The carve-out exempting smaller banks from new debit-interchange price caps seems to be working, enabling certain issuers with less than $10 billion in assets to launch rewards initiatives just as larger banks generally have been shutting theirs down.

Banks in some communities are taking advantage of the loophole by introducing debit rewards to attract new customers, or they are retooling their programs to retain existing ones.

Claremore, Okla.-based RCB Bank, a $2 billion institution with 30 branches, in September introduced cash-back debit rewards that enable new customers to earn 10 cents on each debit card purchase of $10 or more. Those that initiate at least 10 debit card transactions per month qualify for the reward, which they receive as cash deposits in their checking accounts.

There is no monthly fee for the account, and no minimum account balance is required, says Becky Pilgrim, RCB marketing manager.

“So far we have had great response,” Pilgrim tells PaymentsSource, declining to detail customer-acquisition numbers.

The bank touts its debit rewards with signs inside its bank lobbies. The institution did not previously have a debit-rewards program, and it has not extended it to existing customers.

Pinnacle Financial Strategies, a Houston-based bank consulting and software-development firm, helped RCB and other small banks devise such programs in response to demand from smaller institutions seeking to offer debit rewards, Joe Gillen, the firm’s CEO, tells PaymentsSource.

“Community banks are battling to hold on to their market share versus big banks that have put branches on every corner, and debit rewards are a pretty effective tool,” Gillen says. “It’s no longer cost effective for larger banks to offer these types of interchange-based debit rewards, but it works for community banks targeting local customers.”

Some 18 banks with less than $10 billion in assets have signed on to offer cash-back debit rewards using the system from Pinnacle, which offers the service to banks through a fee-based system based on the institution’s size, Gillen says. Another 15 banks plan to add the service early this year, he says.

“Our research continues to show that, of all the types of rewards programs out there, consumers’ top choice always is cash,” Gillen says. “Banks can customize our program in a variety of ways, but it generally provides a straightforward way to reward customers for using debit cards, minimizing their reliance on checks and ATMs for daily transactions, which saves banks money.”

JPMorgan Chase & Co. was among the first large banks to announce as early as 2010 that it would phase out its debit rewards because of the impact from the Durbin amendment within the Dodd-Frank Act (see story).

The Federal Reserve Board announced its final debit interchange rules under the Durbin mandate in June, essentially halving debit-interchange rates for larger issuers (see story).  Banks with less than $10 billion in assets are exempt from the new rule, which went into effect Oct. 1.

PNC Financial Service Group stopped offering debit rewards in September; U.S. Bank ended its program Nov. 1.

Small banks may pick up “a few more customers” as a result of such debit-rewards programs, but their exemption is unlikely to win them any significant market share from larger banks, Brian Riley, senior research director with TowerGroup, tells PaymentsSource.

“We’ll see some winnowing of customers who gravitate toward these rewards programs, but small banks, with fewer economies of scale, often have to make up the difference with other types of customer fees,” he says.

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