Rewards-Points-Math

Why Debit Card Rewards Are No Longer Cost-Effective

The average debit card transaction processing fee a bank would charge a merchant pre-regulation was approximately $0.59. Now, a bank can only charge $0.23 + 0.05% of the transaction value. Let’s ignore for a moment all of the processing and transaction fees associated with a transaction and focus only on the gross fees and rewards expenses illustrated below:

Prior Rewards Model:

  • Average revenue to bank per transaction: $0.59
  • Average transaction size per Federal Reserve: $20
  • Cash-back rewards offered on each purchase: 1.0%
  • Cash back on average purchase: $0.20
  • Total net revenue to bank (fee less reward): $0.39

Current Model if a Bank Offered a Fee:

  • Federally capped fee: $0.23 + 0.05% of transaction value
  • Average transaction size per Federal Reserve: $20
  • Total gross value to bank: $0.23 + $0.01 = $0.24
  • Cash-back rewards offered on each purchase: 1.0%
  • Cash back on average purchase: $0.20
  • Total net revenue to bank (fee less reward): $0.04

So, if a bank ran a debit card rewards program they would be left with only $0.04 to cover all other network expenses associated with processing a transaction and with no chance to eek out a profit. Looks like a challenging environment, but that’s why EarnSmart is here to help. Sign-up above and we’ll be sure you’re the first to hear when we launch our rewards program. Until then, check-in for new blog postings!

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *