the
threat of the new regulations by raising fees and adding new fees
to existing accounts.

Doubts about the cost and
profitability of debit cards rewards programmes post the Durbin
amendment, were flagged up by Oliver Wyman’s 2010 Debit Issuer
Study, commissioned by Discover’s PULSE unit.

The survey reported that 58%
of US financial institutions currently offer a rewards programme,
up from 53% in 2008. Although the number of issuers offering
rewards increased, only 17% are considering launching a rewards
programme this year, compared to 24% that contemplated initiating a
programme in 2008.

Debit card reward schemes
have never been as rewarding for customers as credit card
schemes.

In addition, the majority of US loyalty programmes require
a signature based debit card transaction to qualify as opposed to
PIN transactions, the former attracting a higher interchange fee
for the card issuer.