The Impact of Debit Fee Regulations
This Wednesday, the Federal Reserve is scheduled to vote on the final plan to cap the interchange fees charged by banks on debit card transactions. Currently, retailers pay banks an average of $0.44 every time a consumer makes a debit card transaction. The new regulations propose limiting that interchange, or “swipe” fee, to a maximum of $0.12 per transaction.
Earlier this month, the U.S. Senate failed to pass a measure that would have delayed the onset of these new regulations. These new interchange fees are scheduled to take effect on July 21.
Banks argue regulations will slash revenue and they will have to make changes to their debit cards because the capped fee will not cover the operational costs to process debit transactions.
Debit cards have surpassed checks and credit cards as the primary form of noncash payment for Americans, increasing in volume from about 8 billion in 2000 to 38 billion in 2009. According to the Federal Reserve, the debit card interchange fee generates as much as $16 billion in revenue.
Banks have stockholders to answer to and revenue goals to meet. Historically, when banks incur a loss of revenue, they find new fees and charges to levy on the consumer to generate new revenue. There are a number of ways that banks could make up for this lost revenue resulting from the cap on the debit card interchange fee. Issuers could increase interest rates and existing fees on credit cards or even introduce new fees. Other possible changes that banks could impose:
More Conditions for Free Checking
Banks advertise free checking, but the fine print for major banks like Bank of America, Wells Fargo, Chase, Citibank, PNC and US Bank also contains stipulations. The most common stipulations are the offer to waive monthly fees as long as your balance is above a designated amount, or for you to deposit a specific amount each month. The fee could also be waived if you have multiple accounts.
Over the next year, Bank of America is shifting checking customers into new accounts that have higher balance requirements or other conditions to get free checking. One new product is called Enhanced checking and customers must make deposits totaling $2,000 a month, keep at least $5,000 in various accounts, or use a bank credit card at least once a month to avoid a $15 monthly fee. An eBanking account lets customers avoid a $12 monthly fee if they sign up for paperless statements and make all deposits and withdrawals online or through an ATM.
Monthly Statement Costs
Banks encourage customers to use online statements by charging $2 or $3 to mail paper statements. ATM statements also have fees. US Bank is charging customers for mini ($1) and full ($1.50) statements at US Bank ATM locations. Bank of America doesn’t charge for a mini statement but does charge $3 for full statements from their Bank of America automated teller machines.
There are different fees associated with ATM usage. These fees aren’t new but they could increase as a result of the new debit card regulations. Out of Network charges can be as high as $2.50 per withdrawal. Denied transactions will also generate a fee that is much as $2.50 per denial. Using your debit card internationally costs extra too. Chase Bank charges $5 per withdrawal outside the US.
Reduced Debit Card Reward Programs
Many customers receive rewards for using their debit card. Some banks have already begun reducing or eliminating their debit rewards program. Wells Fargo, SunTrust and U.S Bancorp are among those who have already made significant changes to their rewards programs. Chase is ending its debit card reward program in July.
There has been some speculation that big banks will try to cap debit card transactions to $50 or $100 apiece. This kind of action is seen as very aggressive and is unlikely to happen.
The regulations on debit card interchange fees scheduled to go into effect in one month will reduce the revenue to banks. These institutions will, in turn, charge consumers more for banking services. The consumer will likely not see any benefits from retailers because swipe fees are embedded in product prices. The retailers have clearly won this battle, while banks and, in the end, consumers will end up as the losers.