Will Consumers Pay for New Reduction in Debit Fees?
The Federal Reserve has just announced its proposal that would limit debit card fees to a maximum of 12 cents per transaction. This is a stunning change from the existing interchange or “swipe” fees charged to retailers that average between 1% and 2% of a transaction.
This is part of the Dodd-Frank financial reform bill signed in July that requires the Fed to limit these interchange fees to a level “reasonable and proportional” to what it costs the bank to process the transaction. The intent of the legislation is to lower the cost for merchants which, in turn, would hopefully result in lower prices on goods and services for consumers.
This is obviously good news for retailers who fought hard for it, but this is very bad news for banks. These rules will slash debit card revenue which was almost pure profit for the banks. This proposal could drastically change the debit card industry.
The big question is how this will affect consumers. Will retailers pass on these savings to consumers in the form of lower prices? Or will merchants pocket these savings?
Merchants are charged an interchange fee each time a debit card is swiped. Card processors like Visa and MasterCard pass on the majority of this fee to the banks. The fee is set by the card network and currently the average fee is approximately 2% of the transaction value. A $200 purchase with a 2% interchange fee generated $4 for the bank; the new rule reduces the fee to 12 cents.
The National Retail Federation estimates that debit card fees total about $20 billion annually. Bank of America, the biggest issuer of debit cards, said earlier this year that the fee limits could cost the bank between $1.8 billion to $2.3 billion annually.
Banks are going to have to make up for this substantial loss of revenue by raising rates and fees in other areas. In addition, we’ll probably see issuers cut rewards on debit cards. More than likely, it will be the consumer who will pay the price for this rate cut for retailers.
Changes are already underway for issuers to generate more revenue and it’s the consumer who is being asked to pay more.
Chase began notifying some customers this month that it is adding a $6 monthly fee to accounts with small deposits. Direct deposits will have to be at least $500 to qualify for a waiver on the monthly fee. The monthly requirement is a single direct deposit of at least $500; multiple direct deposits that add up to $500 will not qualify for the waiver. The monthly fee is waived if customers make five or more debit card purchases in a statement period. The change goes into effect starting February 8 and applies to basic checking accounts.
The Fed also proposed rules that would let merchants choose from at least two independent debit networks for routing transactions, potentially creating more competition for Visa and MasterCard.
The Fed has until mid-April to publish final rules that would ensure that debit card interchange fees are “reasonable” and “proportional.” Final rules are scheduled to become effective in July 2011.