Will retailers give debit cards a new life?

As an expert on the credit industry, John Ulzheimer spends his days thinking about credit cards, debit cards and credit scores. So imagine his surprise when he picked up lunch at a restaurant near his house in Atlanta, then later went on a beer run, and was directly confronted with the consumer fallout from the hot-button issue of the day in his profession: new fees for debit card purchases imposed by government regulations.

“The liquor store has an entirely new pricing structure – the cash/debit card price was 5 percent less. And, at the restaurant, for the first time ever, they asked me if I was paying by cash or debit card or credit card, even before I ordered my meal,” he said, and sent along picture at right from the liquor store.

Since the start of October, the credit industry has been focused in on debit cards, as the Durbin Amendment kicked in federal limits on how much card issuers could charge merchants per transaction, and which last week translated into some major banks imposing monthly fees on users for using their debit cards for purchases. Bankrate.com also released a new study that showed reward offers for debit card usage declined 30 percent in the past year.

It seemed as if the industry was conspiring to turn those cards from a popular payment method back into a piece of plastic you only use to get cash from the ATM. And some said good riddance. “There’s absolutely no reason that consumers need to use a debit card. And I was in that camp before this legislation,” said Odysseas Papadimitriou, CEO of credit card comparison site Cardhub.com, which just released its own study on how the new fee limits will affect consumers.

But the end of debit cards as we know them may be forestalled by retailers, as Ulzheimer noticed in his real-world forays. (Bankrate’s senior financial analyst Greg McBridge noted also that smaller community banks and credit unions will also keep debit cards afloat, as they are not affected by the Durbin fee structure changes.)

Some merchants are already willing to pass to along to consumer their newfound savings in fees from the bank. Others will not, but may participate in merchant-funded reward programs, which seem to be taking prevalence in the dwindling space overall of reward programs for debit cards.

“It’s a noticeable shift,” said McBride. “We see that 29 percent of offers are now merchant-funded, versus 13 percent last year. It’s a shift you expect not just to hold, but also to continue.”

Start-ups are also trying to capitalize on advances in behavioral marketing and gear banks to offering different sorts of incentives than traditional reward points. One such player, FreeMonee.com recently conducted a Harris poll and found that what consumers want is for their bank to help them save money and what they want most of all are cash-back offers or rebates – not discount coupons, vouchers, points, miles or anything that delays their gratification in the form of a reward they may not even use in the future. And 63% of their respondents said that they’d be “very to somewhat likely” to change to a different bank if it provided a better retail offer with no strings attached.

This fits in with the company’s approach, which is to offer cash incentives for particular merchants that you get when you use your debit card at that merchant. The offers you get are identified for each cardholder based on their past purchases. The premise is that merchants will be willing to pay for the promotion because the algorithms of the targeted marketing are going to deliver good potential customers, and the banks are happy with it because they recoup some of the revenue lost with the Durbin amendment, and customers get the cash they want.

“Consumers are inundated with offers,” says the company’s CMO Jim Taschetta. “Consumers are saying: You need to do something different than plain discounts.  If you want to motivate me to change my behavior, you have to give me cash.”