Debit Card Fees

Debit Card Fees Have New Rules

New rules for swipe-fees on debit card usage take effect this October. This means two things –
1) Lower costs for retailers and;
2) Less revenue for banks offering debit cards.

The Winners Are …

Consumers with excellent credit ratings and high balances in their accounts aren’t going to be affected as much as less-wealthy consumers when the Durbin Amendment takes effect. They will be able to continue to earn rewards on credit cards and they will probably have enough of a balance in their accounts to receive free checking. The poor, on the other hand, will be less likely to qualify for free checking and they will lose out on debit card usage rewards.

And the Other Winners Are

Retailers are the other winners in the debit card swipe-fee cap. Merchants everywhere are subject to swipe (or interchange) fees which are charged by card networks every time a consumer uses debit or credit. The two main issuers of cards, Visa and MasterCard, can determine their own price unilaterally. Larger retailing networks, like Walmart, Costco, and Target can have enough transactions to negotiate lower swipe fees for themselves, but smaller retail businesses without bargaining power must pay a higher percentage for each transaction to the credit-card companies. And it’s the banks that issue the debit cards which will receive the largest share of the card swipe fees.

The Losers Are …

There is a downside to this new reality. Banks like their fees. Those fees generate billions of dollars of revenue each year. So when the loss of swipe-fees becomes more of a reality, expect that bank customers using the debit cards are going to get fewer rewards and higher costs for having their account at the bank.

How Does It Work?

A debit card purchase of $38 costs the seller an average of a 44 cent fee. Under the new rules of the Federal Reserve, the fee will be capped at 21 cents, plus 0.05% of the transaction, and an additional 1 cent more if certain security conditions exist. The total has been reduced by almost half, for a total of 24 cents. Originally, the Fed wanted the fee capped at 12 cents, but intense lobbying from the banking industry increased the fee to the 24 cent level. But even with the increase caused by the lobbyists, there is still a significant loss of revenue to the banks.

Other Battles on the Swipe-fee Front

The Federal Reserve has attempted to break the Visa-MasterCard control of fees in order to reduce fees. The Fed wants vendors and retailers to be able to process each debit card on at least two independent networks. Because the legislation exempts small banks or credit unions (those with less than $10 billion in assets) from the cap on swipe fees, the credit card networks must be able to differentiate between exempt and nonexempt banks.
However, the Fed has stated it is “uncertain” whether consumers will benefit overall.

Who’s Really Going to Pay for This Change?

The impact on debit card users who bank with exempt community banks and credit unions is also uncertain. Many institutions with assets under $10 billion have not changed their usage programs. However, in a February 2011 survey, almost 50% of credit unions surveyed stated they were considering doing away with free checking in the wake of the Durbin Amendment. The same credit unions are also thinking about ending rewards programs for checking account customers who use debit cards.

Okay, But What About Credit Cards?

Despite the concern about debit fees, credit cards fees are much more expensive for merchants and retailers. A single Visa Signature swipe fee can be twice that of a debit card. Unfortunately, the new law doesn’t cover credit cards. Even if retailers want to pass along the savings for debit card swipes, they will still have to deal with the higher prices for credit cards and the net result will probably be retention of the higher fees.

And Pre-paid Cards?

Prepaid debit cards, which the federal government often uses to issue benefits, also escaped regulation like credit cards. The pre-paid cards have always carried fairly high fees that were also well-disguised. There was a time when the pre-paid card was the tool of those without bank or credit union accounts. However, in today’s world, the pre-paid card is becoming quite common. Even American Express announced a new pre-paid card with significantly lower and simpler fees, hoping to earn their money on interchange revenues rather than charging cardholders directly. Many other credit card issuers are beginning to do the same thing.

The Shifting Sands of Time

More retailers are likely to continue to issue their own financial products, hoping to earn the revenue more from store traffic rather than interchange fees. Target stores already offer their own credit and debit cards, though they can only be used in its stores. Walmart offers its own credit card with special features designed to encourage spending. And the Walmart Money Card, their prepaid debit card, can only be reloaded for free in the store or via direct deposit.

The Rich Get Richer and the Poor Get …

The Durbin Amendment will definitely help consumers with large account deposits at banks or credit unions issuing their debit cards. However, poorer consumers will continue to bear most of the negative consequences and expense.