By Charles Passy
Could debit cards, once a cash cow for banks, be put out to pasture?
A federal court ruling on Wednesday paves the way for a further reduction in the interchange fees (also known as “swipe” fees) that banks levy on merchants for debit cards. It is a victory for retailers, who protested that the 2010 Dodd-Frank financial law, which lowered the fees from 44 cents to 21 cents per transaction, didn’t go far enough. Now, U.S. District Court Judge Richard Leon has essentially scrapped the 21-cent limit and set the stage for an even lower amount, though it may be months, if not years, before any changes are made to the existing cap.
But if changes are indeed made, it could be consumers who ultimately pay the price for banks’ potential loss of billions of dollars in “swipe” fees. As banking industry experts note, the revenue has to be replaced, so higher overdraft penalties and account maintenance charges are all possible. And ultimately, the very existence of debit cards could be in doubt, even if consumers still embrace them as a way to instantly tap into their checking accounts when they reach the cash register. Nevertheless, the math may no longer work out for the banks that issue those cards.
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“It is like squeezing one end of a balloon. The air’s going to have to go somewhere,” says Richard Barrington, senior financial analyst with MoneyRates.com.
Certainly, that is what history has shown. When Dodd-Frank was passed in 2010, it resulted in a decline in the percentage of banks offering free checking and an increase in the amounts charged in overdraft penalties. (In the case of the latter, the average penalty rose from $28.71 to $30.01 from 2011 to 2013, according to MoneyRates.com.) But more to the point, say industry experts, it resulted in a culture of nickel-and-diming for just about anything. Those generous debit-card reward programs? Banks have scaled them back considerably. Those free coin-counting machines? “Now banks charge more (for coin counting) than if you took out a home-equity loan,” says Bankrate.com senior financial analyst Greg McBride. (BankRate.com shows the average rate for a $75,000 home-equity loan is currently 5.68%; coin counting at some banks can be as much as 6%.)
And McBride says history is likely to repeat itself. “The consumer got stuck with the bill” on the previous interchange-fee legislation, he says. “A second go-round is only going to lead to further pain.”
To some extent, that is not disputed by the banking industry, which is calling on the Federal Reserve to follow-up on the court decision. “We urge the Federal Reserve to pursue all legal means to mitigate the harm this decision will cause to consumers,” said American Bankers Association president Frank Keating in a statement released on Wednesday.
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Nessa Feddis, a senior vice president with the American Bankers Association, explains that if interchange fees are lowered, checking accounts will be the source of revenue most likely to be targeted, since each account already costs a bank around $250 a year to maintain. “Consumers will see fewer free checking accounts, higher checking-account fees and higher minimum balances to avoid those fees,” she says.
It is also possible that banks will try to steer consumers to seek other payment options, especially credit and prepaid cards, which aren’t subject to the same “swipe” fee limits. “It really could mean that the debit-card business is much less viable,” says Sherief Meleis, a partner with Novantas, an advisory firm that tracks the banking industry. See also: 10 things credit bureaus won’t tell you