It looks like rewards-earning debit cards are back! Southwest Airlines is about to introduce one. These used to be huge, but they were largely killed off by the Durbin Amendment to Dodd-Frank financial reform legislation passed in the aftermath of the Great Recession.
Senator Dick Durbin got language added that essentially made earning a profit on debit transactions illegal. That was a huge gift to retailers. But it limited free checking account availability for a long time (banks used to want checking account customers because they’d then make money on the debit transactions) and it also killed off rewards (it no longer made sense to spend money to compete for transactions, since those transactions were no longer profitable).
Debit cards are far more payments than credit cards, though credit card transactions are larger. Out of about $10 trillion in card payments each year, credit cards are perhaps 55% – 60% of total spend volume with debit and prepaid cards accounting for the rest.
Airlines aren’t getting a share of debit payments currently. The last major U.S. mileage-earning debit card was the SunTrust Delta SkyMiles product a decade ago.
Generally speaking there are four types of products exempt from interchange limits on debit transactions:
- Small bank-issued. Assets under $10 billion means the caps do not apply.
- Amex-issued debit cards. American Express managed to get carved out, arguing that ‘four party’ (Visa/Mastercard) needed to be regulated but not their own closed-loop three-party system.
- Discover-issued debit: There’s no cap if Discover is both the issuer and network (this is going to be huge for Capital One, now that it owns Discover). However the cap applies if a separate bank issues the Discover debit card and runs it on the Pulse network.
- Prepaid cards not linked to a traditional checking account: They’re exempt as long as they as reloadable and not marketed as “gift cards” and are not linked to a checking account (which makes them debit cards).
The card is issued by Sunrise Banks, a Durbin-exempt sponsor bank (with assets under $10 billion). They’re a community bank in Minnesota. Interchange for a small-issuer Visa/Mastercard debit runs more like 1.15% + $0.15 (signature transaction) or 0.80% + $0.15 (PIN-based transaction), rather than the Durbin-capped rates of ~0.05% + $0.21. It’s the same model used by a bunch of fintech debit cards (Chime, Cash App card, etc.): leverage the small-issuer exemption for higher interchange.
We’ll see what rewards look like on the card, but it’s something. There’s no question that Southwest has finally gotten creative in looking for new revenue. Some of those things they are trying won’t work, and are actually destructive of their brand. Some things they’re doing should have been done a long time ago (like digitizing dispatch paperwork). And some like this is creatively worth trying.
And this opens up rewards for all sorts of payments that are often expensive to earn points on. Some might want to use these for tax payments, for instance, dodging the almost 2% cost associated with credit cards – while still earning rewards.
@ Gary — Please dont promote debit card usage. NO ONE SHOULD EVER USE A DEBIT CARD. See Clarkhoward.com for an explanation. If you want your money stolen, be my guest and dont follow this advice.
We’re so back, it’s not even funny…
Who uses debit cards? High risk zero reward no SUB. Maybe the kettles will want one but not your regulars.
The only debit card worth using is Schwab’s ATM-fee reimbursement for cash while traveling overseas. Keep a low balance on there ($500-1,000). Hasn’t let me down yet.
Loved topping up my Bluebird account at Walmart using my BoA Alaska Airlines debit card back in the day, then transferring the funds back to my BoA account and repeating…
Hold on a minute Boraxo as the devil is in the details. If the new card is like the old unlimited Skymiles Suntrust Delta Card it may be quite useful. If it has restricted miles earning capacity and anything less than a 1:1 earnings ratio the card may still be good for scraping iguana droppings off your shoe.. There are over 19 million adults in Florida alone who could use the new card as we are knee deep in iguanas here.
I can’t believe it’s still legal in the US to force debit and credit card users to subsidize other products (e.g. checking accounts and their users).
So very socialist, so very un-American.
And please, don’t tell me “I have a choice” when the other choice is cash: how do you even pay a 4,000 family vacation with cash? To you bring it to the airport? How many hours would it take? Will you get flagged with SSSS?
@Mary — *whispering* you know what else is ‘socialist’… the fire department, the military, roads, and basically all public services funded by taxpayers have elements of ‘socialism’ because it’s not like you, personally, ‘pay per use,’ etc. (bit of a technicality, but I think you get the point). Rugged individualism is a lie propagated by the ultra-rich, who want to divide and distract us with culture war nonsense while they take more resources and power for themselves. Anyhoo… yeah, debit cards… socialist!
Hmmm…a self-proclaimed ‘Thought Leader in Travel’ is unaware that American Express has beaten WN to the punch by offering Membership Rewards debit card rewards on it’s Rewards Checking Account?
With the ability to transfer MR points to multiple airlines one would really like to fly?
I’m shocked, utterly shocked!
Perhaps less time in the sewers of X, Instagram, etc. digging up the same old stories of a certain demographic trashing boarding gate computers, brawling in public places, misbehaving on Section 8 airlines flights, etc. is in order.
@Gentleman Jack Darby — If you can’t handle the commentary, you could just stick to the shills over at TPG that wouldn’t dare post anything controversial and literally disabled comments because they couldn’t handle the heat… may be a better ‘fit’ for you. It’s super bland, though. And their ‘offers’ are often not the best available. No sense of community either. You do you.
Southwest would love its customers to use debit cards. Saving 2% on interchange fees is huge for a low margin industry like airlines.