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Small banks give debit cash back
The swipe fee cap
When a cardholder buys something at Costco with a credit or debit card, the cardholder's bank charges Costco a fee. Since 2011, federal law has capped that fee for debit cards at 21 cents plus 0.05% of the transaction.
That cap is why most debit cards don't offer cash back: 21 cents plus 0.05% doesn't leave enough money to split with the cardholder. Anyone who wants 3% back on restaurants has to apply for a credit card, whether or not they need or even want one.
The small-bank exception
The 2011 law made an exception for banks with less than $10 billion in assets. That means tiny Kentland Federal Savings & Loan can offer a debit card with, say, 2% back on groceries, and JPMorgan Chase can't. In America, the law here bends over backwards to protect small banks from their enormous competitors.
Why did Congress cap debit swipe fees?
The cap comes from the Durbin Amendment, added to the Dodd-Frank Act of 2010 and named for Senator Dick Durbin of Illinois. Merchants had argued that swipe fees, set by card networks such as Visa and Mastercard, rose with little competition to hold them down. Congress told the Federal Reserve to make debit fees reasonable and proportional to the cost of processing, and the Fed's rule, called Regulation II, set the final figure in 2011. The Fed's first proposal had been lower, in a range of 7 to 12 cents per transaction.
How are credit card rewards paid for?
Credit card rewards are funded largely by the interchange fee that merchants pay on every purchase. Credit card interchange is not covered by the debit cap and typically runs in the neighborhood of 2 percent of the purchase. The card issuer keeps part of that fee and returns part to cardholders as points or cash back. Networks such as Visa and Mastercard publish interchange schedules that vary by card type and merchant category.
Why exempt small banks from the cap?
Lawmakers reasoned that small issuers, with fewer cards and less processing volume, could not absorb lower fees as easily as large ones. The exemption did not cap those banks' fees, so they remained free to receive the card networks' regular rates. Federal Reserve surveys of debit card issuers have found that exempt issuers earn higher average interchange per transaction than covered issuers.
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