Debit Card Fee Caps: Nothing to Fear

Back in December, the Federal Reserve proposed rules to cap debit card interchange fees at 12 cents per transaction. Currently banks charge the retailers (called “merchants” in the industry) on average 56 cents per transaction for a signature debit and 23 cents per transaction for a PIN debit. If the proposed rules become the final rules, obviously banks will earn much less from their debit cards.

From a consumer’s standpoint, I welcome this change if it comes to fruition.

Banks say they will have to get rid of the debit card rewards programs. OK. Most debit cards don’t have a reward program to begin with. Those that do have a reward program give very little in rewards. The going rate is 0.25% of each purchase. Spend $100 on a debit card, get 25 cents back. Big deal! Customers going after rewards use a credit card instead of a debit card anyway.

Banks say they will have to end free checking and charge a monthly fee on checking accounts. OK. A checking account is a service; it shouldn’t be free. Mark your price clearly on a tag and let customers decide if they should buy from you or from someone else. That’s aboveboard competition.

Some fear the popular reward checking accounts will be in jeopardy. The proposed rules only cover banks with $10 billion or more in assets. Reward checking accounts are typically offered by smaller banks and credit unions. Those smaller banks and credit unions are not covered by these rules.

In addition, debit card fees are only a very small component of the profit on reward checking accounts. The key profit driver is loan demand. As long as there is healthy loan demand, reward checking will be profitable. If a bank or credit union discontinues or cuts back the reward checking program, it will be because the bank can’t lend enough money out to credit worthy customers, not because of inadequate debit card fees.

Banks also say retailers won’t share the savings with consumers. Just the other day I noticed a gas station near me offered a 10 cents per gallon discount for cash or debit cards. Handling cash costs money; debit cards cost money; they are both cheaper than credit cards. Offering a discount for both cash and debit cards makes sense to that gas station. It makes sense to me too. If the discount is larger than my credit card reward, I will use debit for the discount; otherwise I will use credit for the reward. Again, that’s aboveboard competition: debit card discount or credit card rewards, you choose.

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  1. Matthew Amster-Burton says

    Thanks for linking to my column, TFB. Whenever business groups (and often consumer groups, too) respond to proposed regulation, they always seem to do so as if competition between firms doesn’t exist. It’s always entertaining.

    The small banks, however, are right to be concerned that the carveout provision won’t work. Just as the gas station discriminates between credit and debit/cash, they’ll discriminate between expensive small bank cards and cheap big bank cards if it comes to that.

    Coincidentally, you’re going to be quoted in my column tomorrow.


  2. Harry Sit says

    @Matthew – The card networks (Visa and MasterCard) control the interchange rates. They can publish a single rate for all banks or they can publish a lower rate for larger banks subject to the rate cap and a higher rate for smaller banks and credit unions not subject to the cap. According to blogs from the industry consultants, the networks are likely to offer two-tiered rates in order to win or keep the business from the smaller banks. It’s not very easy to discriminate between larger banks and smaller banks at the merchant level. Because larger banks issue most of the cards anyway, the stores may just let the smaller banks slide rather than communicating confusing messages to the consumers and risking longer checkout lines.

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